Cutting Payroll May End Up Hurting Sales

By Randall Orser | Small Business

According to recent studies by both the Harvard School of Business and the Wharton School of Business, striking the balance between too few and too many retail payroll hours is the key to increased retail sales. These studies run counter to the usual practice of cutting payroll when sales are down. 

The Harvard study, which focuses only on operations, suggests that increasing payroll yields up to seven percent in profit. The Wharton study, which includes customer satisfaction, suggests that increasing payroll, even moderately, yields up to 28 dollars in sales per one allocated payroll dollar.

The studies’ common denominator is that products do not sell themselves. Here are seven ways that automatically cutting retail payroll expenses often backfires and hurts retail sales.

In-stock reality. The Harvard study identified the weakest link in the supply chain as the front-line store. Even if shipments arrive on time, often they don’t make it to the floor due to reduced payroll hours. Similarly, items that are already on the floor cannot be replenished properly if retail shops don’t have the personnel to make it happen. A customer can’t buy a product that is not available.

In-stock perception

The Wharton study defines the term “in-stock” as more than availability. In-stock items are both available and sold by a knowledgeable associate, who can explain their benefits. This definition is based on study customers from over 500 unnamed stores. The question, “Did you find everything you were looking for?” is ultimately answered based on satisfaction rather than on actual availability. Hence, the customer may not know exactly what he or she is looking for until an associate explains the choices, benefits, and drawbacks. Fewer associates mean fewer one-on-one interactions with customers. According to Wharton, in-stock perception is the same as customer satisfaction.

Loss of seasoned associates

When hours are reduced, seasoned associates — those who have the most sales experience as well as the most product knowledge — move to greener pastures. This means that customers are assisted by those who neither know the product well nor know how to best maximize a sale. The result is a customer who is less satisfied by his or her shopping experience. Less satisfaction equals less in-stock perception. Customers are more likely to answer “no” to the “did you find everything” question when they do not interact with a knowledgeable associate.

Hiring and training

When seasoned employees leave, companies must hire new associates. The notoriously short lifespan for newly hired retail associates, especially those under 30, means that each new hire is a gamble. Companies must gamble with training dollars as well as with putting an inexperienced sales person on the floor. And if the new hire doesn’t work out, they must repeat this process again and again until they find a talented associate. Naturally, without sufficient hours, talented associates tend to look for more profitable work, exacerbating the vicious cycle.

Customer focus

Customers who bond with a particular associate will look for that person again and again to help them find the right product. If a customer finds that the trusted associate has moved on, the customer may be disappointed enough abandon the planned purchase altogether. In the same way, seasoned associates can inform regular customers of new merchandise and special deals, bringing customers into the store without expensive marketing. Without long-term associate/customer relationships, potential sales are lost.

Task management

Shelves and racks need to be restocked. Bathrooms need to be cleaned. Floors need vacuuming. Check-out lines need to be expedited. The sales floor needs to be tidy. And the stock room needs a full-time manager. When associates perform task management, they are not helping customers. On the other hand, if they neglect task management, the shop begins to look run-down and cheap. Both on task or off, too few employees drive customers to other stores.

Online competition

If associates cannot help customers in the store, then customers soon find no reason to leave home. Online operations are almost always fully stocked, never have a line at the cashier, and do not require a drive to the mall. Associates are the primary difference between brick-and-mortar stores and online merchants. If associates are unavailable, then customers will stay home.

The ways that retail sales are affected by reduced payroll can be summed up in five key areas:

  • The product is unavailable.
  • Associates are unavailable.
  • Associates are not knowledgeable.
  • Associates are distracted by task work and are too busy to be helpful.
  • Check out is difficult.
  • In order to maximize profits, retail businesses should reconsider automatically reducing payroll to save money. While it may be illogical to those at head office, reducing payroll too much actually hurts the bottom line while increasing it only slightly can make a significant difference to retail the bottom line — as much as 28 dollars in sales per one allocated payroll dollar.

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