The essential relationship in retail

Seth Godin has written another best seller – Linchpin – and this post has nothing to do with his ideas. Except that I want to poach his idea of a ‘linchpin’ as some a small but essential/ indispensable item.

I was thinking about linchpin in the context of learning about retail/ marketing. (I am a retail trainer by trade after all.) I started a Master of Retail class at University of Wollongong as an adjunct lecturer - my way of giving back - and afterwards I was thinking about whether I was getting the real essentials across – hence the thoughts about knowledge linchpin.

I must digress slightly to contextualise what I would like to say and ask, but stay with me.

Humans have an amazing capacity to create heuristics to make sense of a complex environment. And whilst this is necessary to cope with a flood of information, it stands to reason that much is missed – and that often includes very important ‘facts’. And it is not necessarily a positive thing.

I have always been quiet amazed how people can reduce vast amounts of information to a bite-sized ‘infobyte’. For instance after listening to a 2-hour research presentation, people will latch onto less than a handful of ‘factoids’ which will shape the marketing strategy from there on.

And I wonder if (for instance) our prejudices can’t be attributed to the fact that we create complete mental models based on snippets of perception, heavily filtered by our culture and society – which are almost invariably wrong, but form the basis of our worldview nevertheless.

People generally create these heuristics to help them function and people build their entire approach to life (and work) on such knowledge fragments. The fact that happens is indisputable – and well documented by such luminaries as Cialdini (Science of Influence)

Back to retail knowledge:

Some of these knowledge fragments would have validity, and others would simply be preconceived ideas disguised as experience. [So many people who think they have 20 years experience actually have 1 year’s experience 20 x over.]
This post is about those facts about the retail system that are undeniable; the true linchpins of knowledge as they pertain to the practice of retailing.

What would YOU consider to be a small, seemingly insignificant, but absolutely indispensible piece of knowledge about the practice of retail?

In my mind there are a few such linchpin insights about retailing upon which the entire body of retail knowledge must rest –and should this ever be disproven or changed, it would completely change our understanding

This was a very long-winded way to get around to this simple question:

Which retail insight is THE most valuable and useful for someone in retailing to know?

In my view there are a few such snippets. I will address two of these in another post (Retailing 101). But this principle is right up there:
There is a FIXED relationship between Sales (revenue) and Stock (inventory).

(By fixed I mean ‘relatively’ fixed, since there are individual differences, but that within a range this holds true if all other things are held equal – ceteris paribus.)

That is:

The ratio [stock: sales] is (for a certain category, ceteris paribus) always the same.

So, the stockturn for a jeweller is around 2x per annum. The stockturn for a ladies fashion store is 4-6. And so forth. (This list is a bit dated, but serves to illustrate the point.)

In practice this means that when a store is underperforming, the first metric you should consider is this ratio.

If the ratio is within range (on benchmark) then your only strategic option is to increase your inventory holding. This is the only way to increase sales and in fact it is a PRE-REQUISITE for increased revenue. Because of the fixed nature of the relationship (you can’t increase the stockturn if it is in range) therefore the ONLY option you have is increase the stockholding.

The opposite is true as well of course. If the ratio is too low, then you have to reduce your stockholding or figure out a way to increase the rate of sale. In this case the rate can be increased (through marketing etc), whereas in the first scenario, when the stockturn is on target, you CAN’T increase it further (all things being equal, and certainly not sustainably).

This ONE piece of knowledge (the relationship between stock and sales) is powerful and understanding it makes your strategic and operational decisions simple.

I know so many retailers who don’t understand this, needlessly spinning their wheels with promotions and discounts when it is not the solution.

[Of course you can also increase sales by increasing prices, but I assume that the merchandise is already optimally priced – and if a price increase is a viable option, then you would have taken it already. This is a subject for another post…]

  • I wonder if you agree?

  • Do you have your own ‘linchpin’ insight?

  • Are you willing to share?


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