The radical retail pricing strategy to save your ecommerce profit margins

(This article was originally published on the Ecommerce Jungle Gym blog)

If you were to take a walk around the block of any urban mall at 6am on December the 26th, the scene would be vastly different from any other day.

Normally, lycra-clad cyclists flash past more gentile dogwalkers and tight-wearing joggers. Maybe a young, bearded hipster is firing up a coffee machine in readiness for the two hour long line of caffeine addicted suit pouring through the CBD.

Otherwise, 6am is a time of unrivalled daytime serenity in downtown mall country. No bustling crowds. No bag-clutching shoppers. No window-perusing septegenarians disrupting pedestrians.

December 26 is different.

If you take that walk around the block, you’ll confront thousands and thousands of people. Not joggers, walkers or cyclists. These people are standing still, waiting.

A queue snakes its way from the double doors of the yet-to open mall, all the way around the entire main street block.

Come 9am December 26, this queue turns into a bursting dam of shoppers erupting through a small people-sized whole into a great big ocean of retail bargains.

Of course, the annual volcano of human shoppers I’m referring to is The Great Boxing Day Sales.

Each and every year, otherwise reasonable people make the traditional pilgrimage in the early hours of the morning to line-up in front of a closed mall — all for the chance to fight each other off in the hunt for the biggest and best of discounts.

Here’s a visual reminder:

Boxing Day Sales is a fascinating study in retail consumer behaviour.

People wait all year for this event. Many shoppers delay their purchases for weeks and months in advance, safe in the knowledge they can get a sizable discount on December 26.

There is not one person lining up in front of these department store double doors expecting to pay full price for anything.

Even the most generous retailers understand the importance of maximising your profit margins. Discounts don’t help you on this strategic quest.

If your customers know they can wait to buy your products at a discounted rate, you will not be able to make a sale at your original list price.

This brings me to the ‘radical pricing strategy’ that can set up your ecommerce business for sustainable profitability:

Make your customers want to buy at your original listed price.

I know you were expecting some Retail Confucius to lay down a revolutionary proverb of life-changing proportion.

Instead — I’m just telling you to make your customers want to buy your stuff at full price.

It’s no game-changer. But if you dig a little deeper into this nugget of wisdom, you’ll start to see the glimmers of gold you can turn into a lifetime of riches.

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It’s time to stop systematic discounting before the long-term damage is done

Sustainable ecommerce success is much easier without a never-ending 20% off sale.

We can’t keep offering a 24/7 Boxing Day for our customers. The concept loses its significance. The tactic loses its effectiveness.

What started out as a way to encourage more spending from online shoppers has turned into an entire industry training its customers to delay all purchases and wait for a sale.

We created this margin-crippling problem.

We can’t keep pretending it’s not an issue.

It’s time we fixed it.

How online retailers created a discounting monster

For the early part of the noughties, ecommerce brands used discounting in much the same way as traditional bricks-and-mortar retailers have done so for decades.

Discounts were used sporadically for one of two primary purposes:

  • to help liquidate old or excess inventory (not devaluing full-priced items)
  • to amplify revenue and store traffic during holidays or events (Boxing Day, Christmas, Thanksgiving)

Customers had no expectation of regular sales.

Shoppers had fewer reasons to research and compare competitor options, or to delay purchase and wait for a discount.

Around August 2007, just as ecommerce was gaining mainstream momentum, three letters threatened to cripple the retail industry.

GFC.

The Global Financial Crisis hit spending and consumer sentiment with the force of a recession bigger than anything since the 1920’s Great Depression.

For those of you who need a little reminder, I’ll let Spongebob explain how everybody was feeling:

People weren’t thinking about buying a book, or a trenchcoat, or a washer-dryer. They were wondering if they’d still have a job and a bank balance in one month’s time.

Ecommerce growth stalled in the wake of the GFC from 2007 to the end of the recession in 2010.

And what do retailers turn to when revenue levels are down, and times are tough?

Panic.

And then discounting.

In order to boost spending, online stores started to slash prices and sweeten the deal with free shipping.

