5 Reasons Retailers Should Stop Discounting (and What to do Instead)
Direct-to-consumer brands have defined modern retail best practices, from up-to-the-minute digital marketing strategies to sustainability. Today, there’s a new emerging trend and cutting-edge best practice DTC brands are embracing: the no-discount strategy.
Forgoing discounts is a strategy The Wall Street Journal predicts will become more widespread in 2021. It’s even being deployed by legacy retailers like Macy’s (which is known for offering regular discounts).
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What is the no-discount strategy?
A no-discount strategy means that a brand never (or extremely rarely) offers discounts on its products.
There are shades of gray to this approach: some brands may run a no-discount strategy 99% of the time but still offer a small Black Friday promotion or rewards to their loyal customers in the form of store credits.
The overarching idea, however, is that the brand takes a firm stance on its pricing. Its product is worth its standard price point.
We’ve never done a discount at Beardbrand, but we do offer free shipping and pre-launch pricing. So, promotions, but not discounts.
Many brands like Everlane and Thursday Boot Company even market their price point as the cheapest fair pricing on the market.
Everlane goes so far as to give shoppers a breakdown of all costs related to an item, such as how much it pays its factory workers, how much it pays in shipping, etc.
The result of this approach is that brands can create more loyal customers who feel like they’re buying a well-made item at a fair price. Perhaps more importantly: customers pay full price because an item costs what it costs, and they trust the brand to set a reasonable price point from the start.
Disadvantages of discounts: why do some retailers never discount?
For many years, discounting was the go-to strategy for retailers, particularly as they battled Amazon’s plunging prices. Retailers like Kohl’s and JCPenney became known for never-ending promotions.
However, this strategy led to more than a few issues for retailers, such as:
1. It trains shoppers to not buy at full price
When consumers know an item will eventually go on sale, they feel no urgency to buy it right away. Instead, they begin to think, “If it’s not on sale today, it will be tomorrow. I’ll just wait until then to buy.”
I believe it’s wise not to lower your prices if you are offering a high-quality product. I think that not offering any discounts gives the impression of added value and it makes customers value your product more.
The ubiquity of discounting strategies also caused online shopping behavior shifts, like a rise in customers attempting to game the couponing system. For instance, it’s pretty common now for shoppers to abandon their online shopping carts to see if they can trigger a cart abandonment discount via email in a day or so.
JCPenney learned how detrimental its discounting training was and decided to ditch it in favor of steady “everyday low pricing.” The retailer lost many customers who saw the increased ticket prices as a new “high bar” for JCPenney to undercut with discounting.
In the first quarter post-implementation of the new pricing strategy, JCPenney lost $163M, filed for bankruptcy, and moved back to its regular discounting strategy.
2. It cheapens the product by putting the focus on price
Stax Insights, a global strategy consultancy, found customers are equally concerned with product durability and quality as they are with price. In fact, for a product customers deem good quality, they reportedly were willing to pay an equitable price, whatever that may be.
This is the reason brands like Everlane and Thursday Boot Co. can sell at full price: they’re putting the focus on the quality of their products rather than the price. Companies that create loyalty around their products and brand and command their prices don’t have to reduce them.
10/ When treated as an asset, you’ll gain the ability to command a price
Why does Gucci charge $890 for a Disney tshirt?
Because they can
This is what commanding a price looks like
And the ability to command a price is a moat pic.twitter.com/MQaw1eDfek
— Tayler Carraway (@roost91) December 14, 2020
On the other hand, discounts inherently make price a major focal point, placing the product’s benefits on the backburner. This is detrimental, as studies show consumers tend to think a discounted item does not function as well as a full-priced item.
Brands that use discounting as part of their strategy have to build those future discounts into their pricing structure, ultimately devaluing the final product. Customers come to understand the product’s true value and act accordingly.
