Financial Strategies in Retail

Many financial strategies are available to help retailers continually improve their businesses, and the best merchants make sure to carefully consider — and frequently revisit — many of them. Aligning these strategies with the particulars of your retail business, market and customers can be a decisive factor in developing and maintaining competitive advantage.

What Are Retail Financial Strategies?

Retail financial strategies are the methods and practices used by retailers to improve their businesses’ finances in the present and the future. Financial and business strategies that can help raise revenue, cut costs, improve cash flow and reduce waste and risk are all part of good retail financial management. There’s a large portfolio of tried-and-tested methods, but the best companies are also willing to experiment and learn from their experiences to come up with the right combination of strategies that works for them.

Key Takeaways

• There are a large variety of retail financial strategies that touch on revenue enhancement, purchasing improvements, cash flow management, risk reduction, technology innovation and more.
• No matter what set of strategies a retail business adopts, it should periodically reassess and reconsider its options.
• Retail financial strategies are more effective when fueled with good data and analytics that are empowered by technology that collects, organizes and analyzes data for interpretation by retail managers.

Retail Financial Strategies Explained

It’s not always easy to draw a line around what is and isn’t a retail financial strategy (and what does and doesn’t belong in a financial plan) because so many areas of business are driven by and directly affect a company’s financial standing. But, broadly speaking, anything involving a retailer’s budgeting, expense planning, forecasting, investing, asset management, compensation, risk management and other financing activities can be considered part of its financial strategy.

This is a huge collection of responsibilities and worries demanding attention, and it would be impossible for retail managers to do a good job in all these dimensions if they were reinventing the wheel each time. Learning from the experiences of others, adopting best practices and leveraging useful technologies help retail managers juggle these competing priorities without dropping the ball on any of them.

Importance of Strategic Retail Financial Planning

Being strategic about financial planning can literally make or break a retail business. It can mean the difference between having enough money to make payroll or not, expanding wisely or overextending, or deftly handling a supply chain disruption or letting it ruin the year. Having products that people want to buy isn’t enough to succeed in a competitive retail marketplace because a more-efficient competitor could offer lower prices, better service, more reliably stocked shelves and more convenient locations. Companies that pay close attention to their retail financial strategies and work hard to improve them will wind up with more resources and fewer problems. And that’s more than enough to produce a decisive competitive advantage over companies that don’t take financial strategies seriously.

Key Financial Strategies in Retail

Many of the most important retail financial strategies fall under a few categories, such as cost management, revenue enhancement, cash flow management, investment strategies and risk management. Retailers often develop a combination of strategies, pulling from most or all categories, to keep their cash flows steady, their growth positive and their risks manageable.

1. Cost Management

Cost management is about keeping costs down, of course, but it’s also about the timing of when costs are incurred and payments are made (which goes hand-in-hand with cash flow management). Being smart about cost management frees up financial resources and improves a retailer’s financial stability. Three key areas of cost management for retailers are inventory, operations and supply chain.

• Inventory control: The goal of a good retail inventory management strategy is to balance the dual needs of stocking what customers need, where and when they need it, while not tying up too much money in unsold inventory and its storage space. Some companies prefer to operate leanly, using a just-in-time inventory strategy that keeps the amount of inventory on hand to an absolute minimum — and, therefore, keeps minimal cash tied up in inventory. But that approach comes with challenges and risks, such as stockouts, that don’t work for all retailers. Another common inventory control strategy is to define a set reorder point that keeps inventory levels within a band that the retailer never goes above or below. But either strategy becomes more complicated to manage for retailers with multiple physical locations (plus warehouses for online orders) because it’s not just enough to have enough inventory — it needs to be in the right place, too. Finally, retailers can choose which method to use for valuing their inventory when reporting on financial statements — the cost-basis “gold standard” or the optional retail inventory method for estimating inventory value.

• Operating cost control: This cost management category covers a broad set of strategies to make operations more efficient and less expensive. Most companies do at least a little bit of this organically, getting better at their routine tasks, fixing problems and improving how they do things through trial and error. But the companies that are best at controlling operating costs maintain meticulous data and analyze it often, constantly on the lookout for opportunities to improve. In such analyses, a good mindset is to look for ways to achieve operational goals more efficiently, not just make each task more efficient.