Two other formative developments shaped the future of ecommerce after the financial meltdown of 2007…

#1. The explosive growth of daily deals sites

In January 2008, the daily deals phenomenon struck ecommerce hard, with Groupon launched. By 2011, the ecommerce discounting poster child reached 50 million subscribers.

The explosive growth of Groupon and its competitors signalled a change in the way people shopped online. Ecommerce became directly linked with discounts and deals in the minds of a huge swathe of first-time online shoppers. The origins of Groupon’s name (a portmanteau of ‘group’ and ‘coupon’) tells the story.

#2. The emergence of Cyber Monday

Around the same time as the daily deals sites started to gain traction, the annual ecommerce equivalent of the Boxing Day Sales became a genuine event on the retail calendar.

In November 2007, Cyber Monday notched $37 0 million worth of sales for online retailers, increasing by 20%. In 2008, the concept continued to grow with a 16% increase in revenue. In 2014 Cyber Monday sales topped an astonishing $2 billion.

Andy Mulcahy is Managing Editor of IMRG — the UK’s premier online retail industry association. Andy’s been analysing the many datasets compiled both in IMRG’s indexes and from other sources to communicate key trends and information for over six years, so he has a fair handle on the macro trends impacting the industry.

Speaking to The Business of Fashion, Andy explains why Black Friday has a debilitating effect on ecommerce profit margins:

“When retailers started communicating to consumers that Black Friday discounts were on the way, what they did was say to people, ‘Don’t shop with us now, shop with us on Black Friday’. Inadvertently, they stopped sales.”

The first ever ecommerce experience for many of today’s regular online shoppers was directly related to one of these two post-GFC innovations.

Both are about regular, outrageous discounts.

The drastic deals on offer to crafty online shoppers set a dangerous expectation in the minds of the mainstream consumer.

The recession is over, but we’re still conditioning online shoppers to expect discounts

Post-recession, retailers started discounting as a way of winning over a more cautious consumer.

But we’ve been left with an ecommerce version of Frankenstein’s monster.

Helena Pike, writing for The Business of Fashion, outlines the paradox of the profit-gobbling habit we’ve trained in our customers:

“Fashion consumers are discount shopping more than ever. And while it was retailers that first encouraged them along this path, with retail margins and full-price sales now suffering, those same businesses may have shot themselves in the foot.”

As the GFC continues to fade into the background of the retail industry’s rear-view mirror, ecommerce brands continue to open their coffers and spit out regular discounts. Bargain-hungry customers are all too happy to oblige.

Each time you discount, you’re eroding more margin. This is what your accountant sees…

Each discount makes it harder to convince any shopper to pay full price in the future.

It’s time to pose the question we’ve all been dreading.

How can we stop discounting and make customers pay full price?

Why the ‘Great Discount Expectation’ is killing ecommerce

“In a word, I was too cowardly to do what I knew to be right, as I had been too cowardly to avoid doing what I knew to be wrong.” ― Charles Dickens,Great Expectations

Dickens is full of wisdom, and Great Expectations is a tale with life lessons littered throughout.

This little nugget explains an honest truth to ecommerce marketers facing the ‘Great Discount Expectation’ we’ve collectively fostered amongst discerning online shoppers.

We know we should be working hard to convince customers to buy our items at full price.

But instead, we take the easy option, and offer a discount to generate quick sales.

We know it’s wrong to continually erode our brand’s value with gratuitous discounting — but it’s really difficult to avoid the quick reward that comes with regular mark-downs.

The title of Helena Pike’s Business of Fashion article on this retail conundrum poses the exact question you should be asking of your ecommerce customers:

“Does anyone really expect to pay full price for anything anymore?”

For thousands of online retailers, the honest answer to this question will be ‘No’.

It’s time for you, your brand, and the industry, to address this issue.

Regular discounting develops a damaging customer expectation

We’re fostering a habit amongst online shoppers. It’s a dangerous consumer behaviour to encourage.

Regular discounting trains shoppers not to buy at full price.

Instead, shoppers delay their purchase to wait for a discounted rate, or research competitors to find a superior bargain.

