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Retailers can't discount their way to success

Gavin Masters
Gavin Masters Ecommerce Industry Principal
05 Sep 2019

 

Retail continues to struggle. Declining footfall and consumer confidence continue to put pressure on pricing and cash flow, whilst customer expectation remains high. Geopolitical uncertainty is having a huge effect across all aspects of the economy, from fluctuating exchange rates and raw goods pricing through to increasing logistics costs and, of course, The Great Unknown that is the impending (probably) conclusion of Brexit.

Discounting started as a short-term fillip to help retailers over a “temporary inconvenience” of a dip in sales revenue and to help shift less desirable stock. It has now become the de facto method of shopping for many – once you know what you are going to buy, a 30-second search on the internet can source you the cheapest possible price for the item. With assurances (and insurances) from PCPs and the prevalence of customer reviews on social media, many don’t think twice about buying goods at unbelievably low prices from the digital equivalent of a man stood at the boot of a beige Volvo in Watford Gap service station.

For established retailers, and those who won’t (or can’t) join the race to the bottom of the pricing abyss, this creates some serious problems. More businesses are realising the cost of continual discounting and a blinkered obsession with growth-focused KPIs in preference to profit and margin-led initiatives.

Revealing the true cost to serve

Increasing sales are a good sign for retailers, but issues arise if the profit in these orders doesn’t meet operational costs because of heavy discounting. The problem lies in the fact that businesses are often siloed, making it hard to fully understand costs. In the age of big data, the tools are available to help retailers identify these issues, and respond to them effectively. With a full picture of costs, businesses can assess their position and decide how much discounting they can afford, on which products and customers. This analysis can also allow them to find ways to reduce their costs in other areas.

Adding value

The overriding reason retailers are turning to free shipping and discounted goods are to ensure they can stay competitive in a crowded marketplace. Retailers such as Quiz, which recently issued a profit warning following a strategy of heavy discounting to deal with a tough trading environment, are proof that this technique rarely works. Instead, retailers should increase loyalty in a time where customers are spoilt for choice; a task that can be achieved with value-added incentives, such as personalisation and customer support.

Often, discounting incentives (such as free delivery) have a net negative effect, because consumers don’t always act how you expect. For example, removing a minimum order value on free shipping may cause customers to place orders with lower value making it impossible to meet the base cost required to fulfil that order. Retailers need to take a longer-term view and focus on the fact that increasing loyalty will encourage consumers to keep coming back and supporting them in the future.

 

 

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