  Here’s an example inspired by a true story: A franchisee who operated several locations of a retail chain that sells gifts and sweets used a sign-spinning mascot in front of the stores to turn outside foot traffic into customers. Analytics revealed that employees who dressed up as the mascot had the highest turnover — and sign-spinning training gets expensive when new people have to constantly be trained. Follow-up analysis revealed why turnover was high: It was too hot in the mascot suit. Employees hated it, so they looked for new jobs. A mindset locked into efficiency improvement might have missed the best solution: Instead of shortening mascot shifts, adding breaks or redesigning the costume, the franchisee tossed out the entire process and replaced it with someone offering free samples of its sweet treats. After all, the goal wasn’t to have a sign-spinning mascot. It was to get potential customers in the door. The retailer had previously not considered that option due to the cost of the samples, which turned out to be less than the much-higher-than-expected cost of the mascot program.

In this case, the right option wasn’t to make an operational component more efficient — it was to change the process entirely.

• Strategic sourcing/procurement: Being strategic about where and how physical goods, especially those purchased frequently and in large quantities (such as merchandise inventory) is the best way to keep costs from spiraling out of control. Companies face a tension in their supply chain: Too many suppliers are a lot to manage and make it hard to build solid relationships. But retailers with too few suppliers are more vulnerable to supply chain disruptions and price hikes. This is where merchandise financial planning enters the picture. By striking a good balance, a retailer can build a supply chain that is robust in the face of many kinds of disruptions, expansive enough to shop for the best prices, yet with relationships that are strong enough to earn hard and soft benefits, such as volume discounts and advance notice about changes.

2. Revenue Enhancement

Revenue enhancement simply means making more money. While that’s a highly effective retail financial strategy, it’s easier said than done. Still, there are several tried-and-true approaches to boosting revenue — from pricing, cross-selling and upselling strategies to loyalty and customer retention programs — that all retailers should seriously examine for use with their businesses and customers.

• Pricing strategies: One of the most important decisions any retailer makes is deciding how much to charge for each item. Companies have many pricing strategies at their avail, but a few are particularly applicable to a retail setting, especially with brick-and-mortar stores. These include:

  • Competition-based pricing: Prices are set to be attractive relative to competitors’ offerings.
  • Cost-plus pricing: Prices are determined by the costs plus a markup on each item.
  • Skimming pricing: Offerings are rolled out at slowly rising price points.
  • Penetration pricing: Prices are set low in an effort to increase volume and gain market share.
  • Premium pricing: A combination of higher quality and good brand reputation enable retailers to charge more.
  • Bundle pricing: Two or more items are sold together to increase total revenue.

• Upselling strategies: Upselling is a sales technique in which a retailer generates additional revenue by encouraging customers to purchase a more expensive product than they originally intended. Upselling is effective at all price points, from fast food soda and movie theater popcorn to expensive jewelry and custom vehicles. Ideally, upselling involves offering customers a better experience that they’ll value at more than the difference in price. Upselling can involve offering more features, better quality and/or greater size or quantity. It can also sometimes include bundles and add-ons, though that’s often seen as a form of cross-selling instead.

• Cross-selling strategies: In cross-selling, a retailer suggests additional products or services to a customer who is already making a purchase, either actively from a salesperson — a la “Would you like fries with that?” — or recommended by online software, or passively through bundle promotions or other signage. When implemented correctly, customers will feel less like they’re being sold and more like their needs are being anticipated. For example, a clothing store may leverage its salespeople’s fashion expertise to suggest accessories that best match an outfit being purchased, and the customer will appreciate the expert advice rather than resent the sales pitch. For cross-selling to be most effective, the pitch should not be pushy and should focus on the needs of the customer.

