Traditional Discounting is a Race to the Bottom
Discounts have ruled retail, causing a few unintended consequences.
Discounting is so ubiquitous that in April of 2016, J. Crew ran a sales promotion every single day. This is the way traditionally priced fashion brands have decided to compete with the hugely successful fast fashion brands like Tobi, Zara, and H&M, and the low prices on Amazon.
Consistent discounting may be a good acquisition strategy and even possibly a good retention strategy. But when brands overuse the tool, customers begin to expect only to pay sale prices.
Shoppers have been so desensitized to brightly colored sale signs that what was once a useful tool to attract, retain, and upsell customers has become counterproductive. If an item isn’t on sale, shoppers will wait or go online to find a better price. Because thousands of retailers are running sales every hour of every day, shoppers don’t feel the need to immediately capitalize when they see one and yet they still expect to never pay full price.
This infinite loop of perpetual discounting and attracting customers is entirely dependent on lowering prices, which has a few unintended consequences:
1. It hurts your brand’s value
Constant discounting harms the perception consumers have with a brand. This is especially true of retailers in the luxury space. Many brands no longer want to be associated with third-party stores that always seem the have red sale banners in the windows. Coach decided to pull their goods from 25 percent of department stores for this very reason. Instead, they wanted to direct customers to their own brick-and-mortar stores and online site.
While constant promotions—whether its sales on a brand’s e-commerce store or via partnerships with third-party department stores—may aid in brand awareness and customer acquisition, this strategy also condition shoppers to always expect those discounted prices. They won’t see the value in paying full price because they know they don’t have to, and that’s more harmful to a brand in the long-term.
2. It doesn't always lead to customer loyalty
As noted above, sales can be effective at attracting new customers. But that doesn’t always mean it will lead to a long-lasting customer relationship. Today’s customers are savvier than ever, bouncing from store to store, always on the hunt for the best price. And frequent discounts means you’re just getting those shoppers wanting a better price, not customers that actually want to engage with your brand.
In 2012, when JCPenny tried to pull their coupons and short-lived discounts, the subsequent drop in customers proved how much they were lacking in customer loyalty. Their customers weren’t interested in JCPenny, the retailer, they were interested in the low prices. Brands need to find other strategies to create meaningful relationships with customers that aren’t based on the lowest prices.
3. It’s a losing battle with Amazon anyway
Jeff Bezos’ famous quote—“Your margins are my opportunity”—has given some brands the wrong idea. They try to contend by lowering prices with sales, but Amazon is still conquering them. Last year, the e-commerce giant had 5.6 percent of the retail market. Sears, which was once as ubiquitous, decided to lean into the Amazon takeover by selling their appliances on the site, and their stock soared.
It’s tempting to compete on price, but that’s not where brands can win. Denise Dahlhoff, the research director at the University of Pennsylvania’s Baker Retailing Center, described the problem with this method to The Business Of Fashion. “Once you discount you get into this spiral because your margins get slimmer, and then you also have to sell so much more to make up for the lost margin on the price. It’s sort of this vicious cycle that you get into.”
“Consumers want deals, and they’re willing to wait for them,” C. Britt Beemer, the chairman of America’s Research Group, a consumer research firm. “When you train customers to shop at big discounts, that customer is not going to change.”
The retail market has spent decades training consumers to wait for sales and look for the lowest price. Brands are starting to unlearn that lesson and are heading in a new direction, with the hopes that customers will follow their lead.
For retailers, winning on price is a race to the bottom, and for shoppers, it has created a landscape of businesses with horrible customer experiences, low-quality products, and brands that are indistinguishable and interchangeable. Instead, companies should be building relationships with customers by providing a unique experience, producing high caliber products and creating a brand with specific values that customers are willing to invest in.