The Downside of Discounts

A Bellwether Insight

Photo: Markus Spiske
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Once upon a time, there was a little fashion brand, that grew into a huge national chain. (insert fuzzy visual transition and harp music) Over time, its brand was broken down by competitors and changing consumers; so, the company decided to start incentivizing customers with sales. In turn, the customers became more and more dependent on those sales. The company’s margins dwindled and dwindled into pennies on the dollar.

Then, in what seemed like a hail mary of change, a new leader came to the company and dropped all the discounting. Ahhh…now the company lived in an everyday low price world. As the company looked forward with a smile they noticed something: all of their customers had disappeared. “Oh no…” the new leader said, as the company pushed him out. The company would never be the same, and now, is potentially going out of business.

What…a scary bedtime story! If you didn’t pick up on it already, that company is J.C. Penney. While this once great company has other reasons for its declining sales and store closures (like all the department stores in the last few years), one of the biggest reasons that haunts them is the big downside of discounts: customers love them…and then they become addicted to them. They love the rush of excitement when they get to see a ticket price with 25% off. They love the feeling of getting a little ‘cash coupon’ to use on their next purchase. If you don’t believe us, check out all the extreme coupon shows on TLC, with all those OG quarantine hoarders.

…the big downside of discounts: customers love them…and then they become addicted to them.

For the brands, it’s the same kind of rush. You are worried your full price inventory isn’t selling, you start shakin’ in your lil’ boots and think ‘let’s put something on sale to do some dollas.’ It works. You get a rush you haven’t felt since the last discount. And, just like that, you are hooked too. Every season, you do it again and again. You see another brand do it and say ‘I’ll do mine a little earlier than theirs to get more sales.’ Eventually, you are offering a discount two weeks after your item is put out on the floor…which, in the US, is just shy of the 14-day legal full-price legislation. (speaking of which, make sure to brush up on all the pricing laws where you do business)

So what do you do? It’s a point of parity at this point that you offer some sort of discount, at least a 10% off for your first-ever purchase. And, it’s real easy to keep going down that path to entice a customer into a purchase. In the current COVID-19 pandemic, the problem has only been exacerbated. No in-store selling means brands must find a way to make up those dollars. The discount codes were thrown at us consumers like candy at a parade. While it’s working for many consumers…what’s the downside of discounts on the back end? Will these customers now say ‘maybe next time’ to a purchase until another discount is offered? And what about you? Will you not make the sales numbers you need? Will you not get rid of the inventory that may not sell in another month?

We have some tips for making that not happen, and also tips to help support your customer, so they make repeat purchases.

Don’t discount everything

Yes, the temptation will be to take the easy route: 20% off of the entire site. Resist, we tell you! Take a step back and think of the bigger picture. Just discount the things you absolutely need to get rid of, or just a group of items. Something like “all flare jeans 30% off  – one week only” or “all items with our logo are 10% off.” This ensures you don’t train a consumer that everything will always be on sale. Make sure to think of interesting groups to discount, so the consumer doesn’t get trained by the groupings either.

Another very important part of discounting is making sure you aren’t cutting the price on something that looks just like a full-price item. You will cannibalize the sales of both items.

Another very important part of discounting is making sure you aren’t cutting the price on something that looks just like a full-price item. You will cannibalize the sales of both items. If you are discounting end of season goods, find ways to separate them as far as you can from the full-price things that look similar (think resale, rental, or places that aren’t on your actual website). If you need to discount to make some quick money, use a specific category of your basics for a temporary discount (see above).

Rental, resale, or redirect

The rental and resale markets are poised to be very big industries in the next few years, so building some sort of infrastructure here will be very helpful. Try partnering with a rental or resale company for either long term relationships or temporary virtual pop-up’s (or in-store too when things open back up!). The latter may help you in the long run. Customers will expect in the coming years for certain brands to be on resale websites, so having something temporary will make it appear you won’t be doing this forever.