• Loyalty programs: If seeing loyalty programs on this list seems surprising, that’s OK. Loyalty programs have so many layered uses, from long-term relationship-building to competitive differentiation, that their direct potential for revenue enhancement may not spring first to mind. But it’s strong. Fundamentally, a loyalty program can be as simple as a punch card — for example, buy 10 sandwiches, get one free. It can also be as complicated as a custom-currency ecosystem of recognition and reward across multiple brands supported by massive IT infrastructure and external corporate partnerships, such as the collection of Avios airline miles programs. Loyalty programs can enhance revenue in several ways:

  1. They can collect data on customers, which, in turn, can be used to target more customized promotions, increasing the frequency or quantity of customer purchases. For example, offering discounts to customers who have been absent for a while can be effective at getting them back in the habit of patronizing the business.

  2. They can offer programmatic incentives to drive purchases on the margin. For example, a business traveler who needs 50 nights each year to hit a “platinum” or “diamond” status with a hotel chain might be willing to pay a little more and drive a little farther to stay at an affiliated property compared with a more convenient and/or cheaper option that doesn’t offer any progress toward the status.

  3. Some companies even make money by selling progress in their loyalty programs, either directly to customers, such as the InterContinental Hotels Group letting customers buy points or status, or indirectly to customers through partnerships — for example, airlines selling frequent flier miles to banks to use as credit card rewards.

  Despite loyalty programs’ prowess in enhancing revenue, it would be unwise to consider them for only that purpose. Some companies view their programs primarily as a marketing expense, offering discounts and freebies in exchange for increased loyalty and a treasure trove of actionable data on the highest-value customers. Even in such cases, loyalty programs drive growth and customer retention, which eventually will translate into higher profits.

• Customer retention programs: This approach refers to a wide range of efforts to maintain customer relationships, including the loyalty programs just discussed and other kinds of VIP initiatives. But there are others, as well, and companies will draw the line between loyalty and customer retention plans at different places. A great place to start with customer retention is in service and support, particularly in situations where customers are having issues. Some of these initiatives are explicit and transactional, offering discounts or other incentives to prevent customers from leaving, such as a few free or discounted months on a subscription to prevent a customer canceling that subscription. More subtle programs are often the most effective. But whether subtle or obvious, going above and beyond to fix customers’ problems in the face of service failures is a major driver of retention because it makes customers feel well taken care of and safe. In some cases, loyalty is actually higher after the service failure than before. In fact, this is a large part of Apple’s retention strategy.

• Optimizing store layouts: Though more of a marketing or operations approach to raising revenue than a financial one, optimizing store layouts to enhance impulse buying and cross-selling is a well-proven technique. Examples include placing high-margin items in a store’s most heavily trafficked areas, in prominent displays or at endcaps; grouping complementary products together; separating the most sought-after products so that customers must traverse a long route through the store to get more than one, increasing the opportunity for impulse buying along the way; and showcasing new arrivals or seasonal collections.

3. Cash Flow Management

Cash flow management is one of the most important aspects of retail financial management — and, too often, one of the most overlooked. There’s often an implicit assumption in retail that as long as the business is selling items for more than they cost, it’ll be fine. But the timing of payments can matter a lot, especially during lean times and, counterintuitively, periods of high growth. For example, if a retailer gets a great deal buying inventory in bulk, but it takes a long while to sell that inventory, it may find itself with insufficient cash reserves in the interim. Similarly, if a retailer is growing rapidly and expanding locations, it will need to fill its new stores with expensive inventory before making its first sale in those locations — which ties up a lot of cash on top of the store-opening expenses. Good cash flow management can improve these tight cash situations and expand a retailer’s ability to take advantage of opportunities.

• Efficient receivables and payables management. All businesses need to think about the timing for which they make and receive payments. Paying for everything immediately if customers take a long time to pay will mean being constantly strapped for cash (unless the business has a large capital cushion). With retail, the receivables side isn’t nearly as complicated as it is in other sectors; customers typically pay in cash or with credit or debit cards.

  On the payables side of the equation, however, retail operations need to strike a more delicate balance. It might seem optimal to wait as long as possible to pay suppliers, but that risks damaging important relationships that can serve as a buffer for problems that might arise. Missing payment deadlines with key suppliers (and likely violating contract terms in the process) is a recipe for disaster. Retailers should make sure to work out payment schedules and terms that work for their businesses in advance, and ensure that suppliers are delivering on all their promises before being paid in full. Solid monitoring and relationship management is important here, and both can be greatly aided by software that tracks and manages inventory and the supply chain.

