Cost Cutting in Retail: 18 Ways to Reduce Operating Expenses

The age-old question for most business owners is how to reduce expenses. It’s an important, but not necessarily straightforward, issue to tackle. On one hand, cutting costs can happen in a variety of ways. But on the flip side, you could be sacrificing quality.

For many retailers, product quality is non-negotiable, even when cutting costs is necessary. And that’s a fair philosophy to stick to considering customer satisfaction and loyalty are highly dependent upon quality.

Fortunately, there are cost-cutting methods retailers can lean on that don’t require a sacrifice in product quality or securing a loan. This guide shares 18 cost-cutting tips, as well as ways to reduce operating expenses in retail.

18 cost-cutting tips for retailers

While it can be hard work, it’s worth going through the cost cutting process if you want to maximize profitability. Let’s take a look at 18 ways you can cut retail costs and reduce expenses for your store.

1. Unify your tech stack

A point-of-sale (POS) system is the combination of hardware and software that powers your retail store. Instead of having each component sit in a siloed system, unification brings your front- and back-end operations together into a single business “brain.” 

Shopify, for example, unifies your order, customer, and inventory data into a centralized operating system. This unified approach has been proven to cut total cost of ownership (TCO) by 22% compared to other vendors, while reducing tech costs by eliminating the need for multiple systems and integrations. 

Take The Conran Shop, a home furnishings retailer whose previous system required significant financial and time costs to maintain. “Our greatest frustration was seeing our budgets tied up in maintaining the platform, rather than channeling those resources into creating exceptional experiences for our customers,” says digital director Richard Voyce.

The vast ecosystem of apps and integrations were a driving force in The Conran Shop’s migration to Shopify. Now, it can automate email marketing, synchronize inventory data across all sales channels, and sell business to business (B2B), all through a unified system. As a result, the brand saw a 50% reduction in TCO, combined with a 54% increase in conversion rate and a 23% increase in email marketing revenue. 

2. Evaluate payment processing fees

Fees are associated with accepting credit card payments from customers, and these fees can eat into your profits. But don’t ditch this payment method altogether—especially considering the global trend of moving to cashless consumer spending. 

Take stock of the number of cashless purchases and what you’re paying to process those payments, then see if there’s a more cost-efficient alternative. For example, debit card payments tend to be much cheaper to process than credit card transactions. Display logos from popular banks to remind customers of this option. 

3. Focus on customer retention, not acquisition

For many retailers, customer acquisition is one of their biggest marketing goals. But turning efforts to customer retention could reap more financial rewards and, more importantly, be a more cost-efficient means of boosting sales.

It costs retailers more than five times the amount to acquire a new customer than to re-engage an existing one. But that’s not the only monetary benefit. Repeat customers are likely to spend more, too, and that amount is likely to increase over time. Profits increase and operating costs decrease with this additional spending.

Retailers can improve their customer retention rates through loyalty programs, reaching out to customers who achieve milestones (such as a year since their last purchase or an upcoming birthday), and improving customer service. You can also reference data stored in Shopify’s unified customer profiles to personalize the omnichannel experience. 

Italian streetwear brand Slam Jam is just one retailer that migrated to Shopify to experience these cost savings. Its retail team uses iPad Pros to collect and reference first-party data from unified customer profiles. This omnichannel strategy has resulted in a 15% increase in average daily orders, as well as a 50% decrease in setup and running costs compared to its previous platform. 

4. Audit your expenses 

There are plenty of operational expenses retailers incur. While some of them are essential, some are just nice to have. Take stock of these expenses and compare their cost to the value they provide to your retail business. 

Run through your recent bank statements and categorize each expense into the following categories:

• Good costs: Good costs are expenses that you can’t avoid. Examples include operating expenses like cable, internet, and credit card processing fees. Most times, they’re unavoidable. 
• Bad costs: Bad costs are retail expenses that eat profit. If you’re only using 500 square feet of your 2,000-square-foot retail store, for example, that would be a bad cost. You’re wasting money on rent, lighting, and heating for most of the store. Consider renting that space or downsizing to remove the bad cost. 
• Best costs: Best costs are business expenses that drive maximum profit for your retail store. You might have negotiated the best possible price with a supplier, or used the cash for marketing strategies with a high return on investment. 

5. Rent your retail space

The average monthly rent for a shopping center store is $23.98 per square foot. To contribute to the cost of operating your shop, consider renting out your space for events or other retailers. You may be able to improve profits even further by negotiating a portion of the sales.

If you have a community space, such as a lounge or area with lots of tables and chairs, rent it out for events or meetings. Depending on how your shop is set up, these can be held during or outside of store hours. 

You can also consider sponsoring events with other retailers in your space, which can, in turn, boost foot traffic to your store and boost your sales. It contributes to the cost of maintaining the space: those individuals may be more likely to shop at your store, which can make notable improvements to your bottom line.

