The retail industry faces significant challenges that are putting pressure on margins. Consider rising operating costs, changing consumer behavior, and increasing competition from both online platforms and discount retailers. To remain competitive, it is essential to have constant insight into profit margins and to be able to react quickly to market developments. These insights, derived from data-driven analytics, form the basis for strategic decision-making.
Below we present a nine-step strategic approach to improving margins in the retail sector. In doing so, we also discuss how a powerful tool such as SAP Profitability and Performance Management (PaPM) can support this process.
Step 1: Analyze Costs by Product, Sales Channel and Customer
The first step to improving margins is to thoroughly understand the organization's cost structure. This includes calculating costs by product, sales channel and customer:
- Cost per Product: Analyze the costs of purchasing, production and logistics.
- Cost by Sales Channel: Consider the costs associated with online platforms, physical stores and third-party vendors.
- Cost per Customer: Determine customer acquisition and retention costs, such as marketing expenses, customer service, and loyalty programs.
By accurately identifying these costs, inefficiencies can be identified and pricing strategies determined, resulting in informed decisions about cost savings and optimization.
Step 2: Optimize Discounts by Product.
Discounts, such as rebates from suppliers, are essential for margin management. By carefully negotiating volume discounts, early payment discounts or long-term contracts, and applying them correctly to the right products, the impact on profitability can be maximized. A proactive approach to supplier negotiations contributes directly to improved margins.
Step 3: Analyze Sales Data and Margins
Regularly analyzing sales data helps gain insight into which products are performing well. By encouraging high-margin products and reconsidering low-margin products (for example, by adjusting prices or repositioning), the product mix can be optimized. This ultimately improves the overall profitability of the organization.
Step 4: Understand the Margin Waterfall
The Margin Waterfall provides insight into how gross margin is affected by various costs, such as cost per product, sales channel and customer. Detailed mapping of this waterfall can identify where margins are lost and where optimizations can be made, such as cost reductions, efficiencies or volume increases.
Step 5: Segment Customers
By segmenting customers based on profitability, geographic location, demographics, growth potential and buying behavior, pricing strategies and marketing efforts can be aligned more effectively. This results in higher margins by segment and a better focus on the most valuable customer groups.
Step 6: Analyze Customer Behavior
Understanding customer purchasing behavior is essential for margin optimization. By analyzing average order volume, order value and purchase frequency, strategies can be developed to encourage larger orders and higher margins, for example through bundle offers or loyalty programs.
Step 7: Assess Price Elasticity
A good understanding of the price elasticity of products enables strategic price adjustments that maximize margins. Analyzing price sensitivity helps determine optimal price-volume combinations, resulting in improved margins.
Step 8: Scenario analysis
Scenario analysis is a powerful tool for anticipating market changes. By simulating scenarios such as rising commodity prices or changes in consumer behavior, strategic adjustments can be introduced proactively, minimizing risk and ensuring stable margins.
Step 9: Set Specific Goals for Volume, Price and Margin
Setting clear goals for sales volume, price and margin is essential. These goals should be based on historical data and market trends so that they contribute to sustainable margin improvement. Continuously monitoring progress and adjusting strategies as needed keeps the organization focused on maximizing profitability.
Use of SAP Profitability and Performance Management (PaPM).
SAP PaPM is a powerful tool that can support the execution of the above strategies. It enables organizations to perform in-depth analysis, providing insight into the impact of strategic decisions on margins. With real-time analytics, discounts can be better managed, sales data thoroughly analyzed, customer behavior effectively tracked and customer segmentation targeted. In addition, SAP PaPM provides the ability to perform scenario analysis, allowing organizations to respond quickly to changes in the market or cost structure. Click here for a demo of Margin Analysis in SAP PaPM or contact barry.botman@finext.com.