• Seasonal cash management. Seasonal cash management means managing the business’s cash flow differently based on known fluctuations due to changes in demand throughout the year. Retail businesses often experience seasonal sales patterns, with periods of high cash flow during peak seasons, such as December for retailers that sell toys or June if they sell bathing suits, as well as periods of low cash flow during off-peak sales seasons, such as December for bathing suits or June for toys). A retailer might know the general trends but not the specific highs and lows of any one year’s seasonal fluctuations, so it can be tough to manage this perfectly.

  Here are four important best practices for retailers that face large seasonal shifts in cash flow (though these also may be good ideas for companies with very little seasonal variation):

  1. Create a cash flow forecast. This goes hand-in-hand with demand forecasting and can predict how much cash the business will need — and have — at various points throughout the year. An accurate cash flow forecast identifies when the business is most likely to have cash shortfalls, so they can be addressed in advance instead of causing a last-minute scramble.
  2. Negotiate payment terms with suppliers. Missing a payment to a supplier is bad. Telling a supplier a few days in advance about missing a payment isn’t a whole lot better. But asking the supplier well in advance for longer grace periods to make payments during some months in exchange for more timely payments in other months may be a conversation the supplier is happy to have in order to get and keep your business. Suppliers understand seasonality; retailers should be honest with them about what they need and can do.
  3. Adopt seasonal targets for cash reserves. Many businesses set aside cash reserves for emergencies and time-sensitive opportunities. Retailers facing seasonal challenges and opportunities may want to adjust that reserve balance up and down depending on the seasonal changes in their anticipated needs and risks.
  4. Build strong relationships with financial partners. Sometimes the unexpected happens, and no amount of responsible cash flow management is going to save the day. This is where financial partners, such as a retailer’s primary bank or investors, may be able to make a bridge loan or increase their investment to help the business get through a temporary rough patch or take advantage of an unexpected opportunity.

• Diversification of revenue streams. It may be the case that some of a retailer’s revenue streams are more seasonal than others. Perhaps the brick-and-mortar locations get enough foot traffic that even when website traffic is down, the stores’ enticing displays and frequent promotions make up the difference. Or maybe it’s the other way around: Nobody comes to the stores during seasons of inclement weather, but retailers can make up for some of the difference with good email marketing and online offers to their best customers. More and more companies are exploring subscription models, as those generate much smoother and more predictable cash flow. A business may lend itself to other opportunities and new revenue streams. Even slight differences in cycles can make diversification a worthwhile effort for not only enhancing revenue, but smoothing fluctuations, as well.

4. Investment Strategies

When retailers consider investment strategies, cash management is usually the first thing that comes to mind. While it’s important to make sure the business has enough “liquid” money to handle foreseeable commitments and any surprises, and then to invest the excess for higher yields, it’s not the only kind of strategic investing that retail leaders need to do. Here are three other areas where it benefits retail managers to apply investment thinking:

• Capital expenditure planning. This is the process of identifying, prioritizing and funding purchases of long-term assets, such as property (such as new stores), equipment (such as forklifts) and technology (such as servers). These capital expenditures are necessary investments that usually cost a lot up front but also pay dividends (often in the form of operational capacity) over many years, so it’s useful to think of them with an investment mindset. Which purchase would result in the highest potential returns? What projects are necessary to protect the business on the downside or to maintain the status quo? What projects have asymmetric upside potential?

  One important part of capital expenditure planning is learning from experience. When planning, it’s important to estimate costs, timelines and returns. But after the fact, it’s also important to see how well those forecasts were able to identify areas for improvement in the retailer’s forecasting process. The more it knows about its business and the more experience it builds, the more accurate its forecasts will be, which will, in turn, lead to better-informed decisions and more effective deployment of financial resources.

