The age-old question for many business owners is how to reduce expenses without compromising product quality or customer satisfaction. It’s an important, but not necessarily straightforward, issue to tackle. On one hand, cutting costs can happen in a variety of ways. But on the flip side, sacrificing quality can harm customer loyalty and ultimately hurt profitability. For most retailers, product quality is non-negotiable, even when cutting costs is necessary. This philosophy makes sense, considering customer satisfaction and loyalty are highly dependent upon quality. Fortunately, there are several cost-cutting strategies that retailers can implement without compromising the quality of their products or services. This guide shares 18 such tips that can help reduce operating expenses in retail.
1. Integrate Your Technology Systems
A point-of-sale (POS) system is the combination of hardware and software that powers a retail store. Instead of having each component sit in a siloed system, unifying these components brings front- and back-end operations together into a single business “brain.” For example, a unified POS system can manage orders, customer data, and inventory from one platform, reducing the need for multiple systems and integrations.
This unified approach has been proven to cut the total cost of ownership (TCO) by 22% compared to other vendors. The case of The Conran Shop, a home furnishings retailer, is a prime example. Their previous system required significant financial and time costs to maintain. By switching to an integrated system, they were able to automate email marketing, synchronize inventory data across all sales channels, and sell business to business (B2B), resulting in a 50% reduction in TCO and a 54% increase in conversion rate.
2. Review Payment Processing Charges
Acceptance of credit card payments includes fees that can quickly eat into profits. However, eliminating credit card payments is not a viable option, considering the global trend towards cashless transactions. Review the number of cashless purchases and associated processing fees, looking for more cost-efficient alternatives. For example, debit card payments often incur lower fees compared to credit card transactions.
Clearly display logos from popular banks to remind customers of cheaper payment options. Analyze your current payment processor’s rates and consider negotiating better terms or switching to a more cost-effective processor. Sometimes, even a small reduction in processing fees can lead to significant savings over time.
3. Prioritize Customer Loyalty Over Acquisition
While acquiring new customers is a common marketing goal, focusing on customer retention can be a more cost-efficient strategy for boosting sales. Statistics show that it costs more than five times to acquire a new customer than to re-engage an existing one. Moreover, repeat customers tend to spend more, and their spending typically increases over time.
Retailers can enhance customer retention by implementing loyalty programs, reaching out to customers during significant milestones, and improving customer service. Leveraging data from unified customer profiles can help personalize the shopping experience. For instance, by using first-party data from unified profiles, retailers can personalize marketing efforts, resulting in higher customer engagement and retention rates.
4. Examine Your Expenditures
Operational expenses can pile up quickly, but not all of them are essential. Conduct a thorough audit of all expenditures to identify where cuts can be made without affecting business operations. Start by categorizing expenses into three major groups: good costs, bad costs, and best costs.
Good costs are unavoidable operational expenses, such as cable, internet, and credit card processing fees. Bad costs are expenses that provide little to no value, like renting unused retail space. Best costs are those that drive profit for the store, such as negotiated supplier rates or effective marketing strategies. By identifying and eliminating bad costs, retailers can free up more resources to invest in high-return activities.
5. Lease Your Retail Space
The average monthly rent for a shopping center store can be quite high. To offset these costs, consider leasing out a portion of your retail space for events or other retailers. You can improve profits even further by negotiating a portion of sales from these events or retailers.
If your store has a community space, rent it out for events or meetings during or outside store hours. Sponsoring events with other retailers can also boost foot traffic to your store. This strategy can not only contribute to maintaining the space but may also attract new customers who are more likely to shop at your store during or after the event.
6. Opt for a Smaller Space with Showrooming
Retailers experiencing significant online sales might consider downsizing their physical store. Before making this decision, ensure that your online customers do not rely heavily on in-store shopping experiences. Many customers prefer seeing and interacting with products firsthand before making a purchase.
Showrooming allows you to showcase a few core items in a smaller retail space, thereby reducing operational costs such as rent and utilities. Customers can visit to see the products and then make their purchases online. If maintaining a brick-and-mortar store year-round isn’t feasible, consider opening a pop-up shop to provide the in-store experience without the long-term financial commitment.
7. Adopt Just-in-Time Inventory Management
Implementing a just-in-time (JIT) inventory approach can help reduce storage space and improve cash flow. Instead of keeping large volumes of inventory on hand, JIT replenishes stock just before it’s needed. This strategy minimizes the costs associated with storing excess inventory and reduces the risk of overstocking.
To implement JIT effectively, it’s crucial to have accurate sales data and strong supplier relationships. Understanding customer demand patterns and collaborating with suppliers who can deliver inventory quickly are key to making JIT work. This system aligns inventory levels closely with actual sales, cutting down on waste and storage costs.
8. Launch an Online Store
Online retail is booming, with consumers expected to spend $8 trillion online by 2027. Having an online presence is crucial for a successful omnichannel strategy. Investigate the customer journey to see how shoppers interact with your retail channels, and ensure your online store is an extension of your physical location.
A unified system that gathers data from all sales channels and funnels it back to customer profiles can provide valuable insights. Retailers who have adopted this approach report significant growth in omnichannel sales. For example, combining the retail and online environments can enhance customer experience and drive sales. By migrating operations to a platform that integrates seamlessly, retailers can reduce costs and improve efficiency.
