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Are discounts really worth it?
Are discounts really worth it?

The hidden cost of discounting

It’s the oldest trick in the book – retailers who lower their prices will increase their sales. The concept seems simple enough, but BARRY URQUHART questions whether it works, and if it’s really worth it.

Price cutting is infectious and possibly endemic. Short-term sales events and promotional offers are rampant and have a widespread and lasting impact on the integrity of brands and the trust consumers place upon a product’s value.

Full price is supposed to exist – it says so on the ticket – but when was the last time anyone paid it? It is a figment of imagination, typically seen but never paid.

Consistent, tactical price discounting is not just about the cost of products. Other costs include poorer customer relationships and the loss of loyalty, which are both often casualties in this race-to-the-bottom strategy. Retailers must consider whether discounting is really worth it.

The new order

There’s no denying how much the retail market has changed in Australia in recent years.

This can be seen most clearly in fashion retailing; the proliferation of global fast-fashion outlets like Zara, H&M, UNIQLO and Forever 21 has dictated the need for all in the fashion-retailing supply chain to strive for greater productivity, velocity and volume, and to trim margins to remain competitive, relevant and compellingly attractive.

Those chains will say they’re not discounting prices. Rather, they will say the initiatives are the aspects of a dynamic, customer-focused business model that constitutes a new order.

This is exciting for consumers but burdensome for the industry as a whole.

Cost versus benefit

The underlying premise of discounting is that lower prices will stimulate more interest and increase sales, which will then compensate for the loss of profit that is integral in lowering prices.

Retailers should always remember that 100 per cent of a discount is taken from the profit margin and that fixed and variable costs remain constant in the short-term.

"Retailers should always remember that 100 per cent of a discount is taken from the profit margin and that fixed and variable costs remain constant in the short-term"

Disturbingly, few discounters properly analyse just how much increased turnover is required to compensate for, and neutralise, the impact of lower prices on profits.

Attendant costs and operational considerations are incurred, including increases in inventory, warehousing and retail space, staff numbers, electricity costs, rentals, insurance premiums, advertising and shrinkage.

For example, if a retail business has a 30 per cent profit margin, a 10 per cent across-the-board discount will require an increase in turnover of around 296 per cent – that’s almost a three-fold increase in turnover!

For those who market, seek and retail services, physical inventories are not a key factor in the equation. Travel agents fall into this category, for example. A service-only provider would require a ‘modest’ 180 per cent average increment in turnover to counter a 10 per cent company-wide discount.

Personally, I readily accept and can endorse discount propositions only once I’m assured of a two-to-three-time acceleration in turnover. Even in that scenario, there’s another hidden cost. Ongoing variability in prices erodes the integrity and trust customers attribute to a brand. This can be dismissed – or discounted! – as an opportunity cost but while its presence is not apparent on spreadsheets, its manifestations are quantifiable in the long term.

Start at the beginning

Too often, the introduction of a discounting policy is the unintended beginning of the end. A rush to implement corrective contingency plans is the usual consequence and it is arguably too late to expose the virtues of self-induced obsolescence, given that mantle has been assumed by economic, competitive and innovative disruptions.

An alternative is to recognise and respond to the prevailing structural order of the industry with a fresh business model.

It’s essential to avoid comparative analyses and not to lament buoyant times of the past. A clean slate, a focus on customers and clients, and an orientation to the future must come first.

Fortunately, in the new order there are no traditions, norms or established rules, allowing businesses to dictate their own standards. Productivity, velocity and volume will remain the most important focal points.

Closing thoughts

Some fundamentals in commerce are constant; ignoring them has consequences.

History is littered with case studies of failure that resulted from unabashed, typically-aggressive discounting campaigns. In the end, offering consumers attractive savings can mean that little prospect exists to save the company itself.











ABOUT THE AUTHOR
Barry Urquhart

Contributor • Marketing Focus


Barry Urquhart –is managing director of Marketing Focus. He has been a consultant to the retail industry around the world since 1980. Visit: marketingfocus.net.au or email urquhart@marketingfocus.net.au









Monday, 22 April, 2019 06:19am
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