• Strategic store openings and closings. The decision to close an underperforming store is never easy or pleasant. But if a store is losing money and there’s no viable plan to turn it around, it’s just draining profit. This is when it’s important to think like an investor because some common key performance indicators (KPIs), such as revenue, sales rankings and even number of stores, may urge a retailer to keep that underperforming store open. Investor thinking, though, may suggest that closing the store could unlock assets that can be better deployed — for example, by selling the real estate and reinvesting in higher-potential opportunities or by transferring talented staff members to places where they can generate greater returns for the company and their own careers. Store openings are a little more straightforward, with the exception of figuring out where to open the store. Each retailer is going to have its own criteria for what makes a safe location. A sunglass store needs lots of foot traffic so may prefer a downtown shopping district, while a big-box warehouse store might be more of a destination and prefer to be slightly out of the way where land is cheaper and parking is abundant.

• Technology and innovation investments. While the distribution of possible outcomes from opening a new store can be modeled accurately from past experiences with previous stores, the returns on big technology and innovation investments are more uncertain. By definition, such investments mean trying brand new things that may change the way a company does business — or even the very business it’s in. This requires thinking like an investor, but more like a venture capitalist than a stock analyst. As a category, innovation is one of the highest-yielding places to invest, but any individual innovation project may wind up going bust and losing every dollar put into it. Smart managers will put huge financial commitments only behind ideas that have been validated, whether it’s a large digital transformation project that other companies have successfully implemented or an internal innovation idea that has been tested and worked on at a small scale before being rolled out companywide. Many companies will have large portfolios of innovation projects at the start, with the most promising few among them becoming the ones getting the large investments from management.

5. Risk Management

While most financial strategies focus on the exciting world of faster growth and higher profits, a crucial part of financial management is strategies that reduce risk to protect the business’s downside. The bad news is there are many types of retail risk. The good news is that they’re generally well-studied, so best practices have been developed to reduce each one. Risk reduction strategies usually fall into one of two major groupings: activities that reduce the probability of something bad happening and steps to reduce the damage should one occur.

• Inventory risk: The two key risks inventory managers face are running out of inventory when and where it’s needed and overinvesting in inventory, which ties up cash and may result in unsold goods. Each company has to decide for itself which one is the bigger risk and how to balance them because strategies that reduce one tend to increase the other. For example, just-in-time inventory management greatly reduces the chances a retailer will be left with too much inventory on hand. But a retailer selling snow shovels might see a big demand spike when its supply chain is at its weakest, with roads snowed in and iced over. On the other hand, for a retailer selling perishable items that expire and become worthless, having too much inventory may present greater downside risk than occasionally missing a sales opportunity. Whatever the situation, though, good, automated inventory management software can reduce risks with detailed tracking, which, in turn, can feed high-quality data into planning and forecasting tools so that inventory is managed at optimal levels.

• Market risk: Almost all businesses have some exposure to market risk, in that the demand for most products can change with the whims and needs of customers in ways that are entirely outside of the sellers’ control. Sometimes markets just move in new directions — think, bakeries during the Atkins diet craze, typewriter makers in the age of computers or snap bracelets and denim overalls at the end of those fads. One way for retailers to mitigate market risk is to stay on top of trends and understand their customers’ needs and desires. In some cases, this will flash early warning signs to invest less in certain inventory. In other cases, it may lead to an insight about selling different products entirely. Whether the decline in market demand is temporary or permanent, though, constant investment in understanding its market can keep a business from being caught unaware and end up sitting on a mountain of unsellable inventory.

• Supply chain risk: Retailers are often the final business in a long chain of companies — the last stop of materials and goods before they get into the hands of their ultimate users. At any step along that chain, a disruption can cause ripples downstream that result in retail stores having empty shelves or customers facing long delays. Two ways to reduce this risk is to build redundancy in your supply chains, especially for the most important inputs, and to do business with suppliers who think similarly and have taken steps to protect their own supply chains. A diversified supplier base and contingency planning can help mitigate everyone’s risk.

  Additionally, implementing supply chain visibility tools (from inventory software to GPS trackers on trucks) can provide early warning of potential disruptions, allowing for faster and smoother responses that may not even be noticed by customers. Finally, there’s no substitute for effective communication. It’s important to stay in touch with suppliers in good times and bad because the more information that gets exchanged, the better able a retailer and supplier can work as a team to minimize the fallout from unavoidable disruptions.

