How to Discount to Avoid Brand Dilution
Back in the 2008 financial crisis, the recession forced many fashion brands to shift the way they operated, especially when it came to pricing.
After the severe retail downturn, brands depended on aggressive markdowns to clear piling inventory and drive up sales. Rampant discounting took hold of fast fashion, shaping the current retail model that most of these retailers adopted.
Even several years later, fashion brands are still unable to shake this pattern. Consumers have become so used to discounts that reverting to full-priced sales is not a favourable option.
Now, we are seeing a similar cycle with Covid-19.
One of the first steps fashion brands took in safeguarding their business was deploying deep discounting. Fast fashion retailers quickly offered price slashes up to 90% off, designer brands opted for archive sales and even popular American department store Nordstrom rolled out a Covid-19 themed sale yesterday.
However, as we all know, aggressive markdowns can be a slippery slope. While it is necessary to drive conversion, it can also result in sacrificed margins, impacted profits and ultimately low brand equity.
To prevent retailers from falling into a bottomless pit of markdowns, former Head of Merchandising at Asos and founder of Flourish Retail, Sarah Johnson explains how to form a balanced pricing strategy during this pandemic.
Varying Depths of Discounts
Instead of offering deep discounts immediately, Sarah suggests alternating between deep and shallow discounts for each product category. An analysis of Zara UK’s markdown pattern showed a total of 1,114 SKUs being discounted from 20% up to 89% off.
A closer look at Zara’s discounts by category indicates the number of SKUs discounted at a specific range. For the tops and outerwear categories, the highest number of SKUs is discounted at the 60-69% range whereas the majority of the pants and leggings category is discounted at the 50-59% range.
However, looking at all the categories in the panel above, you can see the number of discounted SKUs across the 30% to 69% range is quite evenly distributed, with only approximately 10-20 SKUs in difference.
A tiered discounting strategy like this ensures only products that have more flexible margins can absorb higher discounts, while low margin products are discounted minimally to protect profits.
Another alternative to offering deep discounts is creating bundles. This method is commonly deployed to increase basket size and transaction value.
A great way to encourage a bundle is by offering additional discounts on top of full-price purchases such as offering 10% off on bottoms for every purchase of a full-priced top. By doing this, you are still driving volume without losing a large portion of the margin.
While avoiding markdowns altogether is not feasible during this time, effective pricing and strategic discounting will enable you to drive sales and move inventory without eating away margins. The trick here is to stay competitive and adapt to market changes.
As conditions start to improve, ensure you are able to transition from discounts to full-priced sales. Most importantly, do not depend on discounting in the long-run – knowing when to stop markdowns is just as critical in preserving cash flow.
Track your competitors’ discounting strategies in Omnilytics’s Covid-19 Fashion Retail Dashboard!
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