6. Consider a smaller space with showrooming

For retailers experiencing significant sales online, it might make sense to go online completely. But before doing so, make sure your online customers don’t depend on the in-store experience as part of their shopping. Many prefer to shop in-store because they can interact with products before buying them. 

In that case, consider a low inventory store using the showrooming strategy. You can reduce operational costs such as light, rent, and heating with a smaller store, showcasing just a handful of core items. This approach also allows customers to visit and interact with the product, then visit your website to complete their purchase. 

If it’s not feasible to maintain a brick-and-mortar all year, consider opening a pop-up shop to create the in-store experience your online shoppers crave. That way, you don’t miss out on the retail experiences many shoppers have while easing the financial commitment that comes with signing annual leases for a permanent store.

7. Implement just-in-time inventory 

If you are operating a smaller store and prefer to have inventory on-hand for customers to take away, implement the just-in-time (JIT) approach to inventory management. Instead of having inventory in your stock room for an elongated period of time, JIT only replenishes stock just before it’s required. This reduces storage space and improves cash flow. 

You’ll need sales data and robust supplier relationships to implement JIT effectively. Learn how much stock you need (accounting for any expected fluctuations in demand), and work with vendors who can supply inventory within a specific timeframe. 

8. Open an online store

Consumers are expected to spend $8 trillion online by 2027. But people don’t use digital channels in silo. The increase in omnichannel shopping—in-store, online, mobile—supports this trend, making it more important for retailers to have a digital presence.

Investigate your typical customer journey to see how shoppers interact with each channel. Shopify makes this easy by collating your data and funneling it back to a unified customer profile—whether it’s loyalty points they’ve earned online, conversations they’ve had with cashiers in-store, or email campaigns they’ve opened. Shopify POS retailers have reported 150% quarterly growth in omnichannel sales with this approach to personalization. 

“Before migrating to Shopify, we were spending tens of thousands of pounds a month just to keep operating the website, employ developers and run a bespoke checkout, which was simply too much investment,” says Asher Budwig, managing director of Lola’s Cupcakes.

“Shopify has enabled us to bring the retail and online environments together to enhance the customer experience.”

9. Optimize fulfillment and shipping

Shipping is a necessary expense, especially for retailers with an online store that coincides with their physical location. But there are ways you can minimize these costs:

• Reduce box sizes. Most carriers charge based on a package’s size and weight. Opt for the smallest box size that your products can fit in without risking damage in transit. 
• Use shipping bags or poly mailers. These are smaller in size and weight than cardboard boxes, and can also be cheaper and easier to store. Vendors like Sticker Mule offer options for branded shipping bags that still look high quality but can cut your costs.
• Negotiate rates with shipping partners.Shopify Shipping lets you lock in pre-negotiated rates from carriers such as DHL, UPS, and USPS to save up to 88% on the cost of shipping. 
• Offer in-store pickup. Have customers within close proximity to your store? Ditch shipping costs entirely by offering buy online, pickup in-store (BOPIS) or curbside pickup options. Shopify’s ability to unify your inventory, order, and customer data means you’ll never drive a customer in-store if a product is out of stock. 

Homeware brand Parachute switched to Shopify to offer alternative fulfillment solutions to nearby customers. “With Shopify POS, we now have a single point of truth for our inventory, which makes everything flow much more smoothly,” founder Ariel Kaye says. 

This unified inventory data made it possible for the brand to offer alternative fulfillment options like buy online, pickup in-store (BOPIS)—of which revenue has grown by five times in the last four years. And because everything is operated from a single system, Parachute has decreased its engineering team from 15 to 1, saving them over $1 million in operational expenses.

10. Take advantage of business relationships

Have you been a loyal customer to your vendors or suppliers for years? Oftentimes, retailers can negotiate a new, lower rate for the same products. Bulk pricing could be an option, or the vendor can throw in free shipping. 

For retailers purchasing through a third-party supplier, see if you can get straight to the manufacturer. If you keep retail prices the same, you could significantly bump up profit margins by securing lower wholesale prices.

11. Lean on automation

If there’s a task that’s repeatable, there could be an opportunity to automate it. Automation helps retailers save time and effort, which ultimately results in reduced costs. It also frees up existing employees to contribute to the business in more impactful ways, helping grow instead of simply maintaining business.

Examples of retail tasks you could automate include:

• Creating purchase orders when stock levels fall below a predetermined threshold
• Sending emails to customers to ask for feedback after their purchase
• Routing ship-to-customer orders to your 3PL’s nearest warehouse for faster, cheaper delivery 

💡Pro tip: Choose point-of-sale (POS) software that includes automations for (or integrates with) payroll, shipping, reporting, invoicing, inventory management, handling returns, and various administrative duties. Shopify, for example, acts as a central business “brain” so you can manage your front- and back-end operations from a single platform.

