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Tips on Selling

Beware the discount trap: how discounting damages retailers

Still popular as a way to attract customers, discounting can actually cost businesses millions in lost sales. In fact, BRYAN PEARSON says a higher markdown can prolong a sale.

In the fashion world, hemlines may rise and fall by the season, but the shelf life of a discounted $500 skirt can drag on for days – 106, to be precise.

An analysis of 114 luxury, premium and mass-market apparel and accessory retailers found that’s how long it can take an online luxury retailer to sell a piece of women’s wear, even when discounted.

Furthermore, when luxury items such as jewellery are marked down at a higher percentage, say 40-50 per cent, they take 19 days longer to sell than if marked down 30-40 per cent.

Meanwhile, mass-merchandise items sell faster at discount, especially when marked down by less. Women’s wear sold 11 days quicker when first discounted from 30-40 per cent, rather than 40-50 per cent.

The difference cost retailers millions in needless reductions, according to the
research which was conducted by Edited, a retail-analytics company with offices in New York, London and Melbourne.

The same unusual trends occur across other fashion sectors, from luxury apparel to kids’ clothing.

But why? What does it mean?

According to Katie Smith, senior retail analyst at Edited, merchants fail to factor in several basic but highly- relevant factors.

Additionally, pricing strategies can be blurred by a range of issues, such as shopper behaviour and competitive distraction.

Timing, popularity, other factors

A key benefit for retailers is that they have a large volume of data available to help them analyse pricing, Smith says.

However, this also requires that they understand what they have and how to use it.

Retailers still miscalculate how much to discount because they fail to include pertinent factors in the formula, such as timing, product type, category and popularity.

There may also be a psychological effect at play, in that the shopper may perceive a larger discount to mean the product is undesirable.

As consumers purchase more goods online and expect to only buy those goods when they’re ‘on sale’, Smith believes that retailers must invest in technologies that give them a holistic view of the market and consumer demand.

“Today, retailers can use analysis tools to understand a trend’s demand before they even put a style into production, which helps buyers know how many orders to place,” she says, adding that real-time analysis of competitors and other market segments helps merchandisers track a trend’s performance, spot saturation and clear stock before a decline.

Retailers need to become more adept at considering how different factors may affect performance.

Take colour as an example – a specific item may perform better in one colour versus another and the result may require a business to take very different strategies to ensure the most value is captured
from the line.

Learning from the grocery aisle

 Similar factors, from customer spending habits to selecting which items to discount, cause supermarkets to make missteps when determining a pricing or discount strategy.

“Retailers still miscalculate how much to discount because they fail to include pertinent factors in the formula, such as timing, product type, category and popularity."

These elements should inform pricing and promotions and can result in a 1-3 per cent increase in sales and profits above organic growth, according to Precima, a retail analytics firm.

But which tools put these elements into play?

Among the most popular is the competitive price index.

This is the practice of identifying a competitive price set among competitors and establishing a target price relative to that.

The challenge with using this strategy on its own is it treats all categories and items equally and doesn’t factor in spending data.

If the retailer combined insights on customer price sensitivity, along with competitive price information and price compliance, they could determine promotions based on a broader, data- driven pricing strategy.

Lastly, there is the oversold power of the loss leader – discounts on price-sensitive items like eggs – used to lure shoppers in with the expectation they will spend more elsewhere, offsetting the discount.

In truth, 25-50 per cent of loss leaders don’t actually increase traffic or lead to ancillary purchases, Precima reports, so analysis is required to find the ones that work.

Of course, for multi-store retailers, all this will make a significant difference if prices are consistent across all stores.

Bryan Pearson

Bryan Pearson is president and CEO of LoyaltyOne, and has more than 20 years' experience in developing customer relationship. Visit:

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