How to calculate the ROI of Electronic Shelf Labels?
We hear it again and again, retailers love the idea of Electronic Shelf Labels / Digital Price Tags, but when you have thousands of SKUs in your store, it is a sizeable investment.
However, if Woolworths, Aldi and Dan Murphys can find the business case, with their tens of thousands of SKUs, then smaller retailers definitely can too.
So let’s look at how to create your own ROI calculation. I’m going to use metrics for an example retailer, you can update the numbers for your own estimations.
Example retailer
Business and Price change assumptions:
10,000 SKUs
10% of SKUs change price per week = 1,000
$29/hr - Wages in Australia, including weekend and public holiday rates.
15 cents cost of printing paper price tickets, including paper, ink, plastic holders etc.
$5 million revenue per year for our example retailer.
Operational task assumptions:
30 manual price changes per hour
28 hours spent restocking shelfs per week
1,000 orders for picking per week (click and collect or delivery)
4 orders picked per hour
Margin and Sales benefit assumptions:
1% increase in margin via better pricing agility using ESLs
1% increase in sales through clearer promotional messaging
1% increase in sales through a better customer experience
Business savings per annum
1. Pricing Automation – Labour
The main benefit of Electronic Shelf Labels is the time saving on price/product information changes. Automating this arduous task creates a 100% saving for retailers.
Calculation: 1,000 (SKUs that change price per week / 30 (price changes per hour) x 29 (hourly wage) = $967/week saving or $50,267/annum.
2. Pricing Automation - Printing
A small cost to the business is incurred in the printing of paper price tickets, including the paper, printing and replacement hardware.
Calculation: 1,000 (SKUs that change price per week) x 0.15 (cost of paper label) = $150 /week saving or $7,800/annum saving.
3. Restocking
An independent study found a 30-40% time saving, when staff used ESLs to guide them when restocking the shelves.
Calculation: 28 (hours spent restocking per week) x 0.35 (35% time saving) x 29 (hourly wage) = $284/week saving or $14,778/annum.
4. Eliminating pricing errors
With ESLs the shelf edge is always up-to-date and in-line with current promotions. This eliminates pricing errors, that can lead to compliance costs to the business.
Calculation: Ballpark $5,000/annum.
5. Margin optimisation
When using ESLs, retailers can actually roll-out more price changes due to the ease of implementation. Therefore, as your internal costs fluctuate, it’s easy to reflect these changes in the shelf price. We’ve estimated a 1% increase in margins per annum.
Calculation: $5 million (annual revenue) x 0.01 (1% increase) = $50,000/annual benefit
6. Clearer promotional messaging
Electronic Shelf Labels offer the opportunity to increase sales, as promotions are clearly highlighted on each and every product, something that can be hard when relying on the installation of shelf talkers. An increase in promotions and offers, will also drive more sales, with customers engaging with seasonal events or last minute competitor-driven offers. We’ve estimated a 1% increase in sales per annum.
Calculation: $5 million (annual revenue) x 0.01 (1% increase) = $50,000/annual benefit
7. Better customer experience
ESLs offer a modern shopping experience, customers can interact with the label (via NFC or QR codes), to discover further product information. Rich and dynamic content can also be displayed directly on the screen, showing ratings, images, country origin, product benefits, comparable pricing etc. These, in turn drive sales and reduce showrooming. We’ve estimated a 1% increase in sales per annum.
Calculation: $5 million (annual revenue) x 0.01 (1% increase) = $50,000/annual benefit
If you offer services such as Click and Collect or Online order delivery, that is fulfilled from a local store, then you can also add the Order Picking cost saving to your calculation.
8. Order picking
An independent study found that order picking time is halved when using ESLs to guide staff.
Calculation: X (hours spent picking orders per week) x 0.5 (50% time saving) x $29 (hourly wage) = Cost saving per week. Times this by 52 weeks in a year to find the annual saving. Estimation for our scenario = $188,500.
Cost/Benefit 1 year
So that covers off all of the main savings you can gain from an Electronic Shelf Label Solution. Now lets look at the ROI calculation.
Cost of solution
$170,000 cost of solution for 1 year. This would include the hardware, installation, software and support for a year. (This is an example figure, not necessarily reflective of current pricing).
Savings per year $416,345 (inc Order Picking)
Cost of solution $170k
Benefit per year $246,345
ROI 145%
Break-even point 0.41 or 5 months
Net benefit of solution after 1 year
Calculation: $416,345 (Total annual saving) – 170,000 (Total cost of solution) = $246,345 Net benefit
145% ROI (1yr)
Net benefit / Cost of solution x 100 = ROI.
145% after just 1 year!
ROI
Calculation: $246,345 (Net benefit) / 170,000 (Total cost of solution) x100 = 145% ROI after 1 year.
ROI of 145% After just 1 year!
A 0% ROI would mean that the investment has broken-even. A 100% ROI would mean that the cost of the investment was made back (broke-even), and the same amount again was generated by the saving/income. So, a 145% ROI means that the investment has been made back more than twice by the saving/income generated, in just 1 year.
5 months
to break-even
Cost of solution / Savings per year = Years to break-even
Break-even after just 5 months!
Break-even point
Calculation: 170,000 (Total cost of solution) / $416,345 (Savings per year) = 4.1 (of a year) or 5 months.
5 months to Break-even!
That’s pretty amazing and makes the business case a no-brainer.
Cost/Benefit 15 years
Benefit over the ‘life’ of the solution
For this we will look at the benefit over 15 years, this is because our ESLs have a battery life of up to 15 years (the longest in the industry!). Therefore you shouldn’t need to invest any more in the existing hardware during this time, and even then, it will be a minimal battery replacement cost.
Savings (15 yrs) $6.25 million
Cost of solution (15 yrs) $191k
Benefit (15 yrs) $6 million
ROI 3170%
3170% ROI (15 yrs)
Since the battery lasts for 15 years, it’s valuable to look at the ROI over this time.
3170% is an incredible ROI for the ‘life’ of a solution.
A conservative approach
You may want to take a much more conservative look at the ROI and exclude the benefits seen in margin optimisation, increased sales and the elimination of pricing errors. Although I think it’s important to look at the overall picture, you might want to present a best-case and worst-case scenario for your business plan. Here are the top level figures removing those elements.
2.3 years break-even
472% ROI (15 yrs)
When taking a very conservative approach to the business saving calculations.
Cost/benefit 1 year
Savings per year $72,845 (savings from pricing automation & restocking only)
Cost of solution $170,000
Net benefit (1 yr) -$97,155
Break-even point 2.33 or 2 years 4 months
Cost/benefit 15 years
Savings (15 yrs) $1.1 million
Cost of solution (15 yrs) $191k (slight increase for annual license & support fees)
Net benefit (15 yrs) $900k
ROI 472%
Break-even point 2.52 or 2 years 6 months
Unquantifiable benefits
Many of our clients tell us that one of the main benefits to our Electronic Pricing solution is the peace of mind it brings them. Knowing that the task that creates the most stress on the company is completed automatically, enables management to focus on more strategic elements of the business. Although this peace of mind is perhaps unquantifiable it’s certainly not without value.
Pricing automation also levels out any volatility in staffing, as the store can still function effectively on a leaner workforce if needed. It helps to increase staff retention, as it creates a happier workforce, since their most onerous task is removed. And lastly, it aids onboarding of new staff, as they become efficient much more quickly, when guided by ESLs to find specific products throughout the store.
Ready to take the next step? Contact us today, or Download a Brochure.
