In order to understand whether discounting is a good strategy for retail, one must understand the objective behind the discounting. Are you aiming at selling large quantities at lower prices? Offloading seasonal stock, running a promotion to motivate consumers to trial purchase of a new product? Run deep discounts on products close to expiry or slow- moving items, to encourage shoppers to browse around before they buy?
One needs to move on discount pricing strategies cautiously. When your aim is to reward loyal customers, discounting works. However, constant discounting sets up a downward pricing spiral that may prevent you from eventually selling at full price. When a store sets up periodic discounts, it conditions its customers to wait for the sales and this habit may erode profit margins.
Low prices may drive sales for a limited period of time, but it does not build customer loyalty. The minute a competitor offers a better price, the customer switches loyalty and you may lose market share. It may also become difficult to increase prices again especially if the product is perceived as being lower in quality.
Online retailers have been known to use tactical discounting as a way of driving forward demand, to take business away from competitors in order to increase total sales. This strategy works well until the time comes to start hitting consistent revenue targets.
The decision to discount, therefore, needs to be based on timing, the product type, the category and its popularity. The consumer may also perceive the product to be undesirable if the discount is larger than expected.
Consumers today, buy online when they expect goods to be on sale and therefore retailers are having to rely on technologies that give them a holistic view of the market, consumer demand and assortments.
Retailers have to become more adept at learning how different factors affect performance. Take color, for example – some items move only in a particular color and again, regional variations also need to be factored in.
So, what is going to work well for retailers? Unfortunately, there is no magic formula that will have a positive impact on average transaction value (ATV).
Unless you are TJ Maxx, J Crew Factory, Costco, Home Goods, Old Navy, Loft and of course Amazon, whose business strategy is based on discounted pricing, you may end up in a continuous spiral of perpetual discounting.
Retailers are therefore advised to factor in spending data – analyze customer price sensitivity, competitive price information and price compliance to determine broader data-driven pricing strategy.
If you intend to run loss leaders to promote ancillary purchases, an in-depth analysis and understanding of the customer and basket data is needed. This does not mean that discounting per se is not good for business. If your product does not exhibit a clear value and you need to sell in order to generate further demand, using discounting intelligently can help provide the push you need.
Retailers should resort to data-driven discounting and promotions, making intelligent use of email, website personalization and channel targeting. Targeted discount strategies can ensure that you are maximizing your profits and revenue.
The impact of discounting varies, based on many factors, including seasonal demand, active above the line (ATL) marketing, existing stacked promotions and demand.
Choose to understand your customer better than anyone else, customize offers and promotions to the customer need and continue to enjoy healthy returns on investment.