9. Streamline Fulfillment and Shipping
Shipping costs are inevitable for retailers with an online store, but there are ways to minimize these expenses. One approach is to reduce the size and weight of packaging by opting for smaller boxes or shipping bags. Negotiating rates with shipping partners can also lead to significant savings.
Offering in-store pickup options, such as buy online, pick up in-store (BOPIS), can eliminate shipping costs altogether for customers near your location. Unified inventory data can ensure that customers are not directed to stores where the product is out of stock. Brands like Parachute have successfully implemented alternative fulfillment options, leading to substantial cost savings.
10. Utilize Business Relationships
Retailers who have maintained long-term relationships with vendors and suppliers can often negotiate better rates or additional perks. Loyalty can be rewarded with bulk pricing or free shipping. Additionally, it might be possible to bypass third-party suppliers and purchase directly from manufacturers.
These direct relationships can lead to lower wholesale prices, which, when combined with stable retail prices, can significantly boost profit margins. Retailers should take advantage of these opportunities to renegotiate terms with suppliers and vendors regularly.
11. Embrace Automation
Automation offers a way to reduce costs and save time by streamlining repetitive tasks. By automating processes like inventory management, customer service follow-ups, and shipping logistics, retailers can focus their efforts on more impactful tasks that contribute to business growth.
For example, creating automated purchase orders when stock levels fall below a certain threshold can prevent stockouts and maintain optimal inventory levels. Automated emails requesting customer feedback or directing ship-to-customer orders to the nearest warehouse can also improve efficiency. Choosing POS software that includes automation features can centralize these processes, saving both time and money.
12. Delegate Time-Consuming Tasks
Outsourcing is another effective way to cut costs and free up staff for more valuable activities. Tasks like order fulfillment, marketing, and administrative duties can be delegated to specialists or third-party providers.
For instance, partnering with a third-party logistics (3PL) provider for order fulfillment can save the time and cost of maintaining an in-house distribution center. Similarly, hiring a freelancer or agency for marketing efforts can bring expertise to your campaigns without the need for a full-time hire. Ensuring that these outsourced tasks are managed effectively can lead to significant cost savings and increased operational efficiency.
13. Reassess Employee Perks and Benefits
While it’s important to offer perks to attract and retain employees, not all benefits need to be expensive. Revisit the current benefits package to identify cost-saving opportunities. Reducing contributions to employee retirement plans by a small percentage or renegotiating bulk membership discounts with local gyms are potential areas for savings.
By making small adjustments across the board, significant cost savings can be achieved without diminishing employee satisfaction. Negotiated local gym memberships, for example, can be a cost-effective alternative to higher monthly stipends for health activities.
14. Align Staff Schedules with Demand
Optimizing staff schedules based on demand can prevent overspending on payroll during low foot traffic periods. Use data to track peak shopping times and plan staff rotations accordingly.
Tools like foot traffic counters can provide valuable insights into customer flow, enabling retailers to schedule shifts that align with demand. For example, if Wednesdays are historically slow, having fewer staff on duty can minimize labor costs without affecting customer service.
15. Shorten Operating Hours
Keeping a retail store open for extended hours can drive up costs related to lighting, heating, and staffing. Reducing operating hours can help cut these expenses while still serving your customers effectively.
Consider closing the store on traditionally slow days, like Mondays, or opening later in the morning to capture midday shoppers. This strategy not only lowers operational costs but also emphasizes the importance of online shopping options. Make sure customers are aware of your online store through signage and communication, allowing them to shop at their convenience even when the physical store is closed.
16. Provide Digital Receipts
Digital receipts reduce printing costs and offer a way to collect customer information for future marketing efforts. By emailing receipts instead of handing out paper copies, retailers can cut down on waste and improve their marketing database.
Use the data collected through digital receipts to personalize marketing campaigns, such as recommending products similar to previous purchases or sending reminders for seasonal sales. This eco-friendly approach can enhance customer satisfaction while reducing operational costs.
17. Use Energy-Efficient Devices
Implementing energy-efficient appliances, like LED lighting and smart thermostats, can lower utility costs significantly. Simple adjustments, like reducing A/C usage or upgrading to energy-efficient light bulbs, can add up to substantial savings over time.
Retailers can also minimize printing costs by using QR codes for advertisements. Shoppers can scan the code with their mobile phones to access detailed product information on the retailer’s website, making it easier and cheaper to update promotional materials.
18. Be Strategic with Discounts
Accepting credit card payments involves fees that can quickly chip away at your profits. Despite these costs, eliminating credit card payments isn’t practical given the worldwide move towards cashless transactions. To manage these expenses, review the volume of cashless purchases and the corresponding processing fees, and consider more economical options.
For instance, debit card payments often come with lower fees compared to credit card transactions. It’s a good idea to prominently display logos from popular banks to remind customers of these more affordable payment methods. This can help guide them towards using options that save both you and them money.
Additionally, it’s crucial to analyze the rates of your current payment processor. Take the time to negotiate better terms or even look into switching to a more affordable processor. Even a small reduction in processing fees can lead to substantial savings over time.
By taking these steps—reviewing your transaction fees, encouraging cheaper payment methods, and negotiating better rates—you can significantly reduce costs and improve your bottom line without sacrificing the convenience of cashless payments for your customers. Such measures ensure you remain competitively priced in an increasingly cashless economy.
