Retail strategies in times of economic uncertainty: Cut costs or reinvest?

Reacting to economic uncertainty: The cost-cutting dilemma

February 2, 2023
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Retail strategies in times of economic uncertainty: Cut costs or reinvest?
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Retail strategies in times of economic uncertainty: Cut costs or reinvest?

The myth of cost cutting amid economic uncertainty

Retailers often react swiftly to a down quarter by cutting costs. However, cost-cutting might not be the best route to take, especially in times of economic uncertainty. Instead, strategic reinvestment can often yield a stronger return.

When cost cutting makes sense

Cost cutting could be beneficial under two circumstances:

  • Your business is operating at its maximum capacity.
  • Your store cannot substantially increase profits with its existing customer base.

In these cases, cost cutting could maximize profits or avoid cannibalizing expected revenue.

The reinvestment advantage: A better path forward

Cutting costs is wrong when your on-site capacity is not fully utilized. As a rule of thumb, don’t cut costs if the following applies to your stores:

  1. Your business has excess capacity on site.
  2. You have the market share to gain (i.e., more customers you could serve).
  3. You have the ability to profitably acquire new customers or profitably increase current customers’ spending.

If one or more of these cases applies to you, cutting marketing or advertising costs may exacerbate the existing issues. Many brands would do better by seeking recession-proof investments that help them maintain market share and grow, especially during a recession.

Upside: Your partner in reinvestment and profitability

How can retailers convince customers to pick their store over others, and even spend more with them? While their first instinct might be to do a big promotional push that drives new sales, these efforts have the inverse effect of cannibalizing profit from customers who would have paid full price.

Our approach to personalized offers and profit margin measurement

That’s where Upside comes in. Within this window of opportunity, our partners have used our platform to capture new market share and measurable incremental profit.

What makes Upside different from other promotions platforms is how we fundamentally change customers’ relationships with your stores:

  • We use our machine-learning algorithm to generate personalized offers based on the unique shopping pattern of each user.
  • We use that technology and data to measure and precisely lift the profit margins of your business.
  • We match all claimed offers with the corresponding transaction data from each sale, comparing the lift Upside provides on a per-customer basis to control groups.

Through this innovative approach, we can measure increases in profits while guaranteeing positive returns when investing with Upside. The key lies in measuring capacity utilization and actively maximizing the full use of all excess capacity at a retailer’s site.

As long as your business has the underutilized capacity, we can ensure you profitably maintain and even grow your market share, regardless of the state of the economy and customer behavior.

Leveraging capacity utilization for greater profits

Capacity utilization is essential when considering how to grow profits. In essence, when you have the spare capacity available, simply putting it to use would grow your bottom line without increasing operating costs.

To increase capacity utilization, retailers must convince consumers to choose their business over others without cutting into already thin profit margins. Otherwise, they will lose market share to the big-box and discount stores catering to value-seekers — particularly during a recession.

Upside's positive impact on capacity utilization

Let’s revisit this fuel-specific example of Upside’s role in maximizing capacity utilization. In this industry, “capacity utilization” refers to the measurement of how many transactions or gallons are pumped during a specific time frame, compared against the transactions or gallons that could have been pumped during the same time frame if the pumps were continuously used. In other words, it’s how much of a potential “pump hour” is spent actively pumping gas.

In the above example profit and loss statement (P&L), we can see the clear delineation between a typical gas station in three phases:

  1. Not using Upside
  2. Using Upside for 1% additional capacity utilization
  3. Investing more in Upside for 20% additional capacity utilization

Regardless of any economic downturn, the numbers prove that optimizing capacity utilization through Upside triggers higher overall earnings before interest, taxes, depreciation, and amortization (EBITDA). In particular, incremental earnings spiked in correlation with higher capacity utilization, including increases as high as 3.4x for a 20% utilization increase. 

Case study: Staying the course with Upside during economic uncertainty

As the data shows, Upside provides a lift in incremental transactions. But what happens to those transactions if you leave the platform when a recession forces you to cut costs? Let’s take a closer look.

We paused Upside usage on a network of 102 gas stations, using this opportunity to track their performance without Upside and test whether our platform’s transactions are truly incremental. Before our experiment, these stations saw a roughly 3.5% volume lift with Upside.

When Upside’s personalized promotions were removed, that newly captured volume shifted to other stations on the app. Within 30 days of pausing platform participation for these sites, 85% of the incremental gallons we’d originally generated for these retailers left the stations for other active Upside partners. This proves that these sites wouldn’t have captured the incremental gallons without Upside.

This data is the perfect testament to Upside’s potential for your stores — providing true incremental profit immediately. It’s a matter of delivering new sales in response to more effective use of unutilized capacity.

Turning economic uncertainty into opportunity with Upside

Despite the instinct to cut costs in the face of economic uncertainty, data shows that strategic reinvestment with Upside leads to enhanced profitability and market share gains. Upside offers a viable solution for retailers to navigate economic fluctuations and ensure long-term success.

Retail strategies in times of economic uncertainty: Cut costs or reinvest?

The Upside Team

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The Upside team is made up of data scientists and industry experts who are passionate about delivering empowering content to our readers. With a focus on providing practical insights and meaningful perspectives, we create engaging materials across a wide range of topics. From exploring industry trends and offering expert analysis to sharing useful tips and inspiring ideas, our team works diligently to provide you with the information you need to thrive.

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