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How can retailers identify the right times to discount?

By Will Gillingham

In a retail utopia (if such a thing were to exist), all products would be bought and sold at full price without any noticeable defection in revenue. But in the current day and age, such things are sometimes not possible, and retailers instead turn to discounting to drive sales when trading is a little tougher than usual.

Discounting is an inclement practice. It can bolster profits through increased buying, or hinder revenue through the fall in price. It can keep you ahead of your competition, or condition customers into waiting for your inevitable price-drops at certain times of the year. Finding the right balance can be exceptionally tricky.

So, when should retailers discount? Is there a guarded industry secret to getting it right? Are there discounting tactics to avoid? And, ultimately, how can retailers refine their discounting strategies to give them their best chances of success? We approached our community of industry experts for their insight on the matter.

Overview

There are many different strategies and paths when it comes to discounting, with the majority being valid approaches. As long as a retailer understands their customer demographic, they should be able to construct a discounting scheme which will resonate with their audience (and we’ll explore a few approaches a little further down).

An approach which should not be taken, on the other hand, is one of perpetual, year-round discounting. Luke Griffiths, General Manager at Klarna UK, explains why: ‘It’s no longer possible to ignore the discounting trap facing retailers. What used to be limited to a few times a year can now be seen all year round — with shops constantly competing for the lowest prices. While it’s true that discounting is one way to get cash ringing at the tills, our research revealed that 53% of retailers find that always-on sales are having a negative impact on their bottom line.’

Griffiths continues: ‘Considering 38% of consumers say constant sales make a brand look cheap and unfashionable, it’s time for retailers to ditch the discounting spiral and employ new ways to boost revenue and secure loyalty.

‘Instead of falling victim to the discounting epidemic, brands need to up their game to focus on refining the overall customer experience, from start to finish. The checkout, an often-ignored part of the purchasing process, is a great place to start, and retailers should look to create a smooth and simple-to-navigate payment process. It’s too often the case that the checkout remains clunky – full of friction and frustration for today’s impatient, time poor, on-the-go consumers.’

Gavin Masters, Industry Principal at Maginus, has a similar view, citing that over a long discount duration, customers aren’t likely to keep up the engagement that may be apparent in the first week of the discount being active.

Masters: ‘The pressure is on for retailers to continually win sales and develop a loyal customer base. However, this is more difficult than ever before – with thousands of online shops to choose from customer loyalty is becoming a myth. In order to win basket conversions, retailers are continuously offering a slew of incentives and discounts including free shipping, a percentage off and buy-one-get-one-free deals. While this is great news for the customer, for retailers, heavily discounting comes at a price. Yes, sales and revenue may instantly increase and targets for that month will be hit, but if consumers aren’t spending more overall throughout the rest of the year, discounting will have a negative impact on overall margin and profitability.’

Instead, Masters claims, before undertaking any discounting activity, retailers should have a granular look at all areas of their business and identify the likely impact to costs, and the amount of sales activity needed to make the discounting profitable.

Masters: ‘In order to know when they can afford to discount, and by how much, retailers need to understand in real-time all the costs involved in a sale to determine the difference between what they are charging their customers and what it actually costs to fulfil any orders. Detailed analysis of ecommerce activity must be done on a regular basis to ensure that retailers understand the true financial performance of product lines and product types. This is extremely complex due to the siloed nature of ecommerce organisations, but includes factoring in third party, delivery, operational, hosting, payment processing and marketing costs which all take a slice of the end order value.’

Having done this and identified that discounting would indeed be a good idea, several options are on the table for retailers. For the rest of this article, we’ll explore some of these in order to shed a little light on the best ways to discount this year.

Sale girl

The Alternatives

To begin with, let’s look at a couple of workarounds. When retailers want to shift stagnating products, discounting isn’t the only route to go about that: two possible alternatives are changing the placements of products on the website and free shipping.

