Understanding and Managing Retail’s Open Loop

 

Retailers often use mailed catalogs or email blasts to generate traffic and increase sales. There’s nothing wrong with this strategy as long as the retailer is properly using their respective databases and doing their best to showcase good products at competitive or promotional pricing.

There is, however, the phenomena called the open loop that both the retailer and any sponsoring supplier must consider.

The open loop (not to be confused with open-loop gift cards and redemption) is when a retailer advertises an item and that advertisement does its job of drawing the customer to the store. The open loop happens when the customer, once in the store, decides to purchase something besides the advertised item, and purchases another item or items. That’s the open loop – the retailer cannot control the customer’s behavior once they are in the store – the customer has an open palette from which to choose.

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This open loop phenomenon is not a bad thing, it’s just something to be managed.

The retailer  needs a plan. For nearly every item advertised the retailer needs to make use of the open loop and have items adjacent to the advertised item that are either higher value, better value or complementary. That way, the customer has logical choice and can see an array of items. If they choose the better item, the retailer has made better margins and the customer has potentially a better product. If they see and  purchase a complementary item along with the advertised item, then the average ticket just grew which is one of the most important goals of a retailer.

The supplier needs a plan. The supplier who may be subsidizing the advertisement needs to have multiple ways of analyzing the success of the promotion. For example if they subsidized widget A and it did not meet sales expectations, but the rest of their line was successful, that’s not necessarily a negative. The traffic and sales caused by advertising widget A bumped your business. The supplier can’t always judge the effectiveness of the subsidy just based on the item they advertised.

The open loop can also apply to the whole store. For example a multi-department store may have a huge sale in one department that delivers store-wide traffic. The store management needs to be sure the other (non-promoted) departments have a plan to take full advantage of that traffic, in fact, they may  have more pressure on them because the advertised department may be featuring lower margin products to bring in the traffic. Therefore, the other departments selling at full or slightly reduced margins need to succeed and create the overall margins necessary to adequately support the business.

Managing the open loop should be part of every retailer’s overall merchandising and promotional planning as well as part of supplier’s planning and promotional product presentation.

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