A recent study by Coresight Research revealed that 40 percent of U.S. non-grocery sales are at a discount, representing roughly $395 billion in lost revenue, or 12 percent of sales.
Retailers seek to avoid markdowns and sell out of the season at full margin, but it isn’t easy to predict how much inventory to acquire. Merchants often complain about over-buying (resulting in markdowns) and under-buying (resulting in out-of-stocks). Both stem from demand volatility and long supply chains.
Two factors cause volatility, typically.
- Changes in consumer behavior, including external factors such as weather, competitors, and social effects.
- More consumer choices, including new channels and alternatives, such as direct-to-consumer startups.
Balancing demand with supply is tricky. The traditional view that inventory is a back-office function is outdated. Merchandising is fundamentally linked to inventory. Most leading brands and retailers now closely coordinate the two functions, if not join them at the hip.
In this post, I’ll address four online merchandising tactics that balance consumer demand with inventory levels, to increase profits.
Merchandising Hacks to Increase Profits
1. Show variants in images. The exposure that a product receives directly impacts its sales — more exposure, more sales. Direct marketers learned this years ago with printed catalogs. Last-minute art decisions would have a significant impact on which product variants sell. For example, if the art director featured a red fleece prominently on the front cover because it was a good photo, the red variant would usually sell much faster than the other colors. Showing multiple variants in category images can lessen this problem.
Online merchants are not stuck with one image. Rather, we can change the featured image much faster, even in real-time, with help from artificial intelligence. But we usually do not. Merchants rarely optimize their store fully; the process is painfully manual for most commerce platforms.
It’s common for merchants to manage the top row of a category grid and to manually feature products for more exposure. This often causes those products to sell out of common sizes — small, medium, large — leaving only, say, extra small and extra large. Thus the product is not technically out of stock and is still displayed prominently. But it should cede its valuable, high-traffic slot to another product that is more likely to convert. Promotions make this problem much more extreme.
Physical stores deal with this problem using category management and planograms — store layouts that place high-profit items in high-exposure locations and otherwise maximize limited floor space.
2. Automate category management. Category management relies on performance tiers, measuring each category’s revenue and profit contribution. It provides a framework to balance exposure with available inventory, to generate profit. Category management for ecommerce can automatically increase or reduce exposure, and thereby reduce markdowns — for categories and individual products.
For example, product inventory that is accelerating faster than sales is a classic warning sign. Increasing exposure and suspending all reorders can bring the products’ inventory velocities brought back into line. For most commerce platforms, the process requires generating a report (to monitor) and then implementing manual fixes to the products. But with new digital category-management technologies, there’s an opportunity to do things differently: automatically expose the products.
3. Emphasize “hidden gems.” Retail sales often skew to a small number of best-selling categories. Frequently the products in these categories represent just 5 to 10 percent of the range. These so-called “cash machine” categories consistently generate high volume and good margins.
Cash-machine categories pay the bills, but the highest margins often come from the products’ long-tail. These “hidden gems” are high margin, high-inventory items that are not getting much visibility — ripe for additional exposure. Exposing the products can drive significant incremental profit and reduce the risk of marking them down.
4. Leverage out-of-stocks. Out-of-stock inventory frustrates shoppers, especially if the products are still on promotion. It’s common for even the largest retailers to promote out-of-stock products on their home page; the home page exposure causes the out-of-stock. When that occurs, the banner should be switched automatically. Otherwise, it’s an indication that inventory and merchandising are not synced.
Nonetheless, out-of-stocks happen. You can reduce the impact on shoppers by providing the ability to back-order the item, or with a button to “email me when in stock.” The silver lining in out-of-stocks is that you can measure shadow demand — sales you could have made if you had more inventory. It’s valuable data for purchasing and supply teams.
Most retailers hide products that are out-of-stock. This is a mistake. They miss the demand signals that enable reordering in season and planning for the next.
Lessons from Offline
These four hacks are a starting point. Profits are always hard won in retail due to changing demand, long supply lines, and competition. Digital merchandising is evolving from a standalone function to being tightly intertwined with inventory, and from a manual, rules-based process to being automated and optimized by artificial intelligence. Lessons learned in years of offline retailing can teach us much about how to expose products online, and when.