“Heavy discounting can be a downward spiral for retailers. By continually lowering prices, retailers risk falling down a rabbit hole, as consumers become conditioned to shop only during sales.” Helena Pike.

Patrick Campbell is the Founder and CEO of leading software pricing agency, Price Intelligently. He encapsulates the perils of repeated discounting in the simplest of terms.

“Blindly discounting is one of the worst things you can do, because you’re conditioning your customer into de-valuing your product, and you’re literally throwing money away by putting it back on the table from the initial and future sales with that customer”

The ramifications of such discounts have a lasting effect on the profitability of your business.

Repeated discounting habituates a bargain-hunting consumer behaviour. The nature of online retail facilitates this mindset.

There’s no queues, or car parking, or time constraints to deter online shoppers from extensive research, browsing and comparisons. Just a comfy seat, a connected device, and a cosy, warm dressing gown, encouraging you to hunt bargains for hours on end.

The internet and search engines make price matching so simple.

Patrick Campbell explains the particular factors unique to ecommerce, which contribute to the bargain-hunting habits that are crushing the margins of sales-happy online retailers:

“By discounting you’ve conditioned the customer to de-value your product. Discounting works in the retail space so well, because brands can limit supply (or at least make it look like supply is limited), and therefore create a sense of urgency in the eyes of the consumer. (Online), supply is practically unlimited and non-physical, and we’re inundated with so many promotions and discounts every day that we know more are coming down the pipeline.”

Kit Yarrow, consumer psychologist and professor of psychology at Golden Gate University, spoke to Helena Pike about the serious implications of repetitive ecommerce discounting:

“Consumers get trained to expect really significant reductions. Nowadays, a lot of consumers put off purchases like winter coats or electronics until this time of the year, because they feel like they’re going to get a better deal.”

In the quest for quick sales, you’re training your customers to behave like this:

But it’s not just delayed revenue and reduced margins that threaten to comprise the viability of brands happy to offer regular discounts.

The practice is inflicting serious long term damage to the value of your brand, and your business.

The 4 ways discounting is killing your retail business

Alyssa Rimmer is the Director of Marketing for the inbound agency, New Breed. In an impassioned plea for the Hubspot blog, Alyssa outlines a number of reasons ‘why discounting is destroying your sales’.

With Alyssa’s help, I want to take you through four of the most significant ways a never-ending 15% off sale can affect external perceptions of your brand.

#1. You’re showing a lack of confidence in your brand

Continual discounting sends a signal of desperation to your customers. You don’t believe enough in what you’re selling if you can’t sell it at your original listed price.

This has a cascading effect on your target customers, who begin to question the quality and credibility of your products.

You don’t want to become the ‘Reject Shop’ of your industry unless you’re prepared to fight a discounting battle to the death.

#2. You’re setting a bad precedent

As soon as you start lowering your prices on a regular basis, your customer will expect to see the same thing again soon.

The last thing you want is a whole stack of customers holding out on making a full-price purchase until you offer another “special deal”.

This vicious cycle will dry up your revenue until your next sale boosts your numbers back up again. Suddenly, you discount periods start blending into each other as you find it harder and harder to convince customers to take action at original list prices.

#3. Your customers have a lower perceived value of your products

Most people value something based on its price.

If you haven’t demonstrated to your prospect that your product is worth buying at full price — you haven’t done your job effectively.

Patrick Campbell, for Price Intelligently, explains why discounting must be used to convince sceptical shoppers that your product is worth the full price value you ascribed. The sale is a lure to convert these customers into buying again at the original list price.

“To understand discounting, we need to realise that at its core, a price is your exchange rate on the value you’re creating through your product or service. With that number put down in pixels, you’re saying that whatever you’ve produced is worth $X, because that product or service helps the customer in a manner that fits that equates to their perceived value.”
Once you’ve decided where on this range you’re going to price, discounting then comes into play in an attempt to move more sensitive customers “up river.” You’re lowering the price point to the level of sensitivity of a new tranche of users. Thus, attempting to convince those users during that initial term that the product is worth the higher price, and when the next term comes up they should pay the regular price.”

If you can’t convince sale customers to make subsequent purchases at listed prices, your discount is not in the long-term interests of your business.

