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Discounting Can Cost Retailers Millions — By Not Selling

Photographer: Akos Stiller/Bloomberg

Hemlines rise and fall fast, but when it comes to the shelf life of a discounted $500 skirt, the number of days can drag on — to 106, to be precise.

That’s how long it can take an online luxury retailer to sell a piece of women’s wear, even when discounted, according to an analysis of discounts among 114 luxury, premium and mass-market apparel and accessory retailers. Furthermore, when luxury items were marked down at a higher percentage (40-50%) than they took 19 days longer to sell than if marked down 30-40%.

That translated to millions in lost revenue among select women’s luxury goods in 2016, according to the research by Edited, a retail analytics company with offices in New York, London and Melbourne.

Mass-merchandise items, meanwhile, sell faster at discount, especially when marked down by less. Women’s wear products sold 11 days faster when first discounted from 30-40%, rather than 40-50%. The difference cost retailers millions in needless reductions, according to the research.

The same unusual trends occur across retail, from luxury apparel to kids’ clothes, but why? And what does it mean? According to Katie Smith, senior retail analyst at Edited, merchants fail to factor in several basic but highly relevant factors. “The simplest missteps are obvious even when looking at the surface of retail’s discounting woes,” she said.

The same applies to cereal and eggs — issues from shopper behavior to competitive distractions can blur pricing strategies.

Let’s look at factors that should influence effective markdown strategies, and how grocery chains can apply the same.

Timing, Popularity And Other Factors

A key benefit for retailers is they have scads of data to analyze, Smith said. But that also requires that they understand what they have and how to use it. Retailers still miscalculate how much to discount because they fail to include pertinent factors in the formula. Specifically: timing, product type, category and popularity.

There may also be a psychological effect at play — ­the shopper may perceive a larger discount to mean the product is undesirable.

“As consumers increasingly purchase goods online and expect to only buy goods when they’re ‘on sale,’ retailers must invest in technologies that give them a holistic view of the market, consumer demand and assortments,” she said in an email. “Today, retailers can use analysis tools to understand a trend’s demand before they even put a style into production, which helps buyers know how many orders to place.”

Further, she said, real-time analysis of competitors and other market segments helps merchandisers track a trend’s performance, spot saturation and clear stock before a decline.

Retailers need to become more adept at considering how different factors may affect performance. Take color as an example. A specific item may perform better in one color versus another, and the result may be very different strategies to ensure the most value is captured from the line. Smith said there may even be strong regional variations that can be addressed by monitoring the data.

“Missing out on sale season by so much as a week could be critical for a retailer in a new market,” she said. “Only by having this comprehensive data at their fingertips to identify patterns and make insightful decisions will retailers have a greater chance of getting their discounting approach right.”

And, more importantly, they could put millions back on the table.

Learning From The Grocery Aisle

Similar factors, from customer spending habits to selecting which items to discount, cause supermarkets to make missteps when determining a pricing or discount strategy. First, let’s look at the shopper.

These elements should inform pricing and promotions and can result in a 1-3% increase in sales and profits above organic growth, according to Precima, a retail analytics firm.

But what tools put these elements into play? Among the most popular is the competitive price index. This is the practice of identifying a competitive price set among competitors and establishing a target price relative to that. Pricing within 5% of Kroger, for instance.

The challenge with using this strategy on its own is it treats all categories and items the same and does not factor in spending data. If the retailer folded in its insights on customer price sensitivity, along with competitive price information and price compliance, it could determine promotions based on a broader data-driven pricing strategy.

Lastly, there is the oversold power of the loss leader – discounts on price-sensitive items (like soft drinks or eggs) used to lure shoppers in with the expectation they will spend more elsewhere, offsetting the discount.

In truth, 25-50% of loss leaders don’t actually increase traffic or lead to ancillary purchases, Precima reports. Identifying those that do work requires an in-depth analysis and understanding of customer and basket data.

All this will make a significant difference, but only if the retailer also deals with pricing compliance across its stores. According to Precima research, 25% of supermarket prices are not aligned with the merchant’s own pricing policy, leading to inconsistencies, customer confusion and lost sales.

This article originally appeared in Forbes. Follow me on Facebook and Twitter for more on retail, loyalty and the customer experience.

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