How variable cost analysis changed in 2020: what retailers need to focus on today

October 21, 2020
By Drew Smith
Drew is the Director of Product Strategy at Upp and focuses on how technology can help brands and retailers deliver what their customers want.

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The current climate has meant that retailers’ variable costs have changed. With retailers facing challenges involving excess stock, increasing their online presence, and managing their inventory online, they’ve been forced to realign their focus. This highlights the importance of retailers having visibility of their product performance.

And although the high street has opened back up, there is still uncertainty that retailers must be prepared for. This article will explain how retailers should be focusing on gaining visibility of their retail spend, aligning their retail teams around the right metrics, and improving profitability, all with the help of the right software.

A look at changing costs in 2020

Let’s get to grips with what a variable cost really is — an expense that alters depending on your production volume. As production and outputs increase, variable costs like direct labour and shipping costs also increase.

The retail industry has made the shift to online shopping as it’s become more difficult for customers to get to brick and mortar stores. The search “buy online” reached a huge 27K in March 2020 due to the current situation. This move has not happened for free.

By looking at some of the key variable expenses impacted by the shift online, you’ll identify pain points and learn how to optimise your performance better in the competitive online retail space.

Marketing costs

One company out of four claim an increase in marketing activities and spending as a result of the current crisis. A large amount of that money and time has been spent on adjusting 86% of UK marketing campaigns which haven’t continued as planned. Rising marketing costs have also been highlighted by our client data, which shows an increase in cost per conversion on some accounts.

It’s been important for marketing teams to consider their margins by boosting marketing spending in 2020 on best-performing lines and to cut back on underperforming products. More than 40% of brands report rising sales of essential products and so have placed a focus there, however this varies depending on the industry.

Distribution and logistical costs

Free returns are a specific distribution cost that has been impacted by the shift online, which is significant in its typically large percent of turnover. This cost is greater now due to mandatory extended return rates, lower minimum spend as well as more customer demand for delivery.

Another variable distribution cost to watch out for is complications with supply chain logistics, which 56% of brands say they have experienced during the current health crisis.

Warehouse and fulfilment

Retailers are used to moderately discounting based on seasonality changes, which is aligned across all UK retailers. However, the current retail climate means that brands are forced into a discounting strategy in a bid to sell excess stock.

A huge incentive for that is to make space for current high demand product categories like home and loungewear, as well as freeing up warehouse space. Discount prices have, of course, had distinct cost effects.

Online data warehousing

Moving the majority of operations online means the implementation of greater security and bandwidth capabilities. Those tools don’t always have a cheap price tag, which makes it a critical variable cost to keep your eye on.

These additional costs highlight how crucial it is for retailers right now to gain full visibility of their costs in order to know exactly which strategies to implement so your business stays at the top.

Gain transparency and insights around your retail spend

Additional variable costs will significantly impact your business. Retailers need full visibility over all of their costs at a granular level, including variables to see how production is changing and to react accordingly.

Some examples of costs that are easily missed but equally as important to identify include:

  • Accidentally overstocking underperforming products, leading to waste and increased costs.
  • Marketing products which are operating in net margin or products which there’s no stock in.

Ensuring that you have greater visibility over your variable costs and that your teams are aligned around the right metrics is crucial to giving your customers what they want. Determining the success of your spend using efficiency metrics like ROAS is not enough — you need transparency over your marketing data as well as your operational retail performance data to ensure that all decisions made drive precise alignment between your marketing budget spent and your revenue and profit objectives.

Gain transparency to make informed decisions

Use AI-driven technology to understand your variable costs

The most effective way to understand product performance is to invest in the right AI-driven tools (like Upp). The right solution will help you gain an overview of your company’s performance on Google Shopping and understand what is impacting your success down to SKU and product line level — something that Google Shopping itself doesn’t provide. That means you can get an idea of your product performance and make effective strategic decisions with your spend accordingly.

Analyse your variable costs

Analysing different parts of your variable costs at different stages with the help of a tech tool will take your business to the next level. Upp’s sole purpose is ensuring businesses are generating substantial growth and increasing profits from their Google Shopping programs.

Upp does this through a simple-to-use, intelligence-led Google Shopping platform that automates many of the day-to-day tasks, campaign structures, and bid updates. It also addresses budget needs while still giving the user full visibility and strategic control. These insights will show you where to focus your attention and lead you to improved margins.

Drive success

With the right tech, you can ensure that your team is in a better position to drive success. From working with retailers and through our own research, it became clear that using metrics like ROAS to determine success was no longer enough.  Similarly, using Google data alone and machine learning recommendations from Google were not enough to drive real success.

Only by matching marketing data with operational retail performance data can you ensure you are making decisions that provide both growth and drive profits. Upp delivers an easy-to-use, AI-led, automated Google Shopping platform that aligns Google to your business goals. It automates your account structure, updates bids strategically and addresses budgets to ensure your marketing spend is operating at optimum performance consistently 24/7.

Get a view of the bigger picture

The right platform can give insights at a granular level as well as a picture of your company’s overall performance. With a bigger picture, you can ensure that your variable costs don’t increase beyond your reach.

You’ll also feel confident that you’re maintaining revenue and margins to help your business thrive in this ever-evolving climate. Start your journey towards becoming one of the 56% of business leaders who say lockdown has become the springboard  — rather than the repellent — for crucial company innovations with the help of Upp. Get in touch today.

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