#4. You’re losing the trust and respect of your customers

While your prospect might be thrilled at the time to get a lower price, in the back of their mind they’re also thinking, “If these guys are always offering a discount — are they just inflating the normal price so I think I’m getting a better deal?”

Each time you discount a product significantly, you’re showing customers you can afford to sell for less. They feel cheated by the original price.

Number four is the scariest proposition facing the online retail industry.

Widespread discounting is leading to entrenched consumer cynicism in ecommerce pricing.

List prices are becoming irrelevant, and sometimes ethically questionable, in the eyes of many online shoppers.

Bonnie Patten, is the Executive Director of TruthInAdvertising.org, a consumer information site charged with calling bullshit on nefarious retail marketing shenanigans.

Bonnie explained to The New York Times why consistent ecommerce discounting is eroding consumer trust:

“We’ve been conditioned to buy only when things are on sale. As a result, what many retailers have done is make sure everything is always on sale. Which means nothing is ever on sale.”

The constant discounting has reached alarming levels. We’re at a point where customers of some ecommerce sites just assume the discounted rate is the price the brand fully intends to sell for anyway. Savvy shoppers are calling the bluff.

In fact, we’ve reached a point where one of the pioneers of this ecommerce discounting daily deals phenomenon — Amazon — is gradually removing list pricing (seen in the red box below) from their online store to encourage their loyal customers to develop a habit of paying full price.

In the same New York Times article, author David Streifeld outlines the serious implications of unethical list pricing for brands like Amazon, Macy’s and Ralph Lauren:

“Now, in many cases, Amazon has dropped any mention of a list price. There is just one price. Take it or leave it.”

The new approach comes as discounts both online and offline have become the subject of dozens of consumer lawsuits for being much less than they seem.

New cases have been filed in the last few months against Macy’s, J. Crew, Gymboree, Ann Taylor, Ralph Lauren and the website Wines ’Til Sold Out, according to TruthInAdvertising.org. Twenty-four cases were filed in the first six months of 2016, nearly as many as the 25 in all of 2015.”

A constant 30% discount eventually becomes a hoax.

Customers see the discount as a way to fraudulently dupe them into thinking they’ve nailed a deal.

In a Complex article titled “Shoppers Won’t Pay Full Price Anymore And It’s Disrupting the Retail Industry”, author Tyler Watamanuk explains this troubling consumer sentiment:

“Shoppers have become averse to paying full price for fashionable clothing, and it’s throwing the entire industry for a loop. Brands like Everlane employ a cost transparency model, which shows customers exactly how much traditional retailers are ripping them off.
For example, Everlane charges $70 for a bomber jacket, and claims traditional retailers would sell a similar jacket at an inflated price of $185. The company even goes as far as including itemized lists of production costs for each item on their website.”

Transparent brands are taking the opportunity to point out their competitor’s rorts.

The internet is a vicious place, and it’s never been easier for people to access information on your supply chain. If you run the gauntlet of inflating list prices to build more margin into your discounted rates — prepare to get caught (or overtaken by a disruptive startup with a lean business model).

(Image courtesy Everlane)

To build a sustainable business, you need to prove your products are worth the full price

Regular discounting devalues your products and your brand.

Multiple studies show a direct correlation between discounting and the customer’s decreasing perception of a product’s value.

“Even though it varies by product, industry, etc., customers receiving a discount on their first month or initial purchase value the product at least 12% lower than the product’s list price.” according to data from Price Intelligently.

A seminal study on the topic of discounting (published in the Marketing Bulletin journal in 1991) forecasted the problem faced by the price-slashing online retailers of today.

Authors Janet Hoek and Leon Roelants monitored daily sales of promoted and competing products (for cornflakes, fruit juice and washing powder) before, during and after a price discount promotion.

The study found Cornflakes sales increased by 50% during a discount period, only to revert back to normal levels as soon as the promotion was over.

The laundry detergent discount period saw competitors’ sales constant during the same time. One competitor even saw sales increase by 200%.

