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Reverse Retail's Race to the Bottom

Posted by Sullin Jose on March 23, 2017

Despite a twofold increase in discounting and sales pricing for the 2016 holiday season, retail receipts actually showed a 3.5 percent decrease in consumer spending, according to industry data. And, as consumers become increasingly reliant on price promotions and the discounted sales model, retailers are finding it difficult to avoid plummeting margins - not just during Black Friday and the holiday season, but throughout the entire year.

Factors like the recession and the ever-growing need to compete with fast-fashion retailers may have backed some major brands into a corner. But, in order to maintain (or in some cases, even regain) a healthy margin of profitability, the industry as a whole will have to look for ways to meet consumer demand and continue to attract customers without sacrificing profits.

The Problem With Discounting

Offering discounts holds some advantages, from attracting and introducing new customers to a brand, to rewarding loyalty and building good faith with regular customers. However, one of the main problems that retailers find with the practice of repeated deep discounting is that it can become a slippery slope – once consumers identify and come to expect lower prices from a brand, it becomes extremely difficult to break free from the cycle.

Consistently lower price points can also erode a brand's perceived value over time, further hurting sales and long-term profitability. Chronic discounting has become so widespread among department stores and major retailers that even brands that typically avoid major discounting are beginning to feel the pressure.

And the problem has real-world ramifications beyond a retailer's bottom line. As sales diminish and revenue continues to plummet, layoffs, staff downsizing and store closings become inevitable, further straining the economy.

What Brands Can Do to Break Out of the Bargain Cycle

Focus on value – Retailers and brands should focus on developing strategies that attract and retain consumer loyalty based on value and long-term relationship building rather than short-term gains through excessive discounting.  When possible reward loyalty that is evident in something other than buying behavior.  Dick's Sporting Goods offers rewards points for customers who remain physically active.  This shifts the conversation from transactions to an adoption of the brand's athletic culture.  Similar examples exist at Sephora, Williams Sonoma and outdoor brand, Cotopaxi.

Be strategic about discountingLuxury brands that wish to enter a segment of the discount market are careful to approach it in such a way as to not dilute or cannibalize their core brand identity. Instead of slashing prices on products across the board, creating separate tiers to move surplus or lower-performing products can be a way to offer consumers a deal without sacrificing a brand's value and overall balance sheet. These offers should also be limited to only the best customers or strategically pushed to select off-price retailers.

Choose the (right) competitive advantage – Rather than perpetuating a never-ending race to the bottom by slashing prices to try and outmaneuver competitors, brands can adopt what the Harvard Business Review describes as "competitive position mapping" to determine what consumers are theoretically willing to pay for perceived benefits.

choosing the right competitive advantageThe practice of drastically slashing prices has become so ubiquitous that finding a major non-luxury consumer brand or retailer that does not currently engage in the practice can be challenging. While halting discounting activity altogether may not be feasible in the short term, gradually scaling back on the frequency and scope of price cuts can help avoid some of the pitfalls faced by companies like J.C. Penney and Macy's.

As concerns continue to grow over international trade, ethical practices in overseas manufacturing and the impact that the disposable, fast-fashion trend has on the environment, prices will have some inflation pressure.  The silver lining is that retailers have an opportunity to spearhead the shift in consumer desires to service and quality over discounted prices, driving consumption patterns in a more sustainable direction.

Additional sources:

6 Reasons Why Discounting is Destroying Your Sales (And What to do Instead)

Ditch the Discounts

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Onestop Internet is a full-service ecommerce solutions provider, specializing in retail planning and merchandise expertise that reduces mark-downs and improves profitability for premium brands. Contact us to see how we can help your ecommerce business grow.

Topics: Retail, promotions, price, profit, margin, race to the bottom, Black Friday, holiday

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