– Retail Industry: Revenue Model

Retail Industry: Revenue Model

Understand the traditional retail revenue model and what are the variations of the different revenue models adopted by the major players in the retail industry. Analyze the advantages and disadvantages of different models. The most common and profitable revenue model is that of the traditional retailer. The traditional retailer profits by selling products and services directly to buyers at a markup of the actual cost.

The success of retail operations largely depends on two main dimensions: margin and revenue. How far a retail business can reach in terms of margin and revenue depends primarily on the type of business (product lines) and the style and scale of operations. In addition, the turnover also depends on the professional competence of the company. Margin is defined as the percentage at which store inventory is sold and turnover is the number of times the average inventory is sold in a year.

In a given business, two retail businesses can choose two different margin levels, and yet both can be successful, provided the strategy and management style are appropriate.

Below are some revenue models adopted by retail players:

1. Low complexity, low margin, high turnover potential

The most common and profitable revenue model is that of the traditional retailer. The traditional retailer profits by selling products and services directly to buyers at a markup of the actual cost. In the first model, the retailer assumes that low price is the most important determinant of customer footfall. Discount retailers typically sell to the mass market with a strong emphasis on price rather than quality or other premium product/service attributes.

Stores in this category sell their products below market level. Marketing communication focuses primarily on price. Low-cost retailers usually offer a large number of SKUs at the best possible price. With a focus on price, the discount retailer operates with very low margins and must have the power to negotiate deep discounts from its suppliers coupled with significant operational efficiencies. They provide very few services; where applicable, and they normally incur additional charges each time they do so. Merchandise in these stores is usually pre-sold or self-sold. This means that customers are buying the product, rather than the store selling it.

Amazon and Wal-Mart are the best examples of low-cost retailers. Wal-Mart benefits from its vast size in the physical retail space, leveraging its volume operations in the digital space. Amazon has created its own efficiency using digital technology. Pantaloon Chain and Flipkart are the Indian examples of such stores.

2. High margin and low turnover

This operation is based on the premise that distinctive merchandise, service and business approach are the most important factors in attracting customers. High-end retailers target highly segmented markets by emphasizing prestige, quality and performance far more than price. Stores in this category sell their products at a higher price than those on the market, but not necessarily at a higher price than those at similar outlets. Many high-end retailers find that higher prices are positively correlated with brand prestige. In many cases, the high-end retailer sells its own branded products instead of reselling other brands. Marketing communication emphasizes the quality and uniqueness of the product.

Merchandise is primarily sold in-store and not pre-sold. These stores offer a large number of services and sell selected product categories. They do not stock nationally advertised national brands. These retailers manufacture themselves or work with contract manufacturers to develop branded products to sell at premium prices. Generally, a store in this category is located in a city center or a large shopping center. Sales largely depend on the art of selling and the image of the point of sale.

Williams-Sonoma and Victoria’s Secret are examples of high-end retailers that have developed their own high-end mainstream product category by selling quality private label products. Gilt Groupe is an example of a premium digital retailer that has created an outlet to sell other premium brands to a targeted group of customers.

3. High-margin, high-turnover stores

These stores generally stock a limited range of products with a relatively high turnover. Cost-plus retailers typically sell to a segmented mass market, trying to maintain comfortable margins instead of focusing on price, and justifying those margins with quality, service, and selection.

They could be located in a non-commercial area but not too far from a main thoroughfare. Their geographical advantage allows them to charge a higher price. High overhead and low volumes also require a higher price. Most cost-plus retailers choose specific product segments, such as computers and electronics or office expertise, and develop a level of retail that mass marketers cannot match. Others may offer a wide range of products, but emphasize the shopping experience or a higher level of customer service.

Staples and Best Buy are the best examples of premium retailers that focus on specific product categories, while Target is a good example of premium retailers that offer a wide range of products.

4. Low-margin, low-turnover stores

Retail businesses in this category are pressured to keep margins low due to price wars. This problem is compounded by low sales volume, which is likely the result of poor management, improper location, etc. These businesses are normally wiped out over a period of time. These retailers spend most of their time fighting for sales volume and trying to build customer loyalty.

Related links

You May Also Like Retail Industry Trends | Retail Industry: Strategies to Overcome Challenges | Retail Industry: Key Performance Metrics | retail industry competitive landscape | Retail Industry: Value Chain | Consumer Industry Business Dynamics | Challenges in the consumer goods industry | Durable consumer goods | Fast Moving Consumer Goods | Consumer Industry History | Importance of Retail Industry | Retail Industry Overview | Retail Industry – Business Model | Retail Industry Sectors: Types of Retail | Retail Industry – Drivers and Dynamics | Retail Industry: Current Challenges | Retail Industry: Revenue Model | Types of consumer goods

Creation Date Monday August 5th, 2013 Views 15681