How to Stop the Discounting Madness! Step One...

Promotions have been a fixture of the American retail landscape for decades, but they've become unusually more Business As Usual since the one-two punch of The Great Recession and booming, lean, e-commerce competition. This is how you fight back for those margins of yore.

In October 2010, just as the country was starting to emerge from the Great Recession, Time cited a survey that revealed that 87% of consumers wouldn’t even consider purchasing a product during the holiday season unless it was at least 20% off. Perhaps even more shockingly, the same survey found that 25% of consumers expect discounts of at least 50% during the holidays.

Consumers’ “promo addiction” didn’t subside as the economy recovered, either. In September 2012, Time argued that the “nonstop discount model” that had prevailed during the Recession had “bred a group of deal junkies that won’t shop unless they see ‘70% [off]’ signs or yellow clearance stickers.”

By all indications, consumers are still looking for discounts wherever and whenever they can get them. When asked which factors significantly influence where they shop, Americans most frequently point to price (cited by 87%), shipping cost and speed (80%), and discount offers (71%). In fact, 50% of consumers cite discounts as an “essential factor” in every purchase decision they make.

Generally speaking, retailers have been willing—if not necessarily eager—to feed consumers’ promo addiction in an effort to secure their loyalty. According to the DynamicAction Retail Index: 2016 Year-in-Review and 2017 Outlook, 44% of all retail orders were sold on promotion in 2016. When markdowns (excess inventory discounted just to get it off the shelves) are taken into account, this figure rises to a staggering 67%. Taken together, this price-slashing led to a 24% margin reduction for North American retailers.  

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https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-power-of-pricing

The Big Risks of Indiscriminate Discounting

Such broad-based discounting would be ill-advised in most circumstances, but the situation becomes even direr in light of the fact that 52% of weekly and monthly promotions are served to customers who would otherwise be willing to pay full price.

While, in the short term, this promotional imprecision tends to drive sales upward, the long-term drawbacks almost inevitably cancel out the initial benefits of the practice.

Setting the Wrong Expectations

Consumers are habitual beings, and every promotion a retailer runs shapes its customers’ expectations for future engagements with the brand. As customers become habituated to a retailer’s standard level of promotionality, the ability of individual promotions to drive sales begins to fall prey to diminishing returns.

google search trends for the term "discount code"

Google Search Trends for the term "discount code" from 2004 to present. 

As a result of setting the wrong expectations, the brand must offer progressively steeper price cuts to sustain—let alone improve—year-over-year sales. It’s unsurprising, then, that many retailers have felt compelled to extend their annual Friends & Family promotion from a long weekend one year to a full week the next year, or to increase their Labor Day discounts from 15% to 25% or even 40%, or to change their holiday promotional strategy from tiered pricing to no-strings-attached offers.

Reducing Perceived Value

Getting swept up in this downward spiral of promotionality not only cuts into a retailer’s profit margins—all else being equal, dropping prices by just 1% can reduce operating profits by up to 8%—but also undermines any attempts at brand differentiation.

By repeatedly slashing its prices, a retailer sends a clear message to consumers that there is nothing unique or “valuable” about its product other than its affordability. This creates substantial concerns around brand equity, which, in an increasingly competitive retail landscape, is a recipe for getting lost in the shuffle.

This has been a particularly pronounced problem for luxury retailers, whose appeal is grounded in brand identity and, to a certain extent, exclusivity. Those that opted to cater to consumers’ promo addiction during and after the Recession quickly found themselves in an unsustainable position and were forced to correct course in dramatic fashion.

For instance, between early 2014 and mid-2016, shares of Michael Kors lost half their value because of retailers slashing prices on their products by as much as 80%, forcing the brand to exempt its products from all coupon-based promotions at department stores and discontinue its Friends & Family promotion at its own retail locations. Similarly, Kate Spade’s profits didn’t recover from the Recession until recently, when parent company Tapestry put an end to its run of flash sales.

And while these are important steps in the right direction, as BDO USA Partner Natalie Kotlyar points out:

“Today, the consumer is...brainwashed to purchase even luxury products on sale.”

In other words, retailers across the board still have a lot of work to do to reduce American consumers’ obsession with nonstop promos.

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STEP ONE: FIND THE LEAK

The first step in the process is determining the root cause of your business’s uncomfortable amount of discounting.

Do you know the cause? There is any number of things that could be going on.

You might have a one-time buyer problem.

Your higher-tier customers might be fading or churning faster than usual.

Maybe you’ve been discounting so long that your most loyal customers are margin leeches who would jump ship for an extra 1% off, and you need to focus on acquiring new customers who are less discount sensitive?

Maybe you don’t have a bead on customer affinity like you’d like to, and certain product categories sell inconsistently.

With a clear understanding of the root cause (or the leakiest leak in your leaky bucket, as I like to call it), you can effectively use your customer intelligence to quarantine the issue, launch marketing tests, and develop solutions for both the long- and short-term.

In most cases, it’s not about eliminating promotions, but deploying them more selectively.

There are a few simple, straightforward steps that deliver immediate improvements. These quick wins can help you make meaningful short-term progress while simultaneously paving the way for strategic promotions in the long-term that not only don’t indulge customers’ promo addiction but actually raise your bottom line.

Below, we’ll investigate three goals retailers cite most frequently when asked why they feel compelled to feed their customers’ promo craze:

  1. Reducing excess inventory

  2. Competitive differentiation

  3. Healthy, full-price growth

Each of these represents a unique challenge, but each can be overcome by aligning your marketing, merchandising, and finance teams on a trajectory charted by data-driven customer insights.

Join us for the next posts in this series as we explain exactly what to do to address these goals, plugging short-term leaky buckets and building a long-term fix to keep your brand flourishing.
 

 

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