How protection services combat retail’s promotional environment and boost sales margins
This post is sponsored by Cover Genius.
Retailers are wrapping up the most wonderful time of the year -- or rather, the most promotional.
Holiday shoppers are notorious for bargain hunting. In 2018, the National Retail Federation reported that sales and promotions were more important than they had ever been, with two-thirds of Thanksgiving weekend shoppers planning their spending around deals. During the most recent holiday season, NRF found that 75% of Thanksgiving weekend shoppers used mobile devices for product research and purchases, with younger shoppers turning to social media to keep an eye on sales and promotions. And a study from RetailMeNot quantified the importance of promotions beyond the holidays, revealing that promotions have an effect on practically every part of the shopping experience, from customer acquisition to loyalty to brand perception -- especially among millennial shoppers.
This promotional environment hasn't exactly established the best shopping behaviors among consumers, especially once the holiday season ends. But to meet the expectations driven by these behaviors, retailers are forced to respond with promotions and lower prices, especially in today's digital shopping environment where consumers have access to price comparisons on their mobile devices in the palms of their hands.
So, now that the most recent holiday season is over, how do retailers close the promotional gap created during the holidays and boost their sales margins? The answer is simply they must find other areas of their business to make up for the promotions.
"Retailers have to look beyond and see how they can better serve their customers in other ways. This is where convenience and services come into play to offer superior customer experiences and a more holistic shopping experience that goes beyond just the actual physical purchase," said Peter Paine, head of retail partnerships at insurance technology firm Cover Genius.
This might sound easier said than done, but Paine pointed to Target as an example of a success story in using promotions to its advantage while compensating for those promotions through services.
Services success in real life: Target
Target faced the 2019 holiday season head-on following a very strong third quarter. The retailer found a way to balance creative promotions that encouraged shoppers to spend more in the moment while incentivizing them to come back and spend again in the future. It relies on its strategy to build healthy margins despite those promotions through its in-house apparel and home lines that customers have come to seek out as well as through its service offerings such as same-day delivery, in-store pickup and product protections.
Driving shoppers to stores with promotions is obviously important when it comes to the bottom line, but it's the services that help Target establish long-term relationships with its customers, Paine said. The most successful retailers know to prioritize long-term relationship building over single transactions.
"Retailers who think beyond the big sales days and big sale items will be able to build stronger relationships with their customers in such a way that will drive frequency back to the retailer," he said.
Product protection and extended warranties: An opportunity in services
Target's success story illustrates how retailers can turn to services to increase their sales margins. And one services category that can boost retail margins is product protection services and extended warranties.
As Paine pointed out, even retail giants like Amazon are seizing the opportunity presented by protection services and product warranties. And if Amazon sees the value in protection services, other e-commerce brands should, too. Not only do these services close the margin gap for retailers who have no choice but to participate in the promotional environment of the industry, but they also help customers solve a problem by providing them with protection for valuable purchases from the same retailer with whom they purchased the actual product. In the end, this keeps shoppers in the retailer's ecosystem because they don't have to go elsewhere to seek out protection services.
Shoppers who are buying items with high price points want to feel confident with those purchases, Paine said, and retailers who help them with that by offering services like extended warranties and easy claims processes are going to drive frequency, order size, better engagement with customers and, at the end of the day, higher sales margins.
"It just makes sense for retailers to offer product warranties, because that is where customers are already shopping and that is where customers have already put their trust, as opposed to going out to the market to find those types of services themselves," Paine said. "The customer can shop with peace of mind, and the retailer can benefit from the margin upside."