The following steps/ checklist should be applied before a product is discounted. Too many retailers are lazy marketers and resort to discounting as the first (and only) option when more often than not discounting is just an exercise in margin destruction. Discounting is a race to the bottom – and inevitable unprofitability. Unless your retail format relies on high volume/low margin sales, discounting should only be part of strategic retail promotions.
Beware the tipping point.
Will this particular round of discounting be the tipping point that changes your retail image in the mind of your customers? If you do it too frequently, you will permanently damage your brand and positioning. Even Mercedes resort to discounting, but few people wait for the discounts to buy – unlike some retailers who shall remain nameless.
Does your market consider price as important?
Discount shoppers rate price highly. Non-discount shoppers look for value in service, quality and store attributes. People are not as price-conscious as you may think, so it does not make sense to give margin away when you don’t have to.
The sanity check
Is the stockturn below benchmark? ONLY discount if the product is not moving. The primary purpose of discounting is to get your cash back. This works by attracting more customers to your store and consequently selling more product. If you are moving stock at the benchmark volume, then discounting is usually value destruction.
If you are satisfied with your responses to the above 3 criteria, then:
Choose the right product
- Choose products with high elasticity. [Divide %Change in Quantity by % Change in Price.)
If the PE > 1 the product is relatively elastic. An increase in price would result in a decrease in revenue, and a decrease in price would result in an increase in revenue.
If the PE < 1 the product is relatively inelastic. An increase in price would result in an increase in revenue, and a decrease in price would result in a decrease in revenue.
- Choose products that are KVIs
Consumers seldom have a high level of comparative prices, except in basic foodstuffs and general commodities. Typically, most consumers would know the prices of a few ‘reference’ items. These items are termed KVIs (Known Value Items.)
- Pick the right markdown %
Perception of savings depends upon the way in which the price is presented. Discounts of 10% or less have little effect on consumer responses. Small discounts usually fall below the perceptual threshold – popularly referred to as JND: Just Noticeable Difference. Retailers are their own worst enemy in trying to stimulate sales with small discounts. (This works only on very high value items – for instance 10% discount a new vehicle would be significant, but it is nothing for a t-shirt.) A small discount is counter-productive: it simply lowers the consumer’s price image for your store, creating expectations of lower prices without actually adding (sufficient) unit sales.