The dilemma of discounting your merchandise.

One of the toughest things for smaller retailers is having a sale or discounting your goods. Why? Because your margins are lean and you need to maximise on your profits to pay for your overheads! I get it.

However there are a few genuine reasons for needing to discount your merchandise in retail. Let’s look into each scenario.

  1. The first reason could be driven by a need to clear your inventory to make space for new merchandise arriving. This is particularly common in fashion and seasonal goods that you change throughout the year.

Clearing inventory to make space for new arrivals is a good plan for all retailers because you recognize the true cost of storing older inventory. There is also the danger of not giving your new collection the space it needs to thrive and look good in the store if it is squashed between older pieces, fighting for customer attention.

2. A common reason for discounting your products is a need to create cash flow for your business when sales are slow and the bills are coming in.

One of the main reasons for discounting your goods is to drive sales up for the simple reason that you need cash to run your business. The logic is correct that you need to turn those slow-moving items into money so you can spend some of it on new, faster moving inventory and cover your business costs in slower periods of the year.

3. Your reason for having a sale could also be driven by customers’ demand for promotions and perhaps your close competitors offering discounts that you need to be competitive with.

It’s a tough scenario when you are almost forced into discounting some of your goods in order to stay competitive or to give your clients the push they need to stay loyal to you but it is a common reality in retail. Perhaps you are a new store and need to incentivise clients to try your goods or perhaps clients have more choice now of similar merchandise to yours, so you need to boost client loyalty by offering them something back.

Whatever your reason, making sure you put out the right offer is very important. For example, if you are trying to clear your inventory quickly to make space as in scenario 1, then it is a good idea to make direct, high percentage discounts to each item. Don’t worry at that moment too much about profit margins, think of the space and the benefit of increasing your chances of selling all your new inventory at full price.

If, as in scenario 2, you need cashflow, then it could be a good idea to offer bundle sales to increase the average spend of each customer transaction. The focus here is about getting the most revenue from each sale so try offering 3 for 2 or a higher discount the more they spend. It’s also a good idea here to offer a freebie when they spend over a certain amount because you are encouraging them to spend more and you can write off the cost of whatever you give as a freebie as marketing spend.

In scenario 3 your focus needs to be on creating customer loyalty. The long term view. Perhaps looking at your lesser selling products and encouraging clients to try them by offering discounts on those in particular or offering one of those free with their other purchases by way of getting them to try. Creating a loyalty program that offers clients who sign up a regular discount is another great way of standing out from the competition. Good clients would prefer ongoing benefits to a one hit discount usually but this is dependent on what you sell. Look hard at your repeat business statistics to make the right judgement here.

All in all, it worries me when retailers say they are holding onto old merchandise because it cost them X amount to buy so they can’t possibly sell at a loss or reduced profit. Or they try to argue that something is worth X so they can’t sell it for less. Ultimately if something isn’t moving as quickly as you need it to then it isn’t worth X anymore. The longer something sits in your store not selling, the more it is costing you and reducing your profit margin anyway.

Tough lessons but it happens to all retailers, it’s the nature of the game. Focus on the big picture of your business and what you need to do to keep the wheels turning.

Good luck!

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