Product Placement

Something as simple as reshuffling where your products appear on your website can have a significant effect, according to FACT-Finder.

Jessica Harding, Online Marketing Coordinator at FACT-Finder, explains: Retailers often use discounts to drive sales, but lose a significant amount of their profit in the process.  But there's good news - this isn't the only way to bring attention to items where you're pushing for more sales. Rather than discounting, you can strategically change your product placement for the same results. A recent study showed that moving an item from the 8th row of a results list to the 3rd had the same effect as discounting that same item by 21%. Which would you prefer, if the end result was the same - moving an item a few rows up, or discounting?

‘Low prices aren't the main consideration anymore - if you provide a quality online experience and convey your USP, your customers will keep coming back to you, even if your competitors are a bit cheaper. Discounts should only be used sparingly alongside a well-planned strategy, and often work best around the holidays. For any other times of year, try optimising your product placement instead.’

Free Shipping

If you don’t currently offer free shipping without a threshold, this can be a simple way to engage the customer without discounting the products themselves.

Alecxa Julia Cristobal of AsiaPay discusses the boons of discounting delivery costs: Putting products on discount is one retail step that can fluctuate the seller’s sales, but it depends on knowing the right time to execute it can boost buyers. With an e-market that has healthy margin you can afford flagging sales all over your store but when it’s slimmer, you can use percentage discounts on products that are not moving or sellable to still gain sales.

‘One of the most effective discount strategies is offering free shipping fees on the retail check out. This also averts cart abandoning of the users when the prices were shown in total.’

However, Gavin Masters of Maginus urges retailers to take caution when considering free shipping: ‘In order to increase purchases, an eCommerce retailer may offer free delivery, removing the minimum order-value threshold. On the surface, the numbers may look positive showing an increase in orders placed, however, order values will also typically fall through the floor. With no minimum requirement for free delivery, consumers aren’t obliged to consider shipping costs when purchasing. This will result in multiple, spread out impulse orders that don’t cover the cost of fulfilment.’

If both of those options have been duly considered and put to the side in favour of discounting products, then here are a few ways to go about doing that.

Shipping

Target your discounting

To prevent a site-wide plunge in revenue per product, it may be an apt idea to target certain groups in line with the products you’re looking to clear. This may not only have the desired effect but might also boost the customer perception of your brand.

Padraig Slattery, VP Retail, SafeCharge, elaborates: ‘Discounts have a certain lure that you cannot ignore. While it is important for a brand to maintain its exclusivity, having a well-planned discount strategy can really boost sales and increase customer loyalty. There’s a fine line between coming across as a “discount brand” where the customer starts to question the quality of products and offering discounts at the right time and to the right target group.

‘One effective way of keeping your brand flying high is to offer exclusive discounts – seniors, mothers on special days, army veterans, teachers, and so on. What this says is that your brand has its values in place, which will ensure customer loyalty.’

There’s also another side to discount targeting, and that’s in omitting those customers who are likely to purchase products at full price: allowing these customers to buy things at a discounted rate when they would have purchased anyway in essence amounts to lost revenue.

This is highlighted by Samuel Kellett, Head of Content at Exponea: One of the keys to effective discounting is to make sure you're not sending discounts to customers that were already planning to purchase - otherwise you're just throwing money away. If you're organising your customer data with a real-time single customer view, you can use predictive analytics to determine a customer's likelihood of purchase, to discover where your discount will be most effective, as well as how large it should be.’

Further to this, Brian Green, Senior Director at Magento, an Adobe Company, demonstrates how desire for an item can easily be registered by paying close attention to internet chatter.

Green: ‘In today’s increasingly competitive retail landscape, it is extremely important that retailers leverage all the information available to understand their customers and predict future buying behaviour. This can play a crucial role in identifying which products should be discounted to maximise profit. For example, analysing outside influencing factors to gain insights into a products market appeal by monitoring product reviews, blog posts and third-party expert review sites to determine sentiment towards the product. Machine learning can also identify products that have seen consistently low ratings so that suppliers can lower their prices on the pieces that are least appealing to their customers.’

