The 2008 global recession has a lot to answer for. Aside from so many fashion brands and retailers closing doors and filing for bankruptcy, many barely survived by adopting a discounting strategy and reducing their stock inventory by heavily reducing the retail price of their products.
The discounting strategy fiasco wasn’t a one-off. It lasted for months if not even years. In fact, one can even argue that it hasn’t stopped ever since.
One thing is certain – the heavy product discounting from that period changed forever it seems the shopping habits of the consumers.
“Bargain hunting” is no longer used to describe an occasional activity, it has become the norm.
Fashion Brands and Their Discounting Strategy
Some brands like the Gap are in permanent discount mode. I am not sure there is a customer left that buys any of that brand’s products at full price anymore. But, make no mistake – this is not happening because they are permanently on the brink of collapse (though a few times they have been) – this now is a brand strategy.
Appealing to the shoppers who like to know how big a saving they are making when shopping, pretending to have everything permanently on sale is just the new way of getting shoppers through the doors.
Just as some brands have discovered a new way to grow via outlet retail, the emergence of outlet retail villages and shopping malls is no longer news.
It is no longer the place where serious brands who didn’t want to damage their reputation would send old unsold stock. Now, this is just another retail channel for which many brands design and manufacture lower priced product lines.
What started for many brands as a trial, has evolved into a permanent alternative stream of revenue. So much so that some brands now have a few select flagship stores to maintain the image of higher priced positioning, but make their turnover from the lower priced goods they sell through a vast network of own outlet shops.
Most other brands, those who want to keep to the traditional model of retail and especially those that are mid-market positioned use any possible event as an occasion for a “promotion” – valentine’s day, mother’s day, father’s day, Black Friday, Cyber Monday,….you name it….there is a reason for a promotion outside of what used to be the traditional sale times.
But doesn’t that speak also of brands churning out products that are perhaps not needed on the market?
“There are too many luxury and premium brands selling very similar products. Some of them reduce their prices without announcing it because it’s embarrassing and devalues their brand” says Milton Pedraza, a New York-based luxury consultant.
While it is clear why brands use discounts and “promotions’ to clear stock in today’s tough retail times we live in, it raises questions about long term survival and overall brand strategy.
Can brands really survive long term and grow (not shrink) by lowering their prices? What is the true cost of this business strategy, especially to younger and smaller brands? And more to the point – what is the lasting effect such practices leave on the brands and consumers?
Before we look into the lasting effect, it is important to look into how and why this heavy discount strategy exists. Why do so many (large) brands discount so heavily?
The main reason is that in today’s oversaturated retail landscape it is much harder to grow and show growth. But, if you don’t show growth then as a business, especially those that are larger and under the scrutiny of the financial markets, alarm bells sound off.
Growth is often measured by looking at the rise in revenue compared to the last year.
If there is no increase, the brands are seen as stagnant. News go out in the press and that affects consumer confidence in the said brand and ultimately leads to customers going to shop elsewhere. Because let’s be honest, no one wants to be associated with a loser.
So to show continuous growth in revenue in a tough market, brands are often under pressure to reduce costs and prices and operate in permanent discount mode to attract current and new customers.
Continuous growth in revenue equals confidence.
That is how investors, bankers and other financial institutions see the rise in numbers in a simple excel sheet. That confidence they get from the numbers (regardless of how they got to be what they are) means they feel happy to arrange for loans and investments.
The new money injected into the business allows brands to open new shops, which in turn helps show continuing growth.
But, the reality is that often this strategy results in unnecessary overexpansion, which in turn leads to financial strain and trouble.
So in conclusion – any short-term gains are long-term pains.
Lastly, let’s not forget the kudos CEOs get from showing business growth and the big bonuses they award themselves.
While this explanation may be simple, it still serves to explain what fuels the thinking behind the permanent discounting mentality.
The side effect of this, however, is that small brands feel that they have to compete or lose business to the bigger brands. Hence, they too start discounting, not fully (or at all) realizing the operational and thinking strategies of the large brands.
While for the larger brands discounting is a strategic move to get more cash, for smaller brands it often is a case of “keeping up with the Joneses” and leads (ultimately) to no good.