If you don’t have the funds or contacts to start resale relationships, pull on your own customer community. Start a resale program on your Instagram. Have customers submit their clothes and then people can message them directly to facilitate the sale. This virtual yard sale could be a great way to shore up loyalty and likes.

If you must get rid of a lot of items, try to redirect customers to another site of your making. Similar to a J.Crew vs J.Crew Factory, but you only discount on your sale site and not your full price (OK so nothing like J.Crew vs J.Crew Factory at all). This will help keep your full-price business looking classy AF on your main site, while the discounts can be found on another site with another (but still on-brand) look and feel that helps differentiate it. You can even give it a fancy name or a separate Instagram page (or maybe only show the items through a new Tik-Tok page). Let that off-price shine, but don’t let it overtake your main brand.

Try a dollar discount towards anything

It’s all in the branding. “Hey, we know times are tough… and we want to help you where we can. Here is a $20 voucher to our website, and you can put it towards anything you’d like.”

A dollar amount-off is quick and easy for a customer to comprehend, and an easier way to digest a higher priced item. One study done with an outdoor gear company gave a dollar off amount with one group of customers and a percentage off with another. The results showed that a dollar off amount produced 170% more sales than a discount, with a 72% higher conversion rate.

You can also try a site credit approach, where each purchase earns you some moolah towards another purchase. Imagine each time you spend $100, you get $5 towards your next purchase. A customer buys again, and get’s another $3. On e-comm, it can be saved in your account so you don’t have to worry about a Kohls Cash situation, where they sit under a magnet on your fridge and expire before you remember to use them on another purchase (not us, sharing for a friend).

With either approach, make sure it’s a number that is lower than the majority of all your items and covers your costs on the items. Include shipping and potential returns – assume the industry average of 3% and a little more for cushion. In your marketing, highlight trend right, in-demand items, but also the ones that are slightly higher price that your other stock.

Low-cost loyalty

Use this time to invest some time in a loyalty program. All of your nontraditional discount strategies can fuel community growth through a program like this. Reward full-price shoppers with a discount on their next purchase. Give them a discount code good on items that are only from a certain group. Build your site credit strategy into a loyalty program and make it fun, so customers can see their dollars adding up and waiting to be spent on your great products. Maybe there is a cute little graphic of a piggy bank on your ‘my account’ page that fills up with money or credits. Fit it with your brand and make it shareable for extra impact. Whatever you do – don’t break the bank. Start the program small and make plans for growth when we return to (somewhat) normal and you have a little extra cash.

Whatever you do – don’t break the bank.

Upsell your discounts

Engage in a little tit for tat with your customer. Offer them access to an exclusive part of your brand in exchange for a discount. Maybe you have a runway show or an intimate interview with the creative genius behind your brand. Once the customer is done watching it, they get a coupon code or voucher to buy something. Do you know what you did during that whole interview or runway show? Built. Customer. Loyalty. The increased time they engaged with your brand and the sense of knowing more about the company puts it a mile ahead of any other brands. This loyalty and community is proven to lead to increased lifetime value of the customer and spend per purchase.

Ok, but like I actually need to discount something, how should I do it?

Whatever sounds better is better. 50% off of a $1200 pair of shoes sounds amazing. 10% off a $100 purchase seems so-so. A $40 site credit sounds great, because that seems like free money. Remember that the customer decides the minute they see the promotion. That initial thought has to seem like a good deal. Make sure to put yourself in the mind of your customer (or potential customer), what would they want to hear? Then look at your comps, what are they doing? And say “I can do better.”

Plan for it, or at least start to

Whatever strategy you decide on, make sure you are planning for it each season when figuring out your costs. If you build in a margin for discounts, you will be better able to adapt to it on the backend. Of course, at this time, you may not know what works best and what doesn’t. And, none of us saw COVID coming like it did, so you will need to take a few seasons to figure out the magic number you are adding into your landed costs. Good pricing strategies take a long time, but you got this.

Now go on, discount witcha bad self.


This article is part of our continuing COVID-19 coverage. For more on how these trends will play out in the market, check out our Quick Insights. For more about educating your business on sustainability and marketing, check out our Courses.