When your sales start to drop, you’ll find yourself looking for ways to offer a discount. Discounts drive short-term increases in transactions. However, those same discounts can quietly erode how Customers think about the brand that sits behind that price. As the UK shopper becomes accustomed to being bombarded with sale after sale we’ve seen that familiarity changes how a customer perceives a discount.
How Customers interpret a price reduction
When Customers see a price reduction, they don’t typically look at it in isolation. Instead, they evaluate it based on reference points developed through prior pricing, competitors’ offerings and what they believe is the right price for the item. This is called the “anchoring” effect. It works both ways. For example, a moderate, timely discount can reinforce the notion that a brand is priced reasonably. On the flip side, an excessive frequency, amount or lack of clarity of price reductions causes a permanent downward shift in reference price. Therefore, the next full price purchase may seem like an overprice compared to past purchases even though nothing has changed with the item.
This is why many retailers are shifting away from broad-based seasonal price reductions towards more targeted approaches. In some cases, this involves using advanced AI-driven pricing platforms like 7Learnings. By leveraging predictive machine learning models, 7Learnings allows retailers to forecast the exact impact of a price change on demand, profit margins, and inventory levels before it goes live. This type of planning allows a retailer to maintain price integrity on lines where reducing the price would harm the brand more than help sales, while simultaneously accelerating markdowns on stagnant inventory. The decision-making process moves from one blanket percentage applied uniformly across all items to multiple, smaller discrete decisions regarding each individual SKU.
Types of discounting behavior that slowly undermine trust
There are several types of discounting behaviors across different categories in retail that begin to undermine trust in the brand rather than support it.
The behavior of offering significant discounts on a product shortly after its introduction creates immediate conflict in consumers minds. If there is no perceived value associated with the original price then why pay more? There is little doubt among consumers when a product is discounted shortly after its release that the initial price was unrealistic and therefore they are aware of the contradictions quickly. When constant promotions are offered, consumers develop an expectation that waiting until the next sale will result in purchasing at a better price. Over time this habit creates a flatness to the pricing structure of a range. The application of the same percent-off across an entire collection regardless of performance results in treating all items as equal in terms of sales strength. In reality it is often a few products in the collection that account for most of the margin. When framing a sale as a “reward”, and consumers realize that the difference between surplus inventory and true value-added to the product, it ultimately leads to negative perceptions of the brand as soon as it is recognized; and it is rarely unrecognized for long.
These behaviors stem from viewing discounting as a singular blunt tool rather than as a variety of decisions that need to be evaluated individually for each product based upon its lifecycle stage, inventory status and profit objective. An item that is six weeks into its end-of-season cycle may accept greater price decreases than an item that is only recently arrived on store shelves. Only when the retailer is monitoring and recording this variability will they be able to apply one rule across all items on their floors. Otherwise, the sale calendar will dictate pricing decisions rather than vice versa.
Setting discount rules to protect the value of your brand
Ultimately, protecting brand perception during discounting activity requires having criteria behind each and every reduction and not relying solely on gut feeling or competitive panic.
Having a margin floor established for each category before the start of a sale period establishes a maximum depth limit based on profitability versus competitiveness. Setting limits on the length of any single promotion prevents training Customers to anticipate a permanently lower price versus a temporary price reduction. The greatest discounts should be reserved for end-of-life inventory and new items and core items should remain close to full price. Finally, evaluating elasticity at the product level helps identify two similar items will respond significantly differently to a percentage off. A single blanket figure will tend to over correct for one of the items.
These criteria are most effective when they are tied to real-time demand forecasts and not historical promotional calendars. Those retailers who utilize pricing platforms capable of modeling price elasticity at the product level can see prior to implementing a sale, whether a particular price decrease will generate sufficient additional volume to offset lost margins or merely provide revenue to consumers who intend to purchase at full price regardless of the discount.
7Learnings helps retailers optimize pricing strategies, marketing, and ordering decisions by leveraging advanced machine learning. 7Learnings empowers businesses to increase profit and revenue by +15%. Trusted by leading brands, the client roster includes Bonprix, Galeria, DK Company, and Westwing.
