Secondary Revenue Streams in Retail

The retail sector has been in doldrums in the recent past. The entire industry is struggling financially.

The financial troubles within the retail sector are indigenous. However, time and again, external shocks such as Covid-19 and Brexit exacerbate the financial trouble. The end result is a large wave of bankruptcies. These bankruptcies do not only affect small and medium retailers.

There are many large retail corporations which have either declared bankruptcy or have gone in for a financial restructuring.

Retail companies have come up with a wide variety of ways in order to counter this challenge. One of the mechanisms being followed by the retail industry is to generate additional sources of revenue i.e. additional revenue streams.

The trend of having additional revenue streams has caught some traction in the retail industry. More than 70% of retailers in the United States have already experimented with creating some sort of a secondary revenue stream.

In this article, we will have a closer look at what are some of the popular sources of secondary revenue in the retail sector.

What is Secondary Revenue?

The primary way in which retail stores earn money is by selling a product from their inventory. The markup applied by the retail stores generates the gross margin which is supposed to pay for all expenses of the retail sector. Hence, any other source of income which can be generated by the retail stores which does not depend on selling products and earning a gross margin from those sales can be considered to be a secondary source of revenue.

Why is Secondary Revenue Important?

The importance of secondary revenue in the retail sector has increased because of several reasons:

1. The retail environment has become extremely price competitive. As a result, there is a continuous downward pressure on the gross margins. At the same time, there is an upward pressure on the costs because of inflation. Hence, primary revenues are drying up for retail companies

2. Retail companies have realized that even though their product margins are low, the partners which sell products in their store have huge advertising budgets which sometimes rival the margin of the product being sold itself

3. Secondary sources of revenue allow brick and mortar retail companies to generate some additional streams of secondary revenue as compared to online retailers. This helps them level the playing field to some extent.

How Is Secondary Revenue Generated?

Over the years, retail companies have been able to generate several sources of secondary revenue. Some of the important sources of revenue are as follows:

1. Signage Revenue: Retail stores have realized that they generate a lot of relevant footfalls for the brands. Almost every person that walks into a retail store is a potential customer for a brand. Hence, if these brands advertised at the retail store, their chances of generating higher sales would be better. This is because the potential customers can make their purchase decision almost instantaneously while at the retail store.

   Hence, many retailers have come up with promotional marketing tools which brands can use. They can use the audio medium, visual medium or even the audiovisual medium. Retail stores are equipped with digital LEDs which be used by brands to advertise their products. Over the years, brands have shown increased interest in spending money for improved signage in the retail store. This has led to increase revenue for retail companies which are trying to augment this source of revenue.

2. Favourable Placement: The placement of the products on particular shelves of the retail store lead to higher sales. Retail stores have realized that they can generate additional revenue by selling more favourable shelf space to brands at a premium.

   For instance, some brands are willing to pay a price for their products to be placed at a prominent position within the store. It is now common for retail stores to charge higher for products to be placed close to the entrance or exit. They also charge a fee to place the products at a shelf whose height matches with the eye level of an average adult.

3. Data Mining: Retail stores interact with the customers in many ways. It is for this reason that these stores have lots of data related to these interactions. The issue is that the data is stores in various systems such as CRM, PoS, ERP etc.

   Retail companies have started transferring the data into a data warehouse. These companies then use advanced data mining techniques in order to generate meaningful information from this raw data. Retail companies have started selling the insights from this data to their partners in exchange for a fee. Since the marketing strategies of many large brands is based on this data, there are many partners who are willing to pay a high price to obtain it. In some parts of the world, this revenue stream may not be feasible because of strict adherence to privacy laws.

4. Advertising Services: There are some big box retailers which have gone a step ahead and have started offering their own advertising services.

   Companies such as Walmart, CVS etc have started offering advertising services to their partners wherein they create an entire advertising and promotional campaign using various channels. Many brands have started using such services and as such retailers have been able to generate significant revenue through this stream.

It can be said that retailers across the world have become increasingly dependent upon additional sources of revenue. It is important for retailer to identify and augment such sources at the earliest in order to maximize their revenue.