12. Outsource time-consuming tasks

Outsourcing is another way to cut costs and reduce time your retail staff spends on repetitive or low-earning tasks. 

Popular tasks to outsource include:

• Order fulfillment. Instead of maintaining your own distribution center, partner with a third-party logistics (3PL) provider to pick, pack, and ship orders from in-store customers.
• Marketing and advertising. Lean on a freelancer or agency’s expertise to spread the word about your store. They’ll handle everything from Facebook advertising campaigns to content marketing strategies. 
• Administrative tasks. Bookkeeping, for example, is an important part of running a retail store. Outsource it to a professional bookkeeper or accountant to make sure your accounts are submitted correctly.

13. Revisit employee perks and benefits

It’s great to reward your retail employees with perks. However, not all perks programs have to be lavish and expensive. Revisit the benefits package you’re offering to employees and see where cost savings can be made. 

If you’re contributing to an employee’s 401(k), for example, reduce your contributions by 1%. What might sound like a small cost saving percentage quickly adds up—especially if you’re doing it for several employees. 

The same applies to any personal expenses you’re offering as part of your benefits package, such as monthly stipends for health or fitness-related activities outside of work. Look to see if there are any local gyms that offer bulk discounts for monthly memberships. A negotiated $30 membership for a local gym is cheaper than a $50 stipend for staff to use (and potentially waste).

14. Optimize staff schedules for demand

It doesn’t make sense to have multiple employees on shift if footfall is low. You might spend more on payroll than you make in sales for the day.

Use Shopify apps like Dor to track foot traffic trends and plan your staff rotations accordingly. If you know that Wednesdays are your slowest days of the week, for example, perhaps you only need a store manager and two cashiers on shift that day. 

15. Reduce opening hours

It’s tempting to be open all hours to capture passersby. But the longer your store is open, the more it costs your business. Lighting, heating, staffing, and labor costs all need to be considered. 

Think about reducing your operational hours to drive down these costs. For example, instead of opening seven days a week, close on Mondays—historically proven to be physical retail’s least busy day. You could also open the doors at 11 a.m. to be ready for lunch break shoppers, instead of hanging around and serving the odd shopper that pops in by chance early in the morning. 

Reducing your operational hours reinforces the importance of your ecommerce website. You don’t want to turn potential customers away and force them to come back later. Have a way for shoppers to purchase the item they would have bought in-store with a sign on the door that points them to your website.

16. Offer digital receipts

Email receipts to your customer instead of giving them a flimsy piece of paper they’ll inevitably lose. You’ll cut printing costs and collect important customer information—data you can use in email marketing campaigns to nudge shoppers back to your store, recommending products similar to previous purchases.

17. Use energy efficient appliances

Brick-and-mortar retailers can find ways to reduce costs of maintaining their physical business. Can you lower the A/C during the summer? Do you have energy-efficient light bulbs? Small steps can add up to big savings over time.

You could also save money on printing in-store advertisements with QR codes using the Shopcodes app. Shoppers can use their mobile phone to scan the code and view more information on your ecommerce website. It’s easier to update this website copy than constantly reprint new signage.

18. Be strategic with discounting 

Discounts lure customers in to make a purchase. That said, it can train customers to never buy at full price. Heavily discounting can also cheapen the product and attract bargain shoppers—all while cutting into profit margins.

That’s not to say that you should forgo discounts entirely. Instead, use them sparingly. Perhaps offer first-time customers a discount year-round, then reserve bigger promotions for shopping events like Black Friday Cyber Monday. 

Reasons for cost cutting in retail

Retailers typically look to cut costs when they encounter the following challenges:

• Financial distress. Running a retail store is an emotional rollercoaster. For some small business owners, the financial pressure of committing to a lease, paying salaries, and employee perk packages is overwhelming. Cost cutting helps ease that pressure. By evaluating your biggest expenses and cutting them as much as possible, there’s less pressure to sell insane levels of stock to pay for them.
• Poor profit margins. Fewer dollars spent on rent, salaries, or employee benefits means more dollars left in your business’s bank account. This improved cash flow gives many retailers a sense of financial security. A healthy profit margin means you don’t have to sell as much inventory to still have money in the bank after paying for business expenses.
• Economic downturn. The retail apocalypse is nowhere near as disastrous as some people make out, but data does indicate a shift to ecommerce. If you cut rent costs by downsizing, for example, you’re not locking yourself into a year-long lease for a store people might only be able to visit on a limited basis. It helps retailers mitigate financial risk should periods of economic uncertainty continue.

Does your retail store need to cut costs?

As is usually the case, there is no one-size-fits-all solution for cutting costs while maintaining product quality. Some retail stores have space to rent out to reduce operational costs; others see greater savings by automating the repetitive tasks their sales associates deal with on a daily basis. 

Problem-solve the areas where your costs are generating the least value so you have more capital to focus on growing your business. It’s the best way to cut costs and run a profitable retail store.