Segmentation in Fashion Wholesale: Using Resources Effectively

May 21, 2019

Segmentation in Fashion Wholesale: Using Resources Effectively

Which fashion retailers are the most strategically important partners for brand manufacturers and their wholesale business? Experience and gut feeling will only get you so far – segmenting customers according to objectively measurable criteria produces much better results. With the right strategy in place, resources can be deployed effectively and in a targeted way.

Fashion retail is undergoing dramatic change – digital channels, fast fashion, and a surge of discount campaigns are all causing retailers discomfort. As the German business newspaper Handelsblatt reported last year, compared to other retail segments, fashion is experiencing below-average growth, with return on sales expected to fall to zero by 2022. Unsurprisingly, these difficulties have a knock-on effect for fashion brands. Conventional brick-and-mortar fashion retailers have to compete with an increasing number of credible players in the form of online shops and concept stores. In addition, many fashion manufacturers are closing branches of their own brick-and-mortar stores, as these have proven costly to develop and rarely hit their per-square-meter sales targets. However, distribution channels via other types of retailers are gaining in significance. The challenge for fashion manufacturers now is to position themselves strongly in the new retail landscape and use all available channels to maximum effect.

Increasing profits sustainably with customer segmentation

In order to succeed in this difficult market environment, brand manufacturers must deploy their resources in the most targeted way possible. The most important step is to invest in productive trade relationships. Only by securing the right partners in brick-and-mortar and online retail and by strengthening customer relationships with them will manufacturers be able to grow in tandem with successful retailers.

So who are the right retail partners? Not every customer is the same. For example, the hip concept stores found in big cities differ significantly, in terms of sales structures and potential, from the traditional fashion boutiques of smaller towns. Hence, it doesn't pay off to invest the same amount in every customer relationship. In order to identify which partners are most strategically important, customer segmentation needs to be conducted. The only way for manufacturers to set the correct priorities is to understand their customers in detail, including all their strengths and weaknesses. This kind of differentiation enables better decision-making on:

  • Products: Which retail partners and branches should receive which product assortments, e.g. capsule collections?
  • Trade investments: How can different customer groups be incentivized and supported effectively?
  • Distribution: Which retailers have priority when stock is limited or requests for repeat orders are received?
  • Marketing: Which customer is it worthwhile making additional marketing investments for (e.g. shopfitting, merchandising, and events)?
  • Services: Which customers should be assigned additional budget (e.g. for training or advice)?
  • Resources: How much support does each customer receive from field sales and customer service?

Knowing which partnerships will drive the most profit growth enables fashion brands to implement measures and allocate resources effectively.

Quantitative and qualitative criteria are needed to rate retailers

How can fashion manufacturers find out which customers deserve the most resources? Instead of basing decisions on experience and intuition, brand manufacturers should segment retailers using quantitative and qualitative criteria to obtain an accurate rating for each of them. Quantitative factors include the customer's size and profitability (i.e. current revenue and profit per customer), as well as the customer's future potential (i.e. expected future revenue).

In addition to raw figures, fashion manufacturers need to monitor qualitative aspects, such as influencer potential, location, competitive positioning, and collaboration, to determine the strategic importance of their retail customers. These rating criteria need to be used to assess both online and offline retailers. For brick-and-mortar stores, a good location in a shopping area is essential, while the equivalent in online retail is a top Google ranking or a large number of unique visits. The interplay between all these criteria determines the overall customer value. When evaluating retailers, it is important not to assess chain stores as single entities – the situation of individual locations has to be considered!

Best practice example: Dividing retailers into different customer categories

Categorizing customers as either "good" or "bad" is ineffective. Manufacturers can achieve better results by analyzing specific characteristics, as this helps identify which product assortments, trade terms and conditions, service, etc. each retailer should receive.

How does this categorization process work? The fashion manufacturer begins by evaluating their wholesale customers using the quantitative and qualitative criteria mentioned above. Certain retailers will display significant business potential and have stores in attractive locations. These customers can be assigned to the same group, e.g. "key accounts," as collaboration with retailers in this category is likely to generate high revenues and facilitate broad distribution. In contrast, a different set of customers may have good positioning and high influencer potential. The manufacturer could classify these retailers as "strategic partners" that offer opportunities to increase brand attractiveness and set new trends. In the same way, other retail partners might stand out for their excellent positioning and good collaboration history. These could be assigned to a category called "field customers," with the manufacturer concentrating on developing good working relationships and broadening distribution. Fewer services and resources need to be deployed for field customers and can instead be allocated in a targeted way to key accounts and strategic partners. Investing in the right customers ensures the manufacturer shares the growth success of these retailers. Deciding which customers to assign to each group is the major challenge of customer segmentation.

Achieving higher revenue and more efficient strategies through customer segmentation

With such a large number of categories, criteria, and customer groups, at first glance, the topic of customer segmentation can seem complicated – even with the help of experts – but it does pay off in the end. Well-defined customer segments increase revenue for fashion brands through targeted investment in “market winners”, as well as by refining the company's strategic direction. Furthermore, targeted measures strengthen brand positioning in the most important brick-and-mortar stores and online shops, while also providing more planning security in terms of collections, accounts, etc. Last but not least, customer segmentation generates greater transparency and efficiency by standardizing processes and guidelines across the company. In our experience, firms that implement this approach see return on sales of up to three percent.

However, in order for manufacturers to benefit, customer segmentation has to be conducted strategically, with the same criteria being applied consistently to all customers, and the assigned classifications being regularly reassessed.