Retailers don’t have to choose between profitability and customer satisfaction

Photo: Nordstrom
Sep 17, 2021

At the height of the COVID pandemic, retail profitability took a back seat to meeting customer demand by whatever means necessary. Retailers had to quickly expand omnichannel operations, often without concern for efficiency, to meet the simple goal of getting goods to customers. While some were able to keep up with demand and increase revenue across channels, even successful retailers struggled to simultaneously increase profitability, finding that their net was reduced despite a higher gross.

Due to changes in consumer behavior that appear to be permanent, omnichannel demand is likely to continue to beat pre-pandemic levels going forward. To remain competitive, retailers must make all channels not just viable but profitable while continuing to offer the high-quality services and features that have become a critical part of driving customer behavior.

It’s true that online orders for home delivery are less profitable than in-store sales, and BOPIS and click-and-collect orders are only slightly better for margins than home delivery. These options, however, have become an integral part of shopping. Retailers who downplay them to protect margins are going to disappoint their customers, lose business and possibly meet the fate that they tried to escape during 2020.

Retailers must review all delivery channels — online and off — and make adjustments using modern technology to improve operational efficiency and inventory productivity Instead of prioritizing margins above all else. A unified supply chain strategy, which brings traditionally siloed processes and data into a one system, allows retailers to efficiently manage in-store operations and the supply chain while also streamlining online operations.

The pandemic did not make forecasts useless, it just made it more complex to get them right.  Margins and customer service will improve with access to highly granular, accurate forecasts from a single data source. The same is true for improving inventory levels for all channels while also managing staff and planograms in physical stores. Retailers can improve profitability and margins throughout the business as a whole, rather than in specific and separate divisions or locations, while continuing to support customer demand with this approach.

Retailers shouldn’t have to choose between profitability and customer satisfaction. While they should, whenever possible, adjust their operations and processes to improve margins, they must also review top-performing delivery channels and prioritize a high level of service, regardless of any under-the-hood changes.

DISCUSSION QUESTIONS: What will it take for retailers to return to pre-pandemic profit margins? What are the top retailers doing to boost their bottoms lines that other retailers are missing?

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13 Comments on "Retailers don’t have to choose between profitability and customer satisfaction"

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Ken Morris

It is far easier to keep your good customers than to acquire new ones. I subscribe to the 80 percent/20 percent rule where 20 percent of your customers generate 80 percent of your sales. These percentages are not static and customer go in and out of the golden 20 percent because of good or bad customer moments. Retailers must concentrate on LTV (lifetime value) and the RFM (recency, frequency and the monetary value) of a customer. Concentrate on reaching out to customers when friction occurs like a bad return and see your profits climb.

David Naumann

Automating and refining the processes for omnichannel fulfillment is an imperative to ensure every transaction is profitable. Retailers scrambled to offer buy online pickup in-store (BOPIS) or at the curb (BOPAC) and many of these processes are still labor intensive, which negatively impacts margins. These services are essential and perfecting the corresponding processes is critical for success.

Martin Whitmore

It’s all about convenience for retail shoppers today. As a retailer you need to provide the most frictionless shopping experience possible. Those retailers that provide that frictionless experience today are flourishing and will continue to do so while those that don’t will fall by the wayside. That doesn’t just apply to the sales process but to the entire customer experience including the returns process.

Liza Amlani

It will take retailers starting to look at their merchandise assortments from a sustainability lens and focus on increasing in-season planning to get closer and faster to the customer.

Buying less product and reducing markdowns will directly impact profitability and margins. Using data to drive decisions on product selection and increasing private label investments is how retailers will survive the future.

Venky Ramesh

As they say in chess: when the king is under attack, you don’t worry about losing a pawn. Rightly so, brands and retailers alike focused on investments that went towards retaining their customers during the pandemic. We saw a lot of that happen in the beauty industry. For a very profitable business model, it struggled with margins. Their investments focused on driving customer acquisition, retention, and loyalty with scant regard to managing costs. However that is changing now, with many retailers (and manufacturers) in the space moving their enterprise data to the cloud with the intention of driving analytics at an enterprise level with the goal of driving profitable revenue growth.

