There’s no denying that retailers are grappling with an addiction to promotional discounts or that it’s starting to eat into their margins. Here’s how your business can wean itself off price promotions to protect both your profits and your brand value.
If you’re a retailer, you don’t need us to tell you that discounts and promotions can be tricky business. No brand wants to offer its products for anything less than they’re really worth, and few customers will be willing to pay full price for your products in the future if a sale is what brought them to your brand in the first place. Retailers just can’t win against e-commerce giants like Amazon in a race to the bottom on price. It has left retailers more reliant on promotions in order to remain competitive, and it’s starting to cut into their bottom lines.
How Retail Got Here
E-commerce transformed the world of retail in plenty of positive ways, but it’s made gaining loyal customers exponentially harder. Consumers can now compare prices across retailers in the span of a few minutes, and Amazon has set a new standard in retail by offering steep price cuts and perks like next-day shipping that most competitors just can’t match. Without a legion of exceptionally loyal brand devotees, there’s very little that retailers can do to hold onto customers besides offering deeper and deeper discounts with more and more frequency.
Indeed, customers have become more inclined to make purchases based on discounts; according to Statista, a full 50 percent of consumers cite discounts as an essential factor in any purchasing decision they make. In 2016, fashion brands met this demand by slashing prices by as much as 80 percent, with 24,000 emails highlighting price promotions sent out to customers in the month of July that year alone.
But indiscriminately offering deep discounts just isn’t a sustainable tactic for brands trying to protect their revenue growth. Even luxury brands like Ralph Lauren and Michael Kors claim the problem is hurting their sales, with both companies taking steps to cut their promotional frequency and excess inventory.
Why We Just Can’t Quit
If this problem is so widespread, why don’t retailers just cut off the promotions that are damaging their revenue and brand value? Unfortunately, retailers have plenty of good reason to be wary about ending the constant stream of discounts that has come to define expectations about retail on both sides of the register.
First, for public companies, there’s the very practical problem of being judged by stockholders for year-over-year growth. Leaders can promise to start building revenue from a more loyal base of customers in the long term, but they might understandably be nervous about the prospect of explaining increasingly dire quarterly reports while working towards that lofty goal.
Then there’s the risk of damaging your relationships with customers who have come to expect frequent and generous discounts on your products. Improving your brand value is all well and good, but it can be hard to change consumers’ impression and expectations of your products, especially after they experience the sting of hiked prices. While your customers can certainly be trained to expect fewer and shallower discounts, it’s probably best not to rip that band-aid off all at once.
It’s clear, then, that retailers will have to take a more gradual approach to weaning themselves off promotions. Gathering strong data on your customers will make it far easier for your business to attract loyal new customers and pull more revenue from your most discount-dependent existing customers. Here’s how your analytics tools can be used to confront your discount addiction — and maybe even help you kick the habit entirely.
Sustaining Revenue and Comps Growth
How do retailers maintain revenue growth without succumbing to the discounts that their customers are demanding? One way is by getting better customers!
For most businesses, the customers with the highest lifetime value aren’t the ones who are simply shopping for a good deal in the moment — they’ve developed a relationship with your brand and have a strong preference for your products. Launching acquisition campaigns targeted at lookalike audiences you’ve built from the current top 10 percent or 15 percent of your highest value customers is a great way to find new customers who will buy more of your products at a higher price point.
In the meantime, you can start offering your discounts more selectively. All your customers are different, and while some may try to mine the internet for every promotional code they can find before finally pressing “purchase,” others — often a pretty significant portion of them — never seek out discounts at all. If you can use your analytics to find these customers and avoid sending them promotional offers they don’t really care about in the first place, you’ll be protecting your overall profit margins while also better conserving your marketing resources.
With good customer segmentation data and predictive analytics at your fingertips, you can be smarter about purchasing decisions and avoid these kinds of blanket assumptions that lead to excess inventory, over-discounting, and a shortage of profits
A huge reason that a lot of retailers over-discount is that it’s difficult for them to predict exactly how much inventory they’ll need, and end up needing to jettison the excess stock in order to keep it from taking up shelf space. You can prevent problems like that in the future by getting smarter about planning and merchandising.
Say, for example, that your revenue is up 10 percent this year across all items. That’s great! The first move you’ll probably think to take is to order 10 percent more stock for the next year. But what if some segment of your customer base — 20-30 year old males, for example — completely drops off in the coming year? If you’re unprepared for that shift, you may end up with a lot of excess hoodies, beanies, and sneakers that you’ll have a hard time offloading.
With good customer segmentation data and predictive analytics at your fingertips, you can be smarter about purchasing decisions and avoid these kinds of blanket assumptions that lead to excess inventory, over-discounting, and a shortage of profits. But if you’ve already bought too much of a specific item, there are steps you can take before offering a full markdown.
You might ask your merchandising team to get tactical about sell-through rates, identifying customer segments likely to be interested in your product and launching highly targeted campaigns enticing them to buy the item at full price. You can also use the data at your disposal to maximize the value of customers who remain engaged with your brand, avoiding sunk profits through discounting and deepening customer relationships in the process.
To protect yourself from backlash against higher prices, you need to create a brand identity that sets you apart from competitors. That doesn’t have to mean establishing yourself as a prestige retailer; instead, you can build a unique customer experience that makes shopping easy and enjoyable enough to offset a lack of constant, expensive promotions.
Take Sephora, for instance. This beauty retailer isn’t known for offering a lot of discounts, but they have a reputation for a great shopping experience that makes it easy for customers to find exactly what they want. Sephora uses a popular points system, a well-designed mobile app, and emerging tech like AI to maintain consistent growth without undercutting the value of their products.
Creating a unique and compelling customer experience is a difficult thing for any brand to do, but all it takes is strong customer data — and a dedication to using that data correctly. While the steps we’ve recommended above can keep retailers’ addiction to promotions at bay, those who are really looking to quit the habit should take a holistic view of their organizations and rethink how they can add value for the consumer in places beyond price point. Like almost any problem in retail, our discount dependence is nothing that can’t be solved by refocusing our resources and attention on a customer-first approach.