• Cybersecurity risk: Too many companies don’t think about cybersecurity risk until it’s too late. With this risk, companies don’t experience negative consequences incrementally. Instead, it’s a risk where everything is fine until it’s a disaster. The main goal of cybersecurity risk management is to minimize the chances of negative events by securing IT systems from both technological and human risks. Regular cybersecurity audits, training for employees and investing in robust cybersecurity infrastructure can help protect retailers. In this case, “robust” requires advanced technological tools as well as very simple human-level interventions, such as a “no passwords on Post-it notes attached to your monitors” policy).

• Regulatory risk: It’s important for a retailer to stay abreast of regulatory changes and have a legal team or adviser to ensure compliance. Some larger retailers even hire lobbyists to try to tilt regulatory changes in favor of the company. The biggest risk comes from being unaware of relevant laws and regulations and accidentally committing crimes, which can result in substantial fines or worse, such as having a location that’s forced to close). Regulatory compliance should be high on the priority list for growing companies especially, as expansion into new jurisdictions immediately introduces new sets of rules that must be followed, whether they’re expanding across a city border or opening a new store on another continent.

• Reputational risk: Reputational risk is like market risk and regulatory risk rolled into one but with a key twist: It’s sometimes the company’s own fault. So the best way to avoid reputational risk is to maintain high standards for products and business practices, while also treating customers and employees with respect. But even businesses that do everything right sometimes wind up painted quite unfavorably in the news or on social media. This can be from the actions of a rogue employee (for example, making racist or discriminatory remarks) or a component in a product sold could become classified as harmful due to research that didn’t exist when the product was designed. To mitigate reputational risks from such unanticipated incidents, a retailer needs effective public relations and crisis management strategies and teams. It’s important to acknowledge the problem head on and aggressively move to remedy it. Businesses seen as dodging and denying a problem, or searching for the absolute bare minimum they can do to make it go away, usually make things worse.

• Physical risks: Retailers maintain valuable and often vulnerable physical assets. Storefronts on desirable real estate, shelves and storerooms full of costly items and, for larger players, a network of logistical capabilities. These assets can be damaged or lost by deliberate threats, such as theft and vandalism, or natural threats, including floods and storms. Retailers can reduce crime-related losses with security measures, and insurance coverage can mitigate financial losses from all causes. For truly disruptive disasters, having contingency and recovery plans in place — including training employees to know what to do — can pay huge dividends. When disaster strikes, it’s helpful to have employees focused on executing what they’ve been trained to do rather than panicking because they don’t know what to do.

• Technological risks: Regular system maintenance, keeping spare equipment in reserve as a safety net, maintaining good data backup and recovery procedures, making continual investments in technology upgrades and hiring knowledgeable information technology staff can help manage many of the risks that come with technology not encompassed by the cybersecurity risks discussed above. From server crashes, to incompatible software systems, to obsolete technology eventually failing, IT support systems are the kind of asset many managers don’t think about until something goes wrong. But this is one area where thinking about it regularly will help prevent occasional disasters.

• Human resource risk: Retailers don’t compete only for customers — they compete for talented employees, too. High turnover is costly, as is hiring people who later have to be let go. Furthermore, being short-staffed adds burdens to the remaining employees, who may start looking for greener pastures and more predictable schedules. The best way to mitigate these HR risks is to become a desirable place to work. That means compensating employees competitively; making sure they have the skills, resources and training to excel at their jobs; and training managers to actually manage well (and aren’t just the most senior or well-educated applicant, a pitfall of many front-line retail locations). It helps to make sure managers know what it’s like to work on the front lines. Waffle House has a famous policy of making sure everyone in every job spends at least some time working in the restaurants, cooking for or serving customers. Not every company needs to go to that extreme, but the people managing and working in the stores will ultimately define a retailer’s reputation and success.

• Financial risk: Financial risk comes in many forms, from bad budgets, to inefficient expenditures, to shortfall in cash when the business needs it most. Fortunately, many of the strategies discussed in this article will help retailers steer clear of those. In addition, implementing regular audits and reviews of their financial policies and processes will help keep operations running efficiently while highlighting problems before they rise to the level of an unavoidable crisis.

