The concept of “less is more” is a bit of a paradigm shift for many retailers. In the past extending the range has been a sure fire way to increase sales. Perhaps so… but if you’ve heard the saying “sales are vanity, profit is sanity” then you’ll want to read on to discover how Retail Acumen have proven (on more than one occasion) that range rationalisation is the smart way to reduce costs, complexity and increase profit!
What are the drawbacks of presenting a wide range of products?
Whilst you may believe that a wide range provides your customer with choice it can often be overwhelming to the consumer. When faced with an array of products, all of which could actually meet their basic need, the consumer at best will select the cheapest (if in doubt, save money) or simply walk away as it takes them too long to figure out the differences and benefits of each option.
Even if your customer presses on and makes a choice, the next problem is that rather than channelling all the demand through a few options the demand is split between many options. This means that you have more product facings to consider, more shelf-fill actions to undertake, more items to include in a stock count, more items to set up on the merchandise management system, more pick faces in the warehouse…. etc. The more SKUs you include on the range the more cash margin contribution each SKU needs to be making to earn it’s place – quite simply the cost of set up, stocking, reporting, operationally managing, presenting, selling and clearing has to be accounted for before the SKU even begins to earn any money for your retail business.
How does range rationalisation increase profit and reduce cost?
When a retailer undertakes a range rationalisation exercise the entire range is analysed, by SKU, for cash margin delivered and number of units sold. The tail of SKUs are initially ear marked for removal. Then the clever stuff starts… We ask ourselves:
- If we cull this SKU from the range would the unit sales be transferable to any of the remaining (higher margin SKUs). In the most part the answer is yes as typically when a retailer has an oversized range there are plenty of options remaining to channel demand through!
- If the unit sales are not transferable what is the margin loss based on the lost sales? How many customers are we likely to disappoint by not including the SKU?
- If we cull all of the proposed SKUs what does the resulting range construction look like? Do all sub-ranges have sufficient authority? Will a credible offer be presented to the consumer? (will they even notice what has been taken away?!)
Based on the answers to the above questions we can make a fact-based decision to move forward with a range reduction exercise.
Typically by channelling more volume through fewer higher margin SKUs this has an immediate and positive impact on profitability. In addition all of the costs of ownership of the SKUs have been removed from the business – so both operationally, administratively and on-systems there is less “clutter” to deal with – thus reducing costs.
It is often a massively compelling business case, and in fact very simple to implement once the analysis has been done. Retail Acumen have worked with a variety of retailers on projects to intensify assortment performance and to undertake range rationalisation. If this is something that you think could benefit your retail business, let me know!