Clothes rail retail

Many retailers are already looking beyond selling their traditional products to exploring secondary revenue options, says Guy Chiswick at Webloyalty.

The last few years have seen rapid change in the way we shop. But change has come at a cost for retailers. Rising operational costs (both on-and-offline), set against fluctuating levels of consumer confidence, an economy facing uncertainty in a post-EU era, and increasing customer expectations means something has to give. It’s profit margins that are feeling the pressure. Even the high street darling John Lewis announced nearly 800 job cuts amid a sea of rising costs, and Next announced its first drop in annual profits for eight years – making it clear no retailer is immune to these challenges.

Tackling the challenge

Recently we partnered with the British Retail Consortium (BRC) to investigate how UK retailers are responding to this challenge. What became clear from our Beyond the Core research is that many retailers are already looking beyond selling their traditional products to exploring secondary revenue options to boost profit margins. In fact, 67 per cent of businesses surveyed reported that at least 1 per cent of their revenue now comes from secondary sources.

But what secondary revenue options are retailers exploring? The list includes affiliate marketing, cross-selling and services, as well as loyalty and reward programmes. Some are achieving more than 40 per cent of revenues in this way, with businesses seeing a 20 per cent or more contribution to total revenue using at least three secondary revenue sources.

Beyond retail, secondary revenue generation is a method that first gained momentum in the travel industry in the early 2000s.Airlines found themselves in a similar predicament – they weren’t making enough money from just selling seats on planes. They needed to look beyond their core proposition and find new ways to remain profitable. This materialised through the introduction of ‘add-ons’ such as travel insurance, car hire and a fee for choosing preferred seats.

Building awareness of secondary revenue opportunities

Despite the high adoption of secondary revenue, there is little awareness of the term itself. According to our research, only 26 per cent of retailers were aware of their business having a secondary revenue strategy in place. What may be exacerbating this lack of understanding is the confusion over which department ‘owns’ it.

The research showed that, for those retailers with these strategies in place, 50 per cent of the responsibility is assigned to sales or commercial teams, with the other half shared evenly between marketing and e-commerce functions.

Although the need for secondary revenue generation will vary by retailer, it seems a greater awareness of the term, and aligned attitudes across the business, is needed to capitalise on the potential the methods offer.

Incorporating secondary revenue strategies into the business

Low margins and an uncertain outlook mean that now might be the right time to explore growth in secondary revenue generation. But it needs to be done a way that fits within the wider business strategy.

It’s important that the programme aligns with brand values, offers customer benefits that are relevant and at the right stage of the customer journey. Cross-selling is a good example of how retailers can capitalise on customers’ when they are already in a purchasing frame of mind by suggesting complimentary goods and services.

Amazon’s platform is a prime example of this; with its “frequently brought together” and “customers who bought this item also bought” prompts incentivising customers to spend more. A report by McKinsey estimates 35% of Amazon’s consumer purchases come from product recommendations based on such algorithms.

Shopper cashback programmes are another way for retailers to save customers money on future purchases. By signing up, consumers can earn savings, discounts and rewards from repeat shopping with retailers that are part of the programme.

To really support retailers’ profit margins, secondary revenue programmes should have little-to-low cost to implement – whether working with third parties, or internally.

Whilst our research showed only a minority (23) per cent of retailers are working with partners to drive extra revenue, 74 per cent reported that their efforts were successful. Clearly there’s a need to carefully consider which providers to work with, but partnering with the right business can both enhance the customer experience and boost revenues for both parties.

Looking ahead to the future of retail

In the current climate, it’s not surprising that many retailers are already exploring alternative options to boost revenues and win customers in new ways.

The number of high-profile closures – and scaling back of operations and jobs – over the last few years are clear signs of the pressure retailers are under. Our research shows there is already an appetite amongst retailers for exploring new ways to diversify their revenue generation. We expect to see this trend continue as retailers strive to meet customers’ expectations and mitigate pressure on the bottom line. It’s clear there are challenging times ahead, and a flexible and creative approach may be just what retailers need to succeed in the long run.

Guy Chiswick, is the Managing Director, Webloyalty Northern Europe