The Dangers of Discounting

Who doesn’t love a good sale? And of course it can be a great way to bring your brand lots of attention. But take caution… it isn’t as simple as reducing prices and advertising the sales period. Some sales strategies can do serious long-term damage to your business and the overall fashion retail industry as a whole. Learn more about the two types of discounts and a new way to leverage them to increase your bottom line and preserve your brand image.

There are two types of discounts in retail – markdowns and POS. Markdowns are usually discounts that take place twice a year, especially in August for Spring/Summer and December/January for the Fall/Winter season. On the other hand, POS (point of sale) discounts are short-term sales with the merchandise usually returning to their original prices afterwards. They’re traditionally used for major national holidays (Mother’s Day, Father’s Day, Christmas, President’s Day, Valentine’s Day, etc.) and they come in different forms like a 3 day sale of 25% off or take an extra 10% off during the next 24 hours.

But times are changing and lots of brands are opting out of traditional retail sales. These were the periods when all major brands and retailers would go on sale at the same time until Saks made a dramatic move in 2008. They broke sale super early and it was suddenly newsworthy because it was in response to the economy crash. It spawned a whole new outlet and off-price industry and movement. Suddenly full-price and markdown stores were following the schedule of POS sales, where the discount stores would take over all of the leftover merchandise.

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But this created a big problem for the business. Outlet stores saw huge increases in profit but they were selling designs that were still really on trend, basically cannibalizing the sales of their full-price counterparts. The widespread availability and frequency of shopping sale merchandise became fully ingrained in our culture and made a huge, long-lasting impact on customer service. In fact, many of the customers that shop major retailers still follow these cadences.

Back to this time of change. Something had to shift to get shoppers accustomed to buying full price fashion too – and that’s exactly what started happening in the last three years or so with the introduction of a lot more e-commerce brands like Bonobos. They don’t have to deal with markdowns because they own their distribution, inventory, etc. – not like larger retailers with industry issues.

As a result, we’ve experienced a shift of individual brands opting out of sales at the usual POS periods. Actually, a lot of them even make their own sales periods and get more attention in the process.

So what does the new system for sales look like? Whereas the traditional merchandise buying metric was 70% full-price sell-through and 30% at markdown, today’s emerging brands are having 80:20 and 90:10 full-price to sales ratios. This usually means sales events run for much shorter lengths of time and appear less frequently. That’s why they feel much more special, leading to an increase in interest and sales. So in the end, both retailers and consumers are changing strategies.

Retail sales are culturally important. There are still people who only buy on sale and actions like impulse buys to consider. So the key then isn’t doing away with markdowns entirely but developing a customized POS approach. If you’ll be doing markdowns, plan so that you’ll be sure to have enough inventory. Sales can be incredibly effective at getting first time shoppers to buy.

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Take a long, hard look at your current markdown strategy and see how it can evolve. It’s just time for a new strategy.

To learn more top strategies from today’s most successful emerging brands, check out our new white paper, “The Age of Emerging Designer”. You’ll learn savvy game plans from brands including Rhode Resort plus insights from pros at the likes of MATCHESFASHION.COM, Topshop, Maker’s Row and Coveteur.

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  • Virginia Ribeiro de Assis

    Love this post! I 100% agree that discounting your product is no good for most brands and can dramatically devalue your brand! Great post Syama!