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What is ROI in Retail
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Omnichannel Retail ROI has been a highly elusive topic, so what is ROI in retail? Sure omnichannel retail is critical to a retailer’s competitive edge. We have all espoused this enough to know that it must be true… right? It might be a competitive edge, but does it pay? It is important to your brand, and to cater to your customer’s desires and shopping needs. Dozens if not hundreds of articles espouse how omnichannel retail provides more revenue, increases foot traffic, and is important to every retailer’s bottom line. Although proof points on the omnichannel retail ROI are scarce, let us run through a journey. What follows is a back of the envelope business case analysis.
Unified commerce is important to your brand. It is important to cater to your customer’s desires and shopping needs. No question about these points. Dozens if not hundreds of articles point out how omnichannel retail provides more revenue, increases foot traffic, and is important to every retailer’s bottom line. Strangely, despite these verbal affirmations, seeing a back of the envelope calculation, using some of the industry statistics, seems rare. That is exactly what we set out to do. Although proof points on the omnichannel retail ROI are scarce, let us run through a journey. What follows is a back of the envelope business case analysis.
Consider this a journey. What this post does is to collect some of the industry stats, and start the discussion of what is ROI in retail. Here is my ‘back of the envelope’ business case analysis. Where we will start is by JUST looking at the upside of buy online and pick up in-store (BOPIS). I will interchangeably call it Click and Collect.
This is a journey because there are many simplifying assumptions to an exercise like this one. Yet, it is important enough, to start this conversation even with incomplete data.
This first step will only look at the upside of click-and-collect. At this stage shoppers often purchase more items on an order pickup. Keep in mind that it is NOT the complete solution to the omnichannel retail ROI calculation, however.
To start we will use a highly conservative approach. For future posts, we will add the efficiencies that a robust best-of-breed order management system brings to an organization and extra revenue generators.
Presume we have a retail chain of 20 stores, and one online eCommerce shop. Imagine that each store generates sales valued at $750,000 per year. This seems conservative when many retail annual reports easily show per store revenue in the $1M – $2.5M range. A quick search of online and offline average order values (AOV) provides a range from $86.93 (Statistica, 3Q2016) through to $153.83 (calculated from US Labor Statistics figures 2015, split monthly). An average of five such AOV’s amounted to $120.51, for our study.
Looking below at the main calculation, divide the revenue per store, by the AOV to give us the total number of orders expected per store. In our example, this amounts to 6,224 orders per store per year. If you know the number of order you accept per store per year, you can plug in your own value, and calculate through to see what it means to your specific business. Back to our case, presuming the average customer purchases 2.5 times per year at this store (some will be more, while others will be less), means that roughly 2,490 customers purchased at any given location.
Tried Click and Collect
There are several statistics estimating the number of customers who have tried Click and Collect (C&C) services. For our calculation, we take an average across seven quoted articles in the chart, below. Rather than trusting any particular or individual study, we take an average presuming that like crowdsourcing, the mean of a series of different opinions (studies in our case), is probably the closest to the truth.
Business Insider, CNBC, Forbes, Internet Retailer, ICSC 2017, ICSC 2016, HubMagazine
Averaging the various studies, suggest that 45.7% of customers have tried Click and Collect. Of these customers, some will become immediate advocates of being able to pick up their ordered goods right away, and with no shipping costs. For many customers, the big advantage is no shipping charges regardless of the purchase size. On the other side of this point is that a customer pickup also saves the retailer the cost of shipping on the ‘free shipping’ orders. However, to simplify our first step on the journey, we will not consider the shipping fees side of the equation.
Another simplification to calculate our first step omnichannel retail ROI is to presume each click and collect customer only orders once. Naturally, we all hope that a customer who has tried BOPIS will become a repeat BOPIS customer. However, to keep our first step model easy, let’s run with this presumption of one-time-only customers.
To be extra conservative, although almost half of the consumers have tried Click and Collect – we will presume that only 15% of the group of consumers who have tried C&C, are YOUR customers. It should easily be more than that. For this exercise, we don’t want to come out with an overly optimistic view of the omnichannel retail ROI. It is better that we are conservative in our analysis. This means providing a range of realistic possibilities, rather than a blue-sky solution that works on theory but not in the real world.
