Retail Industry: Revenue Model

Understand the traditional retail revenue model and, what are the variations in different revenue models adopted by key players in the retail industry. Analyze the pros and cons of various models. The most common and most profitable revenue model is that of the traditional retailer. The traditional retailer profits by selling products and services directly to buyers at a mark-up from the actual cost.

Revenue Models – Retail:

Successful retail operations depend largely on two main dimensions: margin and turnover. How far a retail enterprise can reach in margin and turnover depends essentially on the type of business (product lines) and the style and scale of the operations. In addition, the turnover also depends upon the professional competence of the enterprise. Margin is defined as the percentage mark tip at which the inventory in the store is sold and turnover is the number of times the average inventory is sold in a year.

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

Given below are some revenue models adopted by the players of the retail industry:

1. Low Complexity, Low Margin, High Turnover Potential

The most common and most profitable revenue model is that of the traditional retailer. The traditional retailer profits by selling products and services directly to buyers at a mark-up from the actual cost. In the first model, the retailer assumes that low price is the most significant determinant of customer patronage. Low-cost retailers generally sell to the mass market with a strong emphasis on price over quality or other premium product/service attributes.

The stores in this category price their products below the market level. Marketing communication focuses mainly on price. Low-cost retailers typically offer a high number of SKUs at the best possible price. By emphasizing price, the low-cost retailer operates on very low margins and must have the market power to negotiate deep discounts from its suppliers, coupled with significant operational efficiencies. They provide very few services; if any, and they normally entail an extra charge whenever they do. The merchandise in these stores is generally pre-sold or self-sold. This means that the customers buy the product, rather than the store selling them.

Amazon and Wal-Mart serve as 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 efficiencies using digital technology. Pantaloon Chain and Flipkart are the Indian examples of such stores.

2. High Margin Low Turnover

This operation is based on the premise that distinctive merchandise, service, and sales approach are the most important factors for attracting customers. Premium retailers target highly segmented markets with an emphasis on prestige, quality, and performance much more than price. Stores in this category price their products higher than those in the market, but not necessarily higher than those in similar outlets. Many premium retailers find that higher prices positively correlate to the prestige of the brand. In many cases, the premium retailer sells its own branded products instead of reselling other brands. The focus in marketing communication is on product quality and uniqueness.

Merchandise is primarily sold in store and not pre-sold. These stores provide a large number of services and sell select, categories of products. They do not stock national brands that are nationally advertised. These retailers manufacture their own or work with contract manufacturers to develop name brand products for sale at premium prices. Typically, a store in this category is located in a downtown area or a major shopping center. Sales depend largely on salesmanship and image of the outlet.

Williams-Sonoma and Victoria's Secret are examples of premium retailers who have developed their own mainstream premium product category by selling quality, private-label products. Gilt Groupe is an example of a digital premium 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 narrow line of products with a turnover of reasonably high frequency. Cost-plus retailers generally sell to a segmented mass market, trying to maintain comfortable margins instead of focusing on price, and justifying those margins through quality, service, and selection.

They could be situated in a noncommercial area but not too far from a major thoroughfare. Their locational advantage allows them to charge a higher price. High overhead costs and, low volumes also necessitate a higher price. Most cost plus retailers choose specific product segments, such as computers and electronics or office supplies, and develop a level of expertise that mass-market retailers cannot match. Others may offer a broad product offering but emphasize shopping experience or a higher level of customer service.

Staples and Best Buy represent the best examples of cost-plus retailers that focus on specific product categories, while Target is a good example of a cost-plus retailer that offers a broad array of products.

4. Low Margin-Low Turnover Stores

Retail enterprises in this category are pushed to maintain low margins because of price wars. Compounding this problem is the low volume of sales, which is probably a result of poor management, unsuitable location etc. such businesses, normally get wiped out over a period of time. These retailers spend most of their time fighting for sales volume and trying to build customer loyalty.