DeAnn Campbell

Profit margins were challenged long before COVID-19, as expanding e-commerce capabilities triggered an industry-wide focus on online over offline channels. The cost of online fulfillment coupled with decreased customer loyalty and increased return rates makes e-commerce a far less profitable business model than pure play brick-and-mortar. The retail industry is starting to understand how critical physical stores are to their net profits, and beginning to invest in striking a more profitable balance rather than focusing too heavily on digital.

Cathy Hotka

I’ll propose a different answer: optimizing inventory. At a recent event, retailers talked about persistent inventory shortages and price hikes in container shipping. You can’t sell what you don’t have. Retailers who can figure out how to source product successfully will have happier outcomes.

Shep Hyken

My first question is, did the retailer hold on to their current customers during the pandemic? If so, they should continue to nurture their existing customer base. If not, they must ask why this happened. In virtually any of the sectors that were hit hard, there were some winners. Find out what they did to beat the pandemic and adopt those ideas. Look outside your own industry or sector. What can you learn from the companies that survived and thrived? If a retailer finds it is struggling while others aren’t, there is usually a good reason.

Jeff Sward
A lot of retailers may benefit from a renewed focus on gross margin dollars vs. gross margin percent. There may be a knee jerk reaction to a new, higher cost basis of the business by saying that higher margins are needed to offset the higher costs. And higher costs are not going away, if only in terms of providing higher competitive wages. And in today’s market, grabbing new share is not going to be easy. So what’s left is extracting the maximum possible dollars from the business at hand. Which will mean higher percent margins on some items and lower percent margins on others. It makes editing and curating that much more difficult. I continue to see opportunity in buying less overall and managing risk much more carefully. The margin dollars I see left on the racks at the end of the season are staggering. Reducing the level of inventory that will be sold at negative margin is a huge opportunity for retailers to take more gross margin $$$ to the bank.
Ananda Chakravarty

Retailers have already returned to and in most cases exceeded pre-pandemic sales, but profit margins continue to drop in a regular trend. Some of this is attributable to ecommerce which lowers margins due to shipping, logistics and returns. A&M’s report on the European market is a great view into the added challenges to retailers.

Retailers will have to choose between profitability and customer satisfaction (at least in terms of ecommerce) in the short term, at least until new normal conditions return or long term impacts of their customer satisfaction efforts are realized. For some retailers this will be easy — their business has limited dependency in the ecommerce satisfaction space (discount stores, thrift, convenience, and some drug stores). For most retailers however, they are not able to realize the increased sales because it’s online. Enabling more business in-store through developing in-store stickiness or reducing costs of ecommerce with more efficient services, delivery and returns reduction will be the answer.

David Mascitto
Retailers who haven’t embraced a true omnichannel model basically have three options: 1 – Continue on the current path, which means very limited to no omnichannel offering. In the short term, your profit margins may be higher, but over time you’ll lose business to competitors that have embraced omnichannel. 2 – Continue to use an “improvised” band-aid omnichannel solution. This will also work in the short to medium term, but the inefficiencies will continue to eat into profit margins and the customer experience will also suffer. 3 – This is a two-parter: a) Embrace omnichannel and implement the proper systems (e.g., an order management system); b) Continuously refine and improve your fulfillment model to ensure profit margins remain healthy. That means exploring multiple fulfillment methods (store fulfillment vs. micro-fulfillment vs. drop shipping vs. 3PL or any combination of these, depending on customers’ geographic location; planning store assortment for e-commerce, different last mile delivery options, etc.) . It also means driving the right customer behaviors (if BOPIS is more profitable than home delivery and also spurs… Read more »
Craig Sundstrom

I don’t question the points Andrew makes, but I do question the headline, or perhaps we should add an asterisk: * if their expectations are realistic. The immediate post Pandemic period — to the extent that we can say we’re even in one — is higher prices/reduced supply for goods, transportation and labor. For the retailer who can either modify their model(s) or educate their customers as to the reality, satisfaction — and profits — are both possible. But if they simply try to go about business as usual, one of them has to give.

Kai Clarke

Retailers will find that customer satisfaction and profitability are not mutually exclusive, but rather co-dependant. Focus on the customer satisfaction portion first and profits will follow.

"Using data to drive decisions on product selection and increasing private label investments is how retailers will survive the future."

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