A big presumption at this point is that we will use the retailer’s in-store customer base. This simplifying approach takes a raw estimate of the number of customers who visit a particular store. Use this to estimate the number of customers who will make ONE of their purchases using click and collect. Yes, it is a big presumption. However, it gets our journey started and pointing in the right direction. Implicit here too is that each BOPIS order is equivalent in AOV to an in-store basket of goods.
Calculating through, that means 15% of the full 45.7% (discussed above) of Click & Collect clients will make an omnichannel purchase. That gives us 171 Click and Collect orders from the customer base of 2,490. Comparing against an expected 6,224 annual orders, 171 BOPIS orders should seem do-able for most retailers.
Omnichannel Retail ROI = Selling More
The final phase of our omnichannel retail ROI calculation is to work out whether customers will purchase more, and whether those purchases are substantial? Looking at the body of research we took an average of the findings (see below). This average worked out to 58.8% of consumers who arrived in-store for a pickup, ended up purchasing more items.
Forbes, ICSC 2017, ICSC 2016, Forrester
Continuing to take a conservative position, our calculation presumes each customer trying out a buy-online pickup in store (BOPIS) order, will only place ONE such order during the year. Although this is unlikely, it will give the model the conservative estimate we seek as the baseline. Multiplying 59% of pickup orders against the 171 order pickups means we expect 100 customers to purchase additional items on their order pickup.
Adding Sales at Pickup Time
Customers who purchase more on a pickup probably purchased an additional 25% of the value of their pickup. After a review of the literature, articles and studies, we only found anecdotes on the upside potential. Most hovered around 20% or 25%, although one suggested a high of 125% upside. When a customer is in-store they often realize they need batteries with the device, or could use a new belt to match the new shoes. Using a 25% upsell provides an extra $30.13 based on the initial AOV of $120.51, with which we started.
Return On Investment
In our highly conservative business case, the store added $3,013 to their annual sales revenue. Compared to against the store’s base sales revenue of $750k, our calculation estimates a sales uplift of 0.4% per store. Across the full retail chain of 20 stores, this comes out to $60,253 in added topline revenue, using a highly conservative set of estimates.
A More Aggressive Model
What if we took a more aggressive perspective with this case scenario? A more aggressive model includes:
- Promoting the click & collect service to encourage more customers to try it (average of the top 6 studies being 52%)
- Presume that just 5% of your click & collect customers used it more than once
- A higher frequency of consumers bought more items during an order pickup (average of top 3 studies were 65%)
- Pickup customers bought an average of 50% of their initial purchase (est: $60.25).
When plugging in these more aggressive conditions, we show that each store can generate an additional $13,617 per store. That is an extra 1.8% of the store’s revenue. All told, this would add $272,345 to the chain’s topline sales revenue.
Real World Comparison
The best way to gauge whether this simple calculation has any value is to compare against what we are seeing in the real world. There are not many reports espousing the profitability of one retailer or other due to omnichannel retail, however, there are some discussions. A recent Internet Retailer post pointed out that J.C.Penney claimed that “consumers picked up nearly 40% of JCP.com orders at a local store in the fiscal third quarter ended Oct. 29.” The same article pointed out that Kohl’s experienced 5%-6% in-store customer pickups in 2015, and that nearly 15% of online orders at Target requested in-store pickups. Comparing our dry business case mathematics to real-world examples lends more confidence to our omnichannel retail ROI exercise.
First Step Omnichannel Retail ROI
Purely looking at the single aspect of extra retail sales with customer pickups, a retailer stands to gain between $3k – $14k per store – based on average annual store sales of $750k. This means the omnichannel retail ROI for a retailer is an upside of 0.4% to 1.8%, purely from looking at one aspect of the full equation. This comes from merely promoting BOPIS as an option for its customers.
A small-mid sized retail chain of 20 stores can easily appreciate increased sales revenue of $60k – $272k.
Naturally, this case study is hypothetical, and there are many variables involved in doing omnichannel retail, well. However, this simple perspective serves to show the importance and potential impact that a shift to unified commerce can have on a retailer’s business. Equally interesting is that this simple calculation did not look at other efficiencies provided by the main engine of omnichannel retail – the order management system. These include effective order routing, the impact of reduced discounting due to higher in-store stock turns, increased inventory efficiencies, and improved returns practices.
All told, does an omnichannel retail ROI exist? If done right, a simple math journey suggests YES! Our back of the envelope calculation shows that opportunity exists for the smart retailers firing on all cylinders/channels. Yes, an omnichannel retail ROI is quite achievable.
Related: Retail Order Management