Escape the Discount Downward Spiral, Part 1: Solving for Excess Inventory

It’s no news to retailers that over-discounting is a problem. Just two adverse effects that lead to plummeting bottom lines include setting customers up to expect to only buy on discount and (thereby) reducing the perceived value of your brand.

In the following three-part blog series, we’ll investigate three challenges on the road to maintaining healthy levels of discounts and promos:

  1. Reducing excess inventory

  2. Competitive differentiation

  3. Healthy, full-price growth

Each of these represents a unique challenge, but each can be overcome by aligning your marketing, merchandising, and finance teams on a trajectory charted by data-driven customer insights.

And if you either don’t want to wait or you want all this information in one place, you can check out our new book, In Discounts We Distrust.

Problem 1: Solving for Excess Inventory

As alluded to above, markdowns play a sizable role in determining a retailer’s level of promotionality. When a retailer overbuys, the excess inventory ends up monopolizing valuable shelf space, generating significant carrying costs and complicating the rollout of new merchandise.

Especially at the ends of months, quarters, or other business cycles, retailers often resort to markdowns to get their excess inventory out of the store and make room for the coming season’s hottest items. And while inventory liquidation is always going to be part of the retail business—retailers will never be able to buy with perfect accuracy—brands’ over-reliance on indiscriminate markdowns leaves a lot to be desired.

As a rule of thumb, most retailers implement a markdown strategy that’s not as discriminate as it should be: they prominently promote new markdowns on their website and send a series of promotional emails to everyone in their customer base.

Among other adverse effects, such a strategy further habituates customers to deep discount pricing, and over time creates a perception among the general public that the brand’s product will always go on sale eventually.

Short-Term Solution: Drive Sales with Lookalike Modeling

To level up to a more precise—and, ultimately, more effective—markdown strategy, you can use lookalike modeling to pinpoint price-insensitive customer segments and exempt them from promotional messaging. Instead of discounting items in-store, you can send a promotional email only to a strategically selected set of customers, instead of offering discounts to every person who walks in the door.

Discount codes should be one-time use codes associated with the account you send it to. More and more retailers are moving toward this as apps and browser extensions like Honey become more widely used.

By analyzing everything from historical transactional data to signal-of-intent data (i.e. which customers are looking at Category X online), you can pinpoint a set of customers who have not purchased the items being marked down but share multiple characteristics with customers who have. You can then send markdown offers to these high-potential customers and, if all goes well, move excess inventory without feeding into the discount-habituation of your general customer base.

Using lookalike modeling to narrow the audience in this way is remarkably effective on its own, but it can deliver incredible results when you inject a bit of personalization into the process.

Something as simple as creating a personalized landing page for customers who arrive at a site via a promotional email can push excess inventory out of the storeroom and off the shelves in record time. In fact, a number of our retail partners have used lookalike modeling to maintain steady inventory sell-through rates while reducing their circulation of markdown promos by over 80%.


Long-term Solution: Leverage Customer Insights to Improve Buying Accuracy

As powerful as it is, lookalike modeling is only a short-term fix.

In the long-term, retailers must address the root causes of excess inventory to mitigate—or even eliminate—the need for markdowns altogether. This begins with minimizing buying errors, improving merchandise forecasting, and optimizing supply chains to accommodate customer preferences.

Retailers like Zara have made a point of placing these goals at the heart of their organizational structure. The Spanish fast-fashion giant uses a sophisticated technology platform to capture and aggregate insights on customer demand—at runway shows, on social media, and, most importantly, in stores—and channel them back to its production and design teams.

“We speak to our product teams in Spain daily to discuss what is or isn’t selling well, as well as customer comments on what they do and don’t like,” says one store manager. “We’re always keeping a close eye on how our customers are responding to the current collections and the trends they may be asking for.”

To capitalize on this “audience polling,” Zara only commits to between 50 and 60% of its inventory before each season and reserves 85% of its production capacity for in-season adjustments. By pairing this production flexibility with its legendarily efficient supply chain, Zara is able to transform real-time customer feedback into new product lines in a matter of weeks, a turnaround time that is nearly unheard of — even in the fast-fashion space.

Zara’s model isn’t a perfect fit for every retailer, but the brand’s steadfast commitment to incorporating real-time feedback into its planning processes is a compelling example of how strategically using customer insights reduces a retailer’s need for markdowns. To replicate Zara’s success, brands need to ask a variety of critical customer-centric questions, from “Who are our highest-value customers?” to “What are the product categories, subcategories, and even SKUs that drive conversions among those customers?”

The next frontier of promo reduction will involve answering these kinds of questions, using those answers to shape the production process, and making more accurate buys that all but eliminate the need to rely on markdowns to move excess inventory.

For the full scoop on destroying the discounting downward spiral, get our book on it, In Discounts We Distrust


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