Leveraging Technology for Retail Financial Strategy

Many retail financial strategies require data, analysis and precision to implement well, especially on a continuous basis. Fortunately, many of the most intensive tasks can be assisted — or even mostly automated — by technology, including three indispensable kinds of assistance: financial forecasting, retail analytics and inventory segmentation (though note that not every item will be indispensable to every retailer).

• Financial Forecasting

  Forecasting is one of those activities that you’ll never get perfect — but even an OK job provides tremendous value, especially in transitional times. Retail businesses can make smart use of all kinds of forecasts and forecasting tools, from demand forecasting to help plan staffing and inventory levels, to trend forecasting that helps define a future mix of available products, to cost forecasting that helps to decide when to stock up on critical inputs versus when to wait a week to pull the trigger on a large order.

  Forecasting can be data-intensive and statistically complex enough that businesses have no choice but to use technology. Many businesses start out with spreadsheets, but eventually move on to more sophisticated and customizable technologies, such as enterprise resource planning (ERP) systems with built-in forecasting functions. Retailers that require customized models and more detailed control over how forecasts are generated usually hire statisticians, social scientists, data scientists or other experts to use statistical software packages and languages to create and run the forecasting models. (Read more about forecasting and predictive analytics for retail uses here.)

• Retail Analytics

  Retail analytics is the process of collecting, analyzing and interpreting data generated from retail operations to gain insights into the company’s customers and business. Common focus areas for retail analytics include customer behavior, sales trends and operational performance across multiple dimensions, such as comparing stores or regions with each other or identifying which products are performing better than others. The analytics are used to make better-informed decisions about pricing, inventory levels and variety, promotions and other aspects of retail operations. When a retailer knows its key questions in advance, it can even use retail analytics tools to set up experiments that more accurately collect relevant data and then subsequently measure the impact of decisions, such as price changes and email marketing campaigns.

  Most of these tasks are impossible at all but the highest and broadest levels without using technology. A good ERP system will track inventory, sales and operational data with the precision and granularity that is essential for these analytics. Combined with customer relationship management (CRM) information, the earliest signs of economywide trends may, in fact, be buried in a retailer’s own data, from changes in purchasing behavior to what customers say on satisfaction surveys. Statistical computations are made much easier by technology too, but the real challenge is data collection and organization.

  Once a retailer establishes its most useful analytics, it’s useful to set criteria and goals by identifying benchmarks and key performance indicators. Being clear about what metrics are important will help a retailer align employee teams on its goals. But the retailers should be aware that if what it’s measuring is not aligned with its ultimate goals, it may create behaviors it didn’t predict or want.

• Inventory Segmentation

  Inventory segmentation is the process of categorizing and dividing up inventory into groups based on common characteristics that are useful for learning things about the business that can help make decisions. A retailer may categorize inventory by product type because, for example, inventory types, like winter clothing and athletic footwear, are going to have very different seasonal cycles. Another retailer may divide inventory between perishable and nonperishable, and further divide the perishable inventory into groups based on how long they will last on shelves. In that case, the issue wouldn’t be analyzing their cycles but, rather, reviewing inventory stocking levels to gain insights about when and how much to reorder and to see whether the appropriate restocking strategies are in place for each perishable inventory type. A retailer may also categorize inventory by sales to evaluate its best- and worst-selling products separately, as each will require different kinds of attention and thought.

  There are countless ways to categorize a retailer’s inventory; the options are constrained only by what inventory data gets collected. As a retailer’s datasets become larger, however, the complexity increases to the point where it will need to invest in good inventory management software to access the full range of segmentations and resulting insights that might be available.

Mitigate Risks and Manage Strategic Financial Planning in NetSuite

Many retail financial strategies are possible only in the context of good information technology to track, organize and help retailers analyze their data. A good system will collect data on inventory, logistics, customer behavior, transactions, costs and more, while scaling up and down with the business’s needs. Having all of your information in one place adds a lot of efficiency to a retailer’s analytics operation — and expands the scope of potential analyses. A customizable system will help you keep track of new kinds of data as you identify their usefulness to the operation. NetSuite for Retail offers a cloud-based software solution that does all that and more, while integrating seamlessly with inventory management, ecommerce and CRM software to create a truly integrated omnichannel sales and marketing experience for customers. Furthermore, integration with NetSuite Financial Management automates a wide range of retail accounting and reporting functions.

