Everything costs, including discounts. Price cutting is currently rampant …possibly endemic. The practice seems infectious, if not too rash.
Short-term sales events, bargains and promotional offers have immediate, widespread and lasting impacts on the integrity of brands, and the trust placed in the related value-packaging. As a consequence, full, standard and recommended retail prices are typically forever beyond reach and retrieval.
Customer relationships and loyalty are often casualties of consistent, tactical price discounting.
THE NEW ORDER
The intrusion of global fast-fashion outlets like Zara, H&M, UNIQLO and Forever 21, has dictated the need for all in the fashion retailing supply chains to invoke discipline, to strive for greater productivity, velocity and volume, and to trim margins to remain competitive, relevant and compellingly attractive.
Individually and collectively, those initiatives are not discounting prices. Rather, they are the aspects of a new dynamic, customer-focused business model that constitutes a new order.
It is exciting for some, particularly consumers, and burdensome for others.
The underlying premise of discounting is that lower prices will stimulate sufficient interest and increased sales, to more than compensate for the loss of profit that is integral in lowering prices.
It is well to remember that 100% of the discount is taken from the profit margin. Fixed and variable costs remain essentially constant in the short-term.
Disturbingly, few “discounters” undertake forensic analysis of just how much increased turnover is required to compensate for, and to neutralise, the impact on profits of lower prices.
Attendant costs and operational considerations are incurred, including increases in inventory, warehousing and retail space, staff numbers, electricity costs, rentals, insurance premiums, advertising and shrinkage. Understandably, most are bracketed in the variable-cost structure.
As a sweeping generality applied to retailing per se, (with a 30% profit margin) a 10% across-the-board discount will require an increase in turnover of around 296%. That’s right, a near three-fold increase in turnover.
For those who market, seek and retail services, (such as travel agents,) physical inventories are not a key factor in the equations. They require a “modest” 180% average increment in turnover to counter a 10% company-wide discount.
I readily accept and, indeed, can endorse discount propositions …. - once that I’m assured of a 1.8 to 3 times resultant acceleration in turnover. On-going variability in prices result in further costs. That is - the impact on the integrity and trust attributed to the brand. Arguably that can be, and often is, dismissed (or discounted!) as an opportunity cost.
Its presence is not apparent on spreadsheets. However, its manifestations are quantifiable.
START AT THE BEGINNING
Too often, the introduction of a discounting philosophy or policy is the unintended beginning of the end.
A rush to, and a rush of “corrective” contingency plans are the usual consequences.
An appropriate alternative is to recognise, respect and respond to a new prevailing structural order of the industry, sector or category.
Formulating, documenting, implementing, operating and developing a fresh business model are laudable.
Avoiding comparative analyses and lamenting past “buoyant times” is essential.
A clean slate, a zero-datum point, a focus on customers and clients, and an orientation to the future must come first.
It is, arguably, too late to expose the virtues of self-induced obsolescence, given that that mantle has been assumed by economic, competitive and innovative “disruptions”.
Fortunately, in the new order there are no traditions, norms or established rules.
One is left to dictate their one’s own standards, projections and values.
Productivity, velocity and volumes will be the foundation touch-points, the measures of which will be self-determined.
SO, WHAT’S NEW?
Some fundamentals in commerce are constants. Ignoring them has consequences.
History is littered with case studies of failure which resulted from unabashed, typically aggressively advertised discounting campaigns.
Offering consumers attractive “savings” can mean that little prospect exists to save the company.
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