Sridhar Narayanan, a professor at Stanford Graduate School of Business, was surprised to see a whopping 15% increase in sales of small retailers in his experiment.
Small retailers are vital to the local and global economies, driving up to 30% of GDP in some counties. However, most struggle to stay afloat due to increased competition from Big Retail and eCommerce.
The bigger problem is that there is no research or playbook for small retailers to fight back.
Sridhar led a group of researchers from the University of Texas, the World Bank, and Penn State University to conduct an experiment.
Researchers chose 1,100 random small retailers in 2017-18
Two-thirds of retailers decided to be “modernized” with practices routinely used by Big Retailers
The “modernization” meant helping stores use data and analytics to improve product optimization such as:
Make sure the store has products consumers actually want
Avoiding stockouts (running out of a product)
Keeping an eye on product expirations
Knowing their highest selling and most profitable products
The field agents provided 11 weekly sessions to each retailer, totaling 50 to 60 hours of work
The researchers then collected results including sales numbers at 12 and 24 months after the study began
1. Product optimization increased retailers’ average sales in the shorter and longer-term.
2. At 24 months, stores in the product optimization group had increased their monthly sales by $430, or more than 15%. These represented significant increases given that the businesses’ average monthly revenues were around $2,800.
3. Researchers were concerned that improved sales at the participating stores might come at the expense of neighboring businesses. However, they found no evidence for such a negative impact, suggesting the improvements had an overall positive impact on the local small business economy.
4. Bonus. The researchers realized that the investments in product optimization, on average, paid for themselves in approximately six months.
Researchers say yes. Even though this experiment was conducted in Mexico City, similar results could extend to small retailers in mature markets like the U.S. “Small businesses provide a large proportion of the GDP of even the most developed countries,” Narayanan says. “There may be specific things that work better in a given market, but the broad ideas here would still apply.”
So here are the actionable steps:
1. Optimize products: Test new products every month. Remove products not selling well. This gives your customers options – potentially increasing the average basket/order size. It will also help you find the ideal product mix to carry. Start with tracking your sales data to learn which products and categories are trending up and down.
2. Balance Volume and Margin: Think like a big retailer, let the numbers guide you. A good mix of high-volume and high-margin products can help maximize sales and profitability by store square footage.
3. Keep your finger on the pulse: Follow trends online, in eCommerce, and on social about new and growing products and categories. We’ll be regularly sharing these insights in our upcoming newsletter and blog posts. Don’t forget to learn from other store owners and share your insights with them. Your growth doesn’t come at the expense of your neighbor’s store, as this research finds.
4. It is Worth the Effort – A little time dedicated to looking at data and optimizing your product selection has proven to pay for itself, and then some.