Retailer discounts - Does 30% off mean you're 30% too expensive?

18 October 2018

Rag Trader Magazine, September 2018 |
Mark Schiavello , National Leader, Retail
Partner, Corporate Finance

BDO’s national head of retail Mark Schiavello investigates the discounting equation.

Does 30% off mean you’re 30% too expensive? The impact discounting is having on your brand

Have you noticed Australia’s shopping culture since 2008? Maybe it was the GFC or maybe it was just a natural shift that has evolved over time, but everyone appears to be engaging in discounting. When you walk through a shopping centre in Australia you are inundated with promotions saying “30% off” and “buy one get one free”, and shops seem to be continually running sales.

Discounts are all around us, and as consumers, we have become conditioned to only purchase when we feel we are getting a bargain.

Why do retailers offer discounts?

Competition in retail is fierce and there are compelling reasons why retailers choose to engage in discounting. In its simplest form, discounting makes sense from a short term financial perspective, especially when you’re looking to boost sales and achieve your annual targets.

Discounting is a proven traffic driver that helps attract new customers and delivers a ‘sugar hit’ to the top line. But there is a limit to its effectiveness. Research suggests that discounts become less effective as more products are put on sale. 
When a brand continually discounts its goods do you ever want to pay full price for those same goods when they aren’t on sale?

Each time a consumer observes a discount it is embedded within their memory as a reference point for future interaction with that brand. The higher the frequency of discounting, the higher the likelihood that the sale price becomes the ‘norm’, reducing consumers’ willingness to pay full price.

What are some of the impacts of high frequency discounting?

Heavily reduced gross profit margin and reduced staff engagement

In a hyper competitive retail landscape, it is important that retailers maintain gross profit margin. As a retailer, if you discount by 50%, what does that do to your top line and your gross profit? Essentially, you will need to sell twice as much to make it an effective strategy.

What impact does selling ‘twice as much’ have on your sales staff? Essentially they are working twice as hard for the same reward. This may lead to a disengaged workforce. Engaged sales and support staff are essential to optimising your customer experience.

A negative impact on brand equity

A brand is a promise, as perceived by prospective consumers. Most consumers value something based on its price. Your sales staff aren’t going to say that your product is the best because it is the most expensive. 
Exceptional sales staff demonstrate the value your product will have on the consumers’ life and why they must buy your product. It is impossible to effectively deliver this message if your brand is constantly ‘on sale’.

Final thought

One way to combat the vicious cycle of discounting is to differentiate your product from the competition. By focusing on other factors such as experience, narrative, value adds and uniqueness you can differentiate your brand without having to discount.

These steps will ensure you maintain long term brand loyalty, grow the top line and maintain margin.

Got questions? Mark can be contacted at [email protected]

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