When and How to Strategically Discount Your Inventory
After working in the retail industry for six years, it is hard to shop sales or promotions without starting to analyze what might be happening in that business. While sales used to occur on a predictable cadence in order to clear seasonal merchandise, in a post-recession world we’ve been trained to think everything is on sale at all times, and that if we buy at a regular price we got a bad deal. This change in consumer expectations coupled with the ease of comparing prices online necessitates that retailers about how they strategically discount inventory.
Two Types of Discounting: Promotions vs. Markdowns
As a customer, you know when you receive a discount on an item but that discount could have very different meanings to the retailer. Retailers often refer to items as being on promotion or on markdown. These phrases typically indicate whether a price reduction is temporary (promotion) or permanent (markdown), and sometimes whether the discount is product specific or product agnostic.
Promotional pricing can be product specific or product agnostic. For example, a t-shirt might be temporarily on sale (at a promotion price) for $20 or you might receive a 20 percent off coupon for all dresses. Markdown pricing is almost always product specific.
These pricing distinctions help retailers better analyze their business performance and give flexibility to business operators. A promotional price is a great way to move additional units in an over-inventoried, but otherwise well-performing style, or to entice a customer to buy when (s)he otherwise would not. A markdown price is a great way to clear through seasonal inventory and to manage items out of your system. It is important to remember that while everyone dreams of selling items at full price, promotions or markdowns can often generate profitable sales.
Pre-Season vs. In-Season Discounting Strategies
Many retailers set a discounting strategy for a season ahead of time but leave resources available to make in-season discounting decisions based on business performance.
Pre-season discounting plans typically include strategies for known promotions, i.e. Black Friday/Cyber Monday, and a general schedule for markdown pricing and markdown generated events. When pre-season planning promotions, operators identify target discount rate, product scope, general marketing needs, and potentially target revenue or margins. A pre-season markdown strategy typically includes pricing guidelines, i.e. styles first mark down to 30%, then 50%, then 70% off, and markdown timing, i.e. all items from Fall and Winter will go to markdown after Christmas for an end of season clearance event.
In-season discounting plans are made in response to business performance. For promotions, in-season decisions could be to cancel a promotion because of strong business performance or low inventory, to take a deeper discount on items, or to broaden the scope/lengthen the event. For markdowns, in-season decisions could be to take shallower or deeper pricing action or to extend or shorten a product’s regular price life.
Challenges with Discounting Inventory
Determining the right discount amount is challenging for most retailers because price elasticity information is not readily available. For example, if you sell something at 20 percent off, would the customer have purchased that same item for only 15 percent off? Large retailers often have heavy duty price optimization software to analyze price elasticity but unless you have a robust history of changing price points in similar pricing tiers, it’s almost impossible to predict how a customer buys at different discounts. As a result, retailers often rely on industry traditions (30-50-70 markdown cadences) or the competitive landscape to determine promotion and markdown prices, which can lead to stagnant sales or inventory wipeouts.
Discounting can also create systems issues and challenges when analyzing data. Many pricing systems are not user-friendly and as an inventory planner, there is always the fear that you will accidentally take an item to 90% off. This is a dramatic example, but even more benign systems issues can cause headaches for store associates, customer service, and customers, often requiring manual hotfixes.
Additionally, discounting can create issues with brand perception. When retailers discount too often, customers are trained to think that retailer is always on sale. However, when retailers discount too little, customers potentially buy from competitors. Overall it’s a Goldilocks and the Three Bears challenge. It’s hard to get discounting just right.
For more information on the metrics inventory planners need to track, and how to track them, download our Retail Math Guide. For more information on the inventory planning role and how to do it effectively at your retail business, download A Guide to Inventory Planning.