Discounting Dilemma: The 6 Questions You’re Not Asking
It’s the story all of us in retail can’t stop talking about. Consumers are addicted to discounting, and it’s having a catastrophic impact on retailers’ bottom lines. Whether it’s the abysmal holiday results of several key U.S. department stores, more store closures and job cuts, or credit downgrades, clearly the dominoes are falling at an increasingly rapid pace.
There’s a clear cause-and-effect here: retailers are not getting product to market fast enough, and with the resulting product-to-market mismatch, items have to be severely discounted in order to sell. It’s a sobering reality that begs the question: can retailers reverse this cycle?
The way forward requires unearthing and utilizing data from both internal and external sources, which pinpoint speed-to-market barriers and effective yet profitable pricing and promotion strategies. And while most companies now are compiling gigs and gigs of data, too few know how to analyze it to reveal answers to their most pressing questions. So, which data points should you be paying attention to?
As you weigh the health of your pricing and assortment activities and look to strengthen your top and bottom lines, these are the key metrics that will allow you to determine where you are—and where you should be headed.
How long and how much of my assortment is on sale?The first step is to get real about markdowns. This may not be an entirely pleasant process, but only a realistic evaluation will help. Market data showed that in 2016, a set of key U.S. retailers averaged 40% or more of their assortments on discount during every single month of the year. And while discount levels remained consistently high in 2016, this same group of retailers had 3% or less of their inventory sell out during the same period. This is a very clear signal that discounting isn’t the answer, and there is a deeper issue of assortment mismatch that needs to be addressed, which leads to the next question to consider.
How quickly am I able to get products, particularly if I’m leveraging a trend, to market?Next, it’s time to look at your processes, specifically how many layers of approvals each decision has to go through. While it is important and necessary to have checks and balances, they can greatly slow execution. Companies thriving in today’s retail environment are able to push through these barriers by utilizing methods, including nearshoring and internal fast-tracking teams, to get critical items to market sooner. One brand successfully (and sustainably) using close-to-home production is The Reformation, which manufactures the majority of its pieces in downtown Los Angeles, and Levi’s Eureka Innovation Lab has birthed many ideas around new technology, fits, and sustainable sourcing and business practices.
How often are you introducing new products?A freshness factor is crucial to keeping consumers with short attention spans engaged. Data shows that fast fashion retailers offer 2-3 times more new products every week than their traditional retail counterparts. And while not everyone is playing in the fast fashion sandbox, having new product makes crafting impactful marketing messages easier and alleviates reliance on promotions. This may not be news, but the question is how can you compete? Keep in mind, getting new product to market doesn’t necessitate re-inventing the wheel. Dig into your data and find products that have historically performed well, then iterate based on core design attributes.
What isn’t being discounted?There’s a lot of focus on what’s on sale, and the data shows that, indeed, it is a lot. But what about the items that are selling out at full price? Take a look at data at the category and product level—for both you and your competitors. Too often retailers, faced with resource constraints, give regular and close tracking of the competition a back seat. But once it’s no longer a priority, spotting and quickly reacting upon assortment gaps at the category level becomes difficult and costly.
With this information in place, it’s time to delve into product attribute details. The underlying reasons as to why individual items have outperformed others aren’t always immediately apparent. However, with closer analysis of the data, their success can oftentimes be traced back to design elements you hadn’t previously realized added so much perceived customer value like a convertible strap or a set of hidden pockets. These product-level insights, combined with a clear understanding of what the consumer values, create opportunities to strengthen your assortment and your overall brand positioning.
How are you creating urgency?The ‘one day only sale,’ is the modern retailer’s version of the boy who cried wolf. With many retailers circulating promotional and sale messaging daily, the sense of urgency on the part of the consumer is greatly diminished. It’s time to dig deeper in the toolbox. For instance, rather than offering discounts, show or hint at limited inventory levels. If a consumer is on the fence about making a purchase, seeing that there are only a few left may very well be the only impetus they need to click that ‘buy now’ button.
What value are you getting, aside from just a one-time purchase, from the customer relationship?Promotions based selling is often shortsighted. When a customer purchases something only once it’s on sale, how do you know if and when they’ll come back for more? Instead of dialing up the amount and frequency of discounts to make today’s sale, offer discounts on future purchases, incentivize them to try new categories and different channels, and use your data to really drill down into who that consumer is and what they want.
These are the ongoing steps in what should be a thoughtful, honest, and data-driven evaluation of the state of your business. Doing so not only sets the baseline against which you conduct future ‘health’ check-ups, but it will ultimately enable a tightened focus on the core of your business: delivering true value to the end consumer.
Originally published in Sourcing Journal on February 24, 2017.