The 3 Habits of Highly Used Discounting Strategies In Retail
Fashion consumers today have been spoiled rotten.
Spoilt for choice, spoilt by low product prices…but it was not always the case. Once upon a time, consumers were presented with less options and portrayed more brand loyalty, hence possibly spending more on fashion. With the onslaught of fast fashion and rise of online shopping, it gave way for e-commerce platforms such as Zalora and Amazon to offer discounted items all year round.
And who can blame them? It’s a dog-eat-dog industry and desperation for growth meant retailers have to compete by offering more for less especially when consumers are becoming more inquisitive on the inner workings of a sale and frugal in their spending habits.
Robin Lewis, Chief Executive of The Robin Report, a retail strategy site said:”The path of least resistance to growth for these retailers is to lower your price. And when everybody’s doing that, it gets to be insane. It’s a race to the bottom for everybody because you cannot not compete on price.”
What more, the off-price retail sector – namely factory and discount outlets focused on selling outdated and excess stock – is gaining momentum. The NPD Group reported that off-price consumers currently account for 75% of all apparel purchases across retail channels. Over the past 10 years, sales of off-price footwear and apparel have increased 40% in the US alone, according to an RBC Capital Markets estimate. Several U.S retailers such as J.Crew have picked up on the factory outlet trend, introducing J.Crew Mercantile as part of their new, value-driven label.
Source: J.Crew Factory
Couple the fervent competition with the failure of retailers to anticipate consumer demands and recognise market gaps, as well as an overwhelming number of choices for similar products, and you have got a recipe for disaster.
Andy Mulcahy, Editor of UK’S Online Retail Association, IMRG, echoed the current sentiment. “Does anyone really expect to pay full price for anything anymore?” he said.
The Desensitisation Of The Expectant Consumer
Before we answer that question, it’s important to learn how retailers got themselves into this discount rut that has become the bane of their existence.
It’s all about psychological warfare. Retailers know full well that the sight of a sale releases consumers on a spending frenzy and they feel amazing doing it. This feel-good factor is what neuropsychologist and the chairman of Mindlab, David Lewis, calls “a kind of buzz on steroids” and a sale ignites this fear of missing out on a bargain, closely followed by a “pleasurable swell of excitement” post-purchase.
And it’s this excitement that has fueled the discounting phenomenon. Take the US-born Black Friday event, for example, which has expanded into a global event, spread across a whole week up to a month. In fact, it has become such a hype that consumers have been trained to expect only price cuts. And there’s no breaking away from sales, not when your competitors are putting up red signs and you are left wallowing in the dust.
Source: The Guardian
“It’s almost like a drug,” says Tiffany Hogan, a retail analyst for Kantar Retail. “We’re on this 40 percent off drug that we pulse every weekend or even more frequently. What happens when you take away your promotions? Your shopper just kind of melts away because you know that you’ve trained them to come back on that 40 percent off day.”
For price-conscious consumers, it’s a win-win situation for them as they will buy anything with a sales tag attached. However, what does that mean for retailers?
The Caveats of a Sale
It’s every retailer’s dream to give consumers what they want at a price that supports the whole fashion retail ecosystem. But it’s all wishful thinking now as consumers are shopping smarter with brand loyalty as fickle as the next runway trend. So even though discounts are inviting more footprints into retail and online stores, it’s not without sacrifice.
“The expense that comes with discounting can be destructive in the long run.” says Matthew Lovett, director of retail at Omnilytics. “Not only will your brand be known only for discounted products, but consumers will expect those items to be of lower quality.”
Though retailers have a choice of adopting these discounting practices, sometimes it is inevitable. According to Drapers Online, spend on Black Friday was up 7% in 2017 and many retailers who had previously resisted, took part for the first time. High-street clothing label, Next was one of them. Having shied away from pre-Christmas sales thus far, they reluctantly participated in Black Friday for the first time last year due to an alleged slump in share prices and turbulent sales.
Richard Hyman, an independent retail consultant, speculated on Next’s decision of hopping on the discount trail. “It has taken [Next] years of sitting on the sidelines to make up its mind to join the fray,” said Hyman. “I suspect this is more to do with wanting to boost flagging sales than a sudden liking for the lemming-like melee that is Black Friday.”
But competing on price only leads to a never-ending race to the bottom with shrinking profit margins and eroding brand values. And no one is winning, except for the consumer.
Denise Dahlhoff, Research Director of University of Pennsylvania’s Baker Retailing Center said, ”Once you discount you get into this spiral because your margins get slimmer, and then you also have to sell so much more to make up for the lost margin on the price.”
Source: Business Insider
Besides annual events such as Black Friday, how do retailers discount throughout the year? We’ll look at three types of discounting strategies that often take centre stage.
A popular strategy to get rid of off-season stock. Think of it as an exclusive price cut that only happens on occasion throughout the year, highlighting a large discount range. Let’s illustrate with online designer fashion retail platform, Farfetch, as a perfect example.
As their offerings tend to veer towards the high-end side of retail, that explains their low sellout rate of 11.10% even with an average discount range of 70-74%. Drilling down further on the items that were mostly in the high discount range, it consisted mostly of winter clothings, which made sense for a seasonal clearance.
On the other end of the spectrum, Zalora discounted a lot of their products frequently but on a low discount range of 20-24% on average, as shown below. It is also important to note that their price points were generally lower than that of Farfetch’s, which might explain the use of frequency discounting since the offer prices were already low to begin with and discounting at too high a range might not make sense with their profit margins.
A study from Science Daily on retail pricing strategies concluded that “Consumers seem to prefer many small discounts to a few large ones and their perceptions of average prices do not drive their store choices.”
But what if these discounts were made available every single day?
Everyday Low Pricing
Earlier on in this article, we mentioned how consumers are getting smarter in scouting a good bargain. The Journal of Consumer Research stated that consumers who are trying to maximise savings will almost always choose to buy from retailers who offer the lowest prices most of the time. Instead of resorting to rampant discounting practices, some have chosen the “if you can’t beat them, join them” approach by offering their products at a lower cost than competitors.
Let’s look at another popular fashion retailer – Forever 21, to illustrate, starting with their price architecture.
From the chart, it’s obvious that Forever 21’s price points were only centred at the USD 0-100 range with no items priced any higher than USD 100. But with such low pricing, did it garner a high sellout?
The highest among the three at almost 70%. So another obvious question to ask would be, was Forever 21’s high sellout caused by heavy discounting?
From here, we derived the data from Zalora’s 36.60% sellout, which accounted for 286,984 SKUs and Forever 21’s 70% sellout, the equivalent to 12,045 SKUs. Even for a higher sellout, Forever 21 trumped Zalora with having 55% products sold at full price.
Is it Still Worth Cutting Prices?
It is almost impossible to wean consumers off their discounting habits but retailers can do the next best thing. By strategising and planning ahead, using data as a security blanket for decisions made instead of regularly offering discounts and promotions without much thought. Implementing a data-driven approach will certainly be more technical and time-consuming, but the intrinsic value and sustainable reward at the end will make it worth the price cut.
* Data shown for Forever 21 was derived from the Malaysia market
* Sellouts shown for Forever 21 may vary according to the retailer’s web activities
It’s never too late to start planning your discounting strategy. Drop us an email at firstname.lastname@example.org and we’ll be in touch!
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