3. It attracts bargain shoppers
Offering discounts can attract a new customer to your business, but it might not be the long-term, loyal customer of your dreams. Bargain hunters are often brand agnostic and unlikely to convert into loyal shoppers. As lifetime value (LTV) increasingly becomes the metric that drives success, single-time shoppers are usually not worth the money spent to acquire them.
Thursday Boot Co., for example, doesn’t discount. It wants to focus on developing long-term relationships with its customers that aren’t based on incentives but on product quality.
“This is the right way to treat people, and it also happens to be best for the business long term,” says Thursday’s cofounder, Connor Wilson. Instead of discounts and promotions, Wilson shared that the brand focuses on providing high-quality, hand-crafted footwear with honest pricing.
4. It cuts into profit margins
Perhaps the most obvious disadvantage to discounting is that it eats away at a business’s profit margins. The discount comes out of product margin, after all. Studies show that every 1% of discounting reduces a brand’s bottom line by as much as 6%.
In other words, if an item that sells for $30 with a profit margin of $10 is discounted by 30%, the result is only $1 of profit.
5. It’s not sustainable
Constant discounting is not sustainable for a brand or the earth. When brands with items that start at low price points lean into discounting as a marketing ploy, they must cut corners when producing their items to compensate.
The cost of corner-cutting is massive, both environmentally and socially. The fast fashion industry alone is set to use 25% of Earth’s carbon budget by 2050, and brands that heavily discount often fail to provide a living wage for their floor and factory employees. This means their employees often are the ones who have to compensate for brands’ cost-cutting strategies.
Are there any advantages to discounting?
Discounting didn’t become so ubiquitous for no reason. There are some advantages to running promotions and other off-price strategies, which is why we see them used so frequently.
1. It increases short-term sales
Discounts are a quick way to spike sales in the short-term: a store with an active discount of some form is eight times more likely to make a sale. Plus, time-limited discounts and scarcity-focused deals create a sense of urgency that nudges shoppers to snap up items.
One DTC furniture brand that recently saw this work well is Industry West, which drove almost $1 million in sales during its short-term warehouse sale.
70% of our warehouse sale customers were first-time customers. Considering our marketing for this sale overwhelmingly focused on our existing, owned audience, I think this speaks to the discounted merchandise giving fans of Industry West…who couldn’t quite get in at our usual price point…access to the brand.
2. It can increase exposure to new customers (and convert them)
Discounts are particularly effective for converting new customers, as they lower the barrier to entry. This is particularly true in the world of ecommerce, where customers don’t get to physically handle products before buying them.
Many brands feel like discounting is something they must do to get customers to pull the trigger—in particular for the first purchase. Furniture, for example, is a very difficult industry to make any traction in without discounting.
3. It can increase AOV
Discounts aimed at increasing order volume (like buy-one-get-one or buy-more-save-more) are incredibly effective at driving higher average order values (AOV). Data shows BOGO sales are the most popular type of discount, with 66% of consumers citing it as their preferred promotion. Other retailers use a bundling approach paired with discounts to encourage larger order sizes, too.
4. It can help move merchandise
Discounts can help move products quickly, which is why retailers with stagnant or slow-moving merchandise often use them to liquidate dead stock and make room for new items.
If you’re selling a high-volume commodity product, I’d encourage regular discounting to entice customers who otherwise might not try your product at full price. Even if the brand takes a loss on that first purchase, the potential lifetime value of the customer will greatly outweigh it.
5. It can reward loyal customers
Rewarding your loyal customers is a simple way to keep them around, and offering exclusive discounts to your VIPs is an easy way to do this. When you pair this strategy with the fact that return customers spend 3x more than one-time shoppers, it’s an easy way to drive more sales and say thanks to your avid fans.
6. It can reinforce brand messaging
In rare cases, a branded discount can be a clever way to reinforce brand messaging, so it’s “stickier” in a new customer’s mind. Coffee brand Buzz Lite uses this approach to incentivize purchases, but also to play on its unique brand positioning and message.