Retailers have a broad array of financial strategies available to them, each representing a challenge but also an opportunity. By carefully selecting the right strategies for their unique combination of business, market and customers — and by deploying good information technology to collect and analyze data — retail managers can create and sustain a competitive edge. These financial strategies can protect a company from risk, avoid or minimize disruptions and make resources available for innovation and expansion, laying the groundwork for bigger and better operations in the future.

Retail Financial Strategies FAQs

How can a retail business improve its financial performance?

There are many ways for retail businesses to improve their financial performance. For example, better inventory management, more targeted promotions and diversifying revenue streams can all lead to higher, smoother and more predictable revenue.

What is the future of financial strategies in the retail sector?

While no one can say for certain what the future is for retail financial strategies, the rapid pace of software innovation is a trend that will likely persist for quite some time. Better tracking of processes and inventory coupled with better data analysis and machine learning will yield new insights, better predictive power and actionable intelligence that will make future retailers more efficient than they could dream of today. For smaller retailers, this means they will gain access to the kinds of IT and analytics support now available to only the largest players. Large retailers will continue to push the envelope on how and where they can find more value. Artificial Intelligence will likely play a role too, guiding decisions on both the back end and front lines, interacting with and collecting data on customers.

How has FinTech impacted financial strategies in the retail industry?

FinTech has enabled retailers to evolve alongside their customers as the world of finance goes digital. “Cash-only” businesses used to be plentiful, but in the digital age where people pay with cards and smartphones, we’re now seeing a proliferation of cashless businesses. FinTech has also made it easier for small businesses to secure loans and invest in growth, with online crowdsourced lending platforms allowing customers to invest in their favorite businesses, giving businesses access to financing that never would have been available before. As FinTech has developed, so have fraud detection and prevention methods, leading to more secure and reliable transactions for both businesses and customers alike. These are only a few ways in which FinTech is impacting retail financial strategies, and the relationship continues to evolve as innovators introduce new tools and capabilities.

How can sustainability be integrated into a retail business’s financial planning?

Integrating sustainability into a retailer’s financial strategy starts with improvements that go hand-in-hand with its business objectives. For example, if a retailer receives many small shipments of inventory, it may save on fuel costs and staff time — while also burning less fossil fuel — by changing inventory reorder points and quantities to require fewer truck trips to its stores. Installing solar panels on the roofs of buildings can decrease the carbon footprint of a retailer’s energy consumption while also providing local power generation should a transmission line get knocked down, thus increasing resiliency and lowering some risk in the process. Some sustainability measures are also appealing to consumers, so using (and advertising) recycled and/or fair-trade certified inputs can make a retailer’s supply chain more sustainable, while also improving its reputation in the marketplace.

What are the four retail strategies?

There are far more than four different retail strategies, but you may be thinking of the “marketing mix” or the “4 Ps.” They are product, price, place and promotion. Retailers must make strategic decisions about each.

• Product: Product strategy is about what products you sell and how you differentiate your offerings from the competition. This includes factors such as brand, quality, bundles and diversity of selection.
• Place: Place strategy is about where you sell your products. This includes deciding on the type of place (e.g., physical location, online presence and delivery options) and the specific decisions you make about each type (e.g., where are the stores and what do they look like, what’s your domain name and how is the website designed and what kinds of shipping options do you offer).
• Price: Pricing strategy is about how much you charge for products and the process used to set those prices. Retailers should consider factors such as competitor pricing, brand reputation and cost structure.
• Promotion: Promotion strategy is about how a retailer communicates to its target customers about product offerings. This can be anything from signage, to television commercials, to public relations events, to direct emails to customers. Promotion strategy can also include special deals offered to customers as enticements, which is really a combination of price and promotion.

What are the 5 components of retail strategy?

There are many ways to divide and classify the components of retail strategy, but some people break retail strategy down into the following five components: scope, goals/objectives, resource deployment, sustainable competitive advantage and synergy.