So why are fashion retail discount strategies bad for business?
Let’s examine the reasons why as a small brand and especially one that sees itself as premium, you should not discount their products and without a good reason
1. Brand Devaluation
If you are dreaming of creating a luxury or premium brand, discounting your products often (or even at all if you can manage it), is bad news.
By lowering your prices, you’re allowing less discerning customers to access and buy your products.
While this may seem like a good idea, it eliminates some of the exclusivity that may appeal to your ideal customers.
Related reading: 3 Top Tips for Better Fashion Product Pricing
Being able to buy luxury products at a certain price is often seen by some consumers as a status symbol, a benchmark for where they are placed demographically and the means they have available.
Being seen to have something that not everyone has is universal desire centuries old.
The minute everyone starts wearing the same item – be it acquired at a discount or purchased on the black market, the desirability is gone.
A brand that is not desired becomes irrelevant and ultimately sales decline.
2. Unknowingly Training Customers to Wait for Reductions
In today’s unstable political and therefore economic climate; all customers, those with economic means and those without, like to think twice before buying. Impulse purchasing is at an all-time low.
So while discounting outside of the well-established winter and summer sales may on occasion seem like a good idea, it also leads to unwillingly training your customers to wait for the next promotion or discount before they buy.
Brands who have clear policies of no discounting like Louis Vuitton, reap the benefits.
When a new collection is released, customers know that if they don’t but now, they may not be able to get this product again.
Similarly, Zara’s six weekly cycles in inventory change mean that customers don’t wait and wonder if they should buy or not.
3. Impact on Margin / Profit
Many small and growing fashion brands have their creative founders at the helm. Sadly, most lack business and finance education and even if they know, they often forget that revenue growth doesn’t mean profit.
In their desire to clear out stock, or mimic what the bigger brands are doing, they underestimate the effect sales have on their margin and profits.
Lesser margin means less operating cash. Less operating cash means one either needs to make internal cuts and savings (anathema in the fashion industry) or borrow more. And so the slippery slope begins to form a spiral into growing debt.
Protecting your margin as a business, especially a small and growing brands is essential business rule #1. There are many strategies to do so and resorting to discounting is simply the easy way out.
4. Consumer Confidence
Sales outside of the old traditional sales times (summer/winter sales) sends the wrong message to the outside world. The perception is that you either the business leaders don’t know what they’re doing and as a result ordering too much of the wrong styles, or the business is not selling enough to sell through their stock.
Both scenarios and the many others that may result in the consumer’s mind ultimately lead to lack of buyer confidence.
In an age when there is no longer customer loyalty towards brands, securing confidence in your customer’s minds is advisable.
It is curious to note that while most customers will seemingly ignore reports around fashion brands’ success stories of increased profits or record-breaking revenue growth, the minute there is news of a brand struggling, the collective customer confidence shifts away from that brand. There is very little, if any, feeling of forgiveness or support for those seen to be doing less than their best.
5. Too Much Focus on Price
By offering discounts, a business unknowingly puts focus on its price rather than the products or brand unique value propositions. If the only competitive advantage a business has is its price, then that business is in big trouble.
Price-matching has become commonplace, so now more than ever, fashion brands need to rely on quality and service to make it in today’s consumer-centric economy.
So, all in all, with everything, said and done, fashion brands looking to establish a serious reputation and loyal customer base must think twice before blindly mimicking the discounting strategies of larger brands.
Growing a fashion business is not a race, but a slow and often precarious marathon.
Discounting your products without a clear pricing and growth strategy and sound reason is a short cut that may hurt the business more than anticipated.
Random sales promotions are a “band-aid” that treats a symptom and not the problem, in business terms.
While business growth is an important metric, it is a metric with inflated importance in my opinion.
What should be given importance and reported on, now more than ever, is business health, operating margin transparency and profit margin clarity.
How your customer buys from you is the result of your brand teachings.
You can educate your customers on how to shop your products and feel about your brand. Growing a brand reputation is a never-ending practice, easily destroyed by a knee jerk reaction to an economic situation.
In today’s competitive environment, one cannot afford to be reckless and experiment without seriously considering the best and worst case outcomes.