Inventrak Blog

Retailers spend money on marketing in the same way as stockbrokers speculate on the market.

During good times they spend money on any new fad or idea that they hope will rapidly grow their business. In dark times, like what we are experiencing at present in certain economies, they go into their shell cursing all of those supposed great ideas.

Cutting back drastically on marketing is a bad idea. When times become good again, the market will only remember those who were always present. Stopping spending on marketing altogether is the ultimate sin a retailer can make.

If you treat marketing as an investment, instead of an expense or a gamble, you start to make smarter decisions. Yes, there is risk involved. The more aware of where your retail business is at in the business life cycle or economic cycle, ensures that you spend your marketing dollars on higher return investments.

With less people walking through your doors, the worst thing you can do is spend more cash in the hope that this trend will dramatically change. Holding sales events to drive customers is also a bad idea, because you reduce margins along with increasing the volume of transactions. Higher volume of transactions means more stock to process and more people to process the sales; this leads to higher wage costs and low gross margins which equal death.

Now is the time to move most of your marketing dollars from customer acquisition and brand building activities to customer retention strategies i.e. your customer loyalty program. Here are some of the things you can move your dollars into;

- Increased floor coverage especially in peak times: I can hear you now "This is not marketing spend". Yes it is. Sales and marketing is the same thing - they both try to get more customers. Having adequate floor coverage increases conversion rates and also average customer spend.

- Commission for sales staff: I have seen commission programs being implemented that have doubled conversion rates overnight, and at most a couple of months. If you want to change the behaviour, change the motivation.

- Loyalty program: Sign up as many people as you can. If you can have 25% of your business being repeat loyal customers you can ride through any economic cycle. Your friends remember you in good times and in bad.

- VIP events: A quick way to inject some much needed cash in the business, and also to reward those who are loyal to your business. Make sure when you have a VIP event, that you extend the invitation to 2 of their friends (helps increase your database).

- Commission/prizes for loyalty program sign ups: Reward your team for building one of the best assets your business can have.

- Incentives for the profitable loyal customers: Even if you have a large and healthy database, within this is are sub groups of profitable, break-even and loss making customers. Focus on the profitable that drive your business, and give them incentives to spend more within your stores.

All the drama going on in the world economy has thrown a whole heap of debate of what will happen next. Some of the dialogue has been confusing. Politicians and the media have not made it any easier with their fear campaigns, spin or just general lack of understanding of economic fundamentals.

I am here to give you an understanding of what has happened, and how all of this massive change will affect consumer spending - you know the people who shop in your stores.

Debt Levels got out of Hand in the US - Let's not too caught up in this sub prime thing. Basically debt is debt, and Americans have a lot of it. And don't waive your fingers at our American friends, the OECD average for personal debt 79.5%. Essentially when you borrow money, can't make the repayments and the house is worth less than what you paid for it, you are in a bit of bother. Top that with some credit card debt, and you get the picture.

The World is fuelled by American Consumerism - Over 60% of America's GDP is powered by consumer spending. No matter what the politicians promise to rectify over there, it's going to take some time for the world economy to turn around. I'll explain things as I go along.

Surely We Can't Rely on the US for Everything - When the US stop spending, poor old countries like China, India, and their Central/South American counterparts stop producing. No use making goods if no one is buying. China's growth is slowing and India has an issue with inflation (and some reported job losses). We need to hope and pray that they can be the growth engines of the world economy, whilst the original powers sought themselves out.

Yeah But What About These Countries With Commodities? Surely They've Got Money - When people stop spending money, factories stop producing items, which means they don't need the commodities to produce the products (or the fuel to ship them their). The markets know this, so they dump these commodity producing countries currencies. When their currency goes down, the price of imports (consumer products) goes up. The once cheap plasma screen TV, is not so cheap now.

The World Got Scared (Particularly Europe) - The number one selling car in the UK is BMW 3 Series (it alternates with the Ford Mondeo for the top spot), so you know they thought times were good. Also when a little known island called Iceland has businesses buying English Premier League soccer teams you know something is not quite right.

So when the US went under, Europe got cold feet, and all of the sudden the markets in Europe crashed. Banks, like all publicly listed companies, need shareholders money as capital for their business. When this capital gets pulled from under their feet, all of this debt that the banks had all along is being exposed. So the banks needed the governments money (new capital) to keep them running.

Why Bail Out the Banks - Because when people feel good they spend. When they feel scared they stop spending. For economies to grow they need people to spend money. It's a vicious cycle. So governments bailed the banks to make people feel safe and secure, so that they can spend their money again.

So what should you take from all of this. My advice - don't panic. You'll only do something stupid.

People are still buying things. It is estimated that 86% of purchases are emotional, so I don't think spending is going to go cold turkey. The people, who are tightening their spending, did not have the money to spend to begin with. It is just that when times were good, they got blinded and spent like crazy.

But here are some things you can do;

§ Increase prices on unique items, as this will protect you from inflation eating away at margins

§ Focus on converting the people coming through the doors into customers. There is going to be less people shopping, you need to maximise the all opportunities

§ Focus on building loyalty. It is proven that loyal customers spend more than people off the street, and come into your store(s) more times a year

§ Tighten you product range to focus on core categories. Excess stock ties up cash, and a lack of cash closes down businesses