We sell microdose coffee with just 10% caffeine, so we offer a ‘microdose discount’ of 10% off a first purchase or subscription. It provides value to the customer and reinforces the Buzz Lite brand message.
How to decide what discounting strategy is right for you
Ultimately, every brand needs to decide what sort of discounting strategy is right for their products and audiences and whether or not they want to use them at all.
Keep in mind that even a firm no-discount strategy doesn’t mean a brand won’t partake in any off-price strategies—there are plenty of creative workarounds for brands to utilize pricing strategies that help them move product and drive sales.
We focus on selling the value we bring to each customer. Our no-discounting approach is about not wanting to train people to wait for a deal. The ONLY price break we give is on discontinued styles with broken size runs at the end of their lives. It’s primarily a tactic to better manage inventory.
Here are the steps to take when considering a discounting strategy.
Step 1: Determine your goals
As with any strategy, it’s important to establish (and document) your objectives before getting too far into execution. Having clear end goals in mind helps determine whether or not discounting is the best way to reach your targets.
For example, if the goal is to boost AOV, try creating product bundles before running official discounts. With product bundles, you don’t necessarily have to provide any sort of discount on the products to achieve that goal—the convenience factor is sometimes enough to drive more sales.
One brand with a clear, goal-driven discounting strategy is Lululemon. The athletic-wear brand has a page on its site dedicated to overstocked items it needs to move, titled “We Made Too Much.” This way, shoppers know they’re getting a special deal on products that are rarely marked down.
The transparency around the fact that the brand is working to move stagnant products helps set expectations for their other collections and service a more bargain-oriented secondary buyer persona.
Step 2: Understand your audience
Next, think about the nature of your current audience. For example, if a discount targets first-time customers, will it bring in the kind of audience you plan to serve for years, or is it bringing in one-time bargain hunters?
We’ve found that our demographic is motivated as much by our product and value proposition as discounts, so we focus on providing value that way. We only did one discount last year, and it was for 24 hours only on Black Friday for only one product.
You may also find that part of your customer base works in lower-paying fields or high-stress roles. Offering an exclusive discount for shoppers working in professions like education and health care shows appreciation and can help generate long-term loyalty with customers in specific demographics.
Sneaker and mask brand Atoms does this, offering a 15% discount to teachers and a 10% discount to health-care workers, students, and military and government employees. While Atoms has a strict no-discount policy otherwise, this ongoing offer helps them speak to customers who work in public-facing roles and spend hours on their feet.
Step 3: Test your theories
With so many types of discounts and so many ways to offer them, it’s best to test different tactics to find out what works best with a data-driven approach. Give each deal you run a unique coupon code so you can track the sale’s up-front success, and then follow the LTV of customers who utilized the promotion as they continue their customer journey.
Tracking the success of your promotions is exceptionally easy with Shopify POS Pro’s robust reporting. Shopify POS Pro supports any discounting strategy you choose to test, and its reporting features make determining the success of specific discounts simple.
Accessories brand Lele Sadoughi never offered sales outside of Black Friday before the coronavirus hit. But by March 23, 2020, owner Lele Sadoughi decided to start testing discounts to help keep the brand moving forward in a difficult time.
She began by offering informal sales that ran for two hours and ramped up from there. By the end of the first week, the brand had six to seven times more sales than it did on the first day. Today, Lele Sadoughi runs thoughtful promotions such as BOGOs as a mainstay of its marketing strategy.
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Decide if the no-discount approach is right for you
Ultimately, your ideal discounting strategy likely exists somewhere between no discounts and a JCPenney-style never-ending deluge of deals.
Remember: discounts aren’t the only way to win market share. Shoppers are looking for great products made by passionate brands.
If a brand can make a compelling case around why a product is worth the full ticket price, many consumers will pay it, and it will shift the relationship dynamic in a positive way.
Shopify POS Pro can support whatever discounting strategy you decide to take. Learn more about its features and how you can benefit from them.