While targeted discounting by itself has the potential to boost discounting profit, there are ways to improve on it; notably, looking outside of the traditional discounting patterns: those seasonal events such as Black Friday where customers are expecting you to discount. If retailers issue targeted campaigns in the right manner, discounting can be an effective strategy throughout the year.

Special deal

Look beyond the seasonal cycle

As noted by Gabriel Fabreschi, Business Developer at Lengow, the stifled sales at the close of 2018 show that seasonal cycles aren’t absolutely reliable. As such, retailers may seek to undertake more inventive, off-season promotions.

Fabreschi: ‘With a range of external factors driving the promotional cycle, understanding your own brand positioning and sales season is key for managing discounts. Although easy to adopt an "every day discount" strategy, constant discounts can affect brand image and will be difficult to escape in the long run. Key periods such as Christmas and the end-of-year sales will remain a central part of retailers’ overall revenue, and discounts are expected, however, if anything was learned from Q4 2018, relying on traditional sales periods to deliver revenue is not always a certainty.

‘Adopting an agnostic approach to discounts and understanding your consumers will ultimately lead to new opportunities. Providing personalised offers, flash sales across social media and practising an Online to Offline approach are just some ways of re-engaging previous and current customers while generating new ones.’

Laura Morroll, Senior Manager at BearingPoint supports Fabreschi’s view, stating how technology now allows for clear visibility on customer behaviour, which, in turn, can inform off-season discounting.

Morroll: Too many retailers are hooked on the ‘drug’ of deep discounting to clear through heavy stocks and chase after their own year-on-year performance – sadly it’s a downward spiral that erodes profits, damaging the brand and conditioning customers to hold out for discounted prices rather than pay full price.

‘Combatting this with a more strategic approach to discounting takes careful planning, strong foundational buying and merchandising processes, and robust inventory management routines. Advanced analytics and predictive technology solutions can support merchandising activities, targeting lines to markdown and determining the optimal discount depth to maximise sell through and achieved margin.’

To shift out-of-season stock (or even those in-vogue products which haven’t had much of an uptake), it’s recommended that retailers look to their data and their customer demographic to create targeted campaigns. However, it’s also worthwhile making a note of what competitors are doing, because if their prices are notably cheaper, there’s a chance a portion of your clientele will jump the fence (at least as long as your competitor’s discount is running).

Seasons

Keep an eye on competitors

A considerable segment of customers believe there’s no need to be loyal when it comes to retail. Because of that, it’s important to keep toe-to-toe with your competitors’ movements so that you don’t find yourself outmanoeuvred.

If you keep a view on your competitors, you can engage in a reactive strategy.

Gijs Schuringa, Customer Onboarding Manager, Omnia Retail: ‘By incorporating stock characteristics (e.g. turnover rate) or competitor pricing data in your pricing strategy, discount can be applied proactively if the sales prognosis isn’t realised or whenever you’re outpriced in the market. Discount can be applied gradually based on stock levels or reactive based on competitor pricing, rather than losing significant margin when entering the end of season sale. When targets are being hit again, prices can be raised to their normal levels.’

In Summary

Discounting is part and parcel of the current state of retail. To truly take advantage of the opportunities it presents, a strategic campaign should be cultivated, rather than perpetually discounting year-round.

If simple alternatives (such as offering free shipping or redistributing products on the website) don’t work, then understanding the customer demographic and administering targeted discounting is one of the best ways to shift end-of-life stock outside of the traditional seasonal sales.

As long as a retailer understands the movements of the market (and their competitors), discounting can be a great mechanism to sell products which might not otherwise have sold, rather than an anchor on the profit margin. As with anything, broad visibility and careful planning are the core ingredients in a discounting recipe for success.

Will Gillingham, Content Manager, IMRG

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