Basic Assumptions Of The Wheel Of Retailing
What is a wheel of retailing? The wheel of retailing is a simple concept of how retailers enter into the market slowly and then gradually penetrate themselves to be a reliable and major retailer for their area. It refers to how the retailers start as a discount store in order to convert potential customers into customers. These new entrants start as a discounter in the beginning and then gradually increase their prices as they get robust in the market. The term wheel of retailing or retail wheel was generated by Professor Malcom P. McNair who used to be a lecturer at Harvard Business School.
Wheel of retailing
As explained above the wheel of retailing is a process of a new entry trying to fit in the market as a retailer. Take the example of a retail outlet who sells costumes. A Harley Quinn costume would be at a cheaper rate at the outlet at the beginning of its time although the same Harley Quinn costume price would be raised as the retail outlets become more mature.
There are certain steps for the process of the wheel of retailing. There are 4 steps that are elaborated.
Phase 1 – Entry
The first phase of the wheel of retailing refers to the entry of the retail outlet in the territory. When a new outlet enters the market it has to keep itself distinguished from the other retail outlets. In this phase, the particular new entrant would keep its price lower as compared to the competitive prices, will be having a low margin and will have a minimum reputation as compared to the already existing retail outlets.
The entrant retail outlet would have one simple goal at the beginning of its time which would be to create customers. The outlet would have to give its customers an incentive. The lower prices of the shop as compared to the rest would work as an incentive for the customers
Phase 2 – Growth
In the second phase of the wheel of retailing, the prices of the products in that particular retail outlet increase as compared to the initial prices. The shop reaches this phase after a while when it gains a number of customers. This phase consists of high prices, high margin,s and a reputable image of the retail in the eyes of the customers as well as potential customers.
Phase – Maturity
The retail outlet reaches the third phase of the wheel of retailing when the shop earns a good number of loyal customers. In this phase, the retail outlet increases the prices of the products. In this phase, the retail is well reputed among the others and has a good earning. In this phase, the retail outlets have an even higher margin as compared to early times. This is the phase where the retail outlet has reached its maximum, now it has the ability to raise its prices, bring more products in the outlet and has to make strategies of how to retain its customers.
Phase 4 – Decline
This phase is the last phase for the wheel of retailing for the particular shop.
In order to illustrate the wheel of retailing in a better way, let’s take an example.
Consider a new retail outlet of FMCG products starting its retail in an area called Defense. The outlet would start its business with low prices of the products giving extra discounts to the customers to make them regular customers. On the other hand, when the outlet understands the fact that it has gauged enough of the customers to raise the prices, they will enter the second phase of the wheel of retailing where they have a high margin, high reputation and the capability to have high prices as compared to the past.
The retail outlet would reach the third phase when those regular customers turn into loyal customers. That is the phase of the wheel of retailing where the respective outlet can change they’re higher and increase their prices to gauge a good amount of profit.
The retail outlet would reach the final phase of the wheel of retailing where another retail outlet comes in existence with the same qualities of low prices, low margin and low reputation and which would try to get its way up to the phase of maturity.
The researches have noticed 2 limitations of the wheel of retailing.
- The limitation of price factor – one issue that the wheel of retailing has is that it considers the price to be one of the primary factors although the experts disagree.
- Not universal – the wheel of retailing is not applicable to all the retail outlets. They are not applicable to specialty stores or the ones who sell luxury items. The people trying to buy luxury items are price insensitive.
The wheel of retailing is a process that should be known to all retailers who want to prosper in the market. There are some limitations to the theory but it is applicable to most of the retail outlets in the market. One needs to make sure to understand the stages of the wheel of retailing to gain a good, reputable and profitable position in the respective market.