Blattberg Eppen and Lieberman (1981), Neslin, Henderson and Quelch (1985) and Gupta (1988) concluded that these promotions may only displace sales that would have otherwise occurred at the product’s usual price, thus delaying their subsequent purchase of it and competing brands.

These conclusions raise an important question about the cost-effectiveness of price discounts.

In summary, manufacturers who promote their brands by way of temporary price discounts may, in the short term, induce buyers of competing brands to purchase their product, but it appears that price discounts do not usually have a permanent effect on consumers’ brand preferences.

The results suggest that regular discounting has little or no long-term impact on a customer’s brand loyalty.

Instead, your never-ending 50% off sale makes your brand look a little desperate.

If you discount — you might make some more quick sales (albeit at reduced margins).

Just don’t expect to keep these new customers in the long term.

If you do discount, do it right, and do it sparingly

I urge you — consider any discount within a strategic context.

Ask yourself why you aren’t offering your product or service at full price.

But don’t stop with that answer.

Ask yourself if you can achieve the same goal without devaluing your product with a discount.

  • If you want to sell excess or old stock fast — why not offer a freebie or 3 for 2 special deal to encourage users to stay in the habit of paying full price. The add-on is perceived as a reward. You’re less likely to devalue your brand in the minds of the customer.
  • Better yet — offer an unannouced sale, exclusive to your most valued repeat customers, for a limited 24 hour period. Promote the flash sale to your most valued customers with a personalised email and coupon code. This way you are rewarding the loyalty of those shoppers who have previously paid full price for your products on multiple occasions.
  • Implement a loyalty program that periodically rewards repeat customers who pay full price for their items. A coffee card style rewards program sends the right message to shoppers and encourages more frequent purchases. From the brand’s perspective — more sales are made at higher margins, and relationships with repeat customers are strengthened.

If you are going to persevere with discounting to boost your short-term revenue — make sure you’re doing so for the right reasons.

You must make sure you can turn any first-time buyer from a discounted item, into a loyal customer prepared to pay full price in the future.

You need to convey value and convince customers to buy without a discount

In simple terms — discounts should be used to encourage more price-sensitive prospects to try your products and recognise they are worth the full ticket value.

Somewhere along the way, many ecommerce brands have lost track of the strategy behind discounting. We’ve stopped reverting back to our regular, full price.

Instead, we keep offering up sale after sale — encouraging shoppers to wait for the next margin-crippling bargain. This is the industry’s crucial problem — a problem threatening the long-term profitability of so many ecommerce businesses.

It’s time to convince your customers without a discount.

If shoppers know your full price is as low as you can go, there’s no bargain-hunting haggle driving your consumers.

When you eradicate the “could I get this for cheaper?” question from popping up in your customer’s mind — there’s no need to browse, research or compare elsewhere.

The impulse to buy is not quashed by some rational wallet-conscious thought, urging you to wait for a better deal. If you know the item will always be full-price, you either decide to buy, or you don’t. “Maybe later” is no longer an option.

We need to work harder to prove value to consumers, to create customer experiences that compel shoppers to buy at full price. Instead of slashing prices to boost sales — online retailers need to recreate the feeling a customer gets after nailing down a bargain.

“Neuropsychologist David Lewis says that, for some shoppers, getting a good deal can feel like ‘a kind of buzz on steroids.’ Sales seize on what Lewis describes as ‘fun fear’ — the fear that you might miss out on a bargain, followed by a ‘pleasurable swell of excitement’ at the moment of purchase.” — The Business of Fashion

You need to find a way to give your customers that same ‘buzz’.

You need to use scarcity and urgency to prompt the same ‘fun fear’.

And you need to trigger the same ‘swell of excitement’ by convincing your customer they’ve made a great value buy without a discounted price.

Convincing customers to value your products at full price is hard.

But building a sustainable ecommerce business on unsustainable margins is impossible.

It’s time to start your first ‘0% off sale’.

Make it last all year round — even through December 26th!

The original version of this article was published on the Ecommerce Jungle Gym blog. If you work in ecommerce, or you just want to learn more about online retail — you need to subscribe for a weekly package of ecommerce marketing learning to receive stories like this one delivered free to your inbox door.