Once you’ve entered the Discounting Cycle of Despair, it is hard to get out of it without drastic action. Offering discounts with regularity trains customers to wait for and to expect further discounts. It becomes a game of brinkmanship. You believe that your product and brand is worth more than the customer has been trained to pay. Price and quality are largely perceptions, and repeated, relentless discounting is not just damaging your current gross margin, but your customer profitability in years to come. This is the hardest part of the Cycle to recover from.
Let’s be clear – your discounting actions today impacts on future customer profitability and your ability to trade at lower discounts in the future.
Getting it right
To recap: sensible and rational discounts can drive improved profitability – as long as the reduction in £ Gross Margin per order is more than compensated by a reduced marketing cost – and therefore more profit per order and customer (after marketing).
It goes wrong when sales budgets are incorrectly set and sales are ‘chased’ by discounting, at the expense of orders and customer profit. This process of unprofitable discounting sets customer expectations that are hard to change and so, the Cycle continues.
The key to success is a customer-centric plan
Budgets and targets need to be built by establishing what the existing customer base will deliver in revenue, and by the number of new customers the business can realistically acquire, correlated to the marketing, channel and product plans.
Unless you simply want growth at any cost, avoid benchmarking sales growth on a % basis against previous years. Start with the customer and you won’t go wrong… And measure everything by increments, not averages (i.e. identify the incremental cost and benefit of an activity or outcome).
To get out of this Cycle, your sales budget or short-term growth expectations may need to be reduced. This might be the right decision if your goal is medium-term sustainable growth and profit. Your alternative might be to spend more on marketing to counterbalance the effects of short-term reduced revenues.
Having a good stock disposal channel is critical in enabling you to confidently buy to your forecast without liquidating your stock at brand-damaging rates in the event of trading problems. As an example, you might consider selling through discount stores in other countries if it helps you to maintain margins with your core customer.
And of course, the most important enabler to changing your trading metrics is to improve your measurement. All too often, retailers measure in silos and normally at revenue rather than contribution level. Change your reporting to measure customer profitability, understand the drivers of this and make it someone’s responsibility.
All in all, stop peddling at a loss and put the brakes on the cycle of desperate discounting. Discount mindfully, with your eye on the prize, and you will speed your successful growth.