Any savvy eCommerce business knows that discounting is an effective way to drive revenue or get rid of overstocked products. However, if it’s not done in a strategic, data-driven way, discounting will also kill your profits . All too often, retailers offer discounts indiscriminately, without considering the long-term impact on their bottom line. Discounting is a drug – it feels good initially but actually has a big sting in the tail. Here we explore the dangers of discounting and how to avoid them.
The dangers of discounting in eCommerce
Discounting is a quick and easy way to get rid of excess inventory, but it’s often done without sufficient strategy behind it. This can lead to potential profit being lost, because products have been discounted unnecessarily. Discounting is also a convenient way to push more significant problems down the road.
With the “quick fix” of discounting being applied to the wide range of issues retailers are facing, from increased inflation and a steep decline in consumer confidence to the ever growing issue of overstock, online retailers are actually training consumers to expect a discount, which will then erode margins even further.
Overstock and how to mitigate its impact
The rapid demise of Made.com, is a sobering one – valued at £775 million when it joined the London Stock Exchange just over a year ago, it went into administration (with Next named today as buying what’s left). The reason? With record sales followed by supply chain disruption during COVID, Made sank millions of pounds into inventory – which it then could not sell, despite discounting, due largely to the cost of living crisis. This coupled with rising costs sadly tipped Made over the edge.
This story is becoming alarmingly too familiar. Boohoo has just issued a profit and sales warning. And last week heavyweight brand Nike’s shares fell by 10% after reporting overstock issues driven by continued supply chain problems. The heavyweight brand reported that inventory on its balance sheet was up 44% to $9.7 billion.
There are many forms of discounts that eCommerce businesses can offer, including site-wide discounts, coupons, and basket discounts. While these methods may be quick and easy, they often result in unnecessary discounting that erodes profit.
However, if items are already on a promotion of some kind, how do you avoid their inclusion in discounting if you apply the discounts on an entire line? And why would you discount items low on stock, or selling well?
Avoiding profit erosion whilst discounting
The answer? It is usually very difficult, time consuming and an almost impossible task to understand exactly which products to discount. Beyond the obvious route for discounting once a product’s lifecyle is nearing its end, many (often competing) factors need to be analysed and assessed. Everything that affects a product, from business operations, to the market and consumer influencers need to be combined to really understand the effect of a discount on a retailer’s bottom line.
Therefore it’s important to take a data-driven approach to discounting in eCommerce. This means understanding your inventory at SKU level and making discounting decisions based on the current, real time performance of each individual SKU. Not an easy task when you consider each SKU has over 100 data points to consider and that a retailer’s business, the market and consumer concerns are constantly fluctuating.
Which is where the power of retail decision intelligence comes into its own. Human teams simply cannot compete with machine learning algorithms that can take into account the mass of data that surrounds every product a retailer sells.
Google realises this and is adding some automation to discounting (beta version). This is great news (and another indicator that without automation retailers WILL be left behind) but can only look at helping retailers with decisions based on advertising data alone.
Upps decision intelligence puts the product at the heart of decision making and is able to consider over 120 data points for each SKU, spanning advertising, customer influencers, business operations and fluctuating market trends. It does this 24 hours a day, 7 days a week making advertising enhancements every 15 minutes. And with this level of data retailers can finally make informed decisions on exactly which items to discount, in real time – all the time.
“Not every product needs to be discounted in order to sell; decision intelligence that understands inventory at the SKU level can help businesses make informed decisions about when and how to discount products. Discounting then becomes reserved for specific products that may be nearing the end of their lifecycle, overstocked or are otherwise difficult to sell.”Drew Smith, CEO Upp.
By taking this approach, you can ensure that only the necessary discounts are applied, preserving your profit margins in the process.
Effective discounting works
Discounting is a necessary part of doing business in eCommerce. However, it’s important to understand the risks involved and take a data-driven, holistic approach to decision-making.
Retailers are often hampered in this by competing interests – business op’s will be tasked with completely different goals than a retailer’s paid media agency. And yet both need to be understood – and weighed against market information such as trends and seasonality. Retailers who understand the performance, life cycle, stock levels and pricing of each SKU are already ahead of the pack.
The next step is taking advantage of technology that can combine this knowledge with both advertising performance and consumer influencers.
By understanding your inventory and applying discounts strategically, you can avoid eroding your profits needlessly and instead drive sustainable growth for your business.
Discounting is an effective way to drive revenue, but it comes at a cost. When products are not effectively discounted, businesses lose out on profit that could be used to grow the business or invest in other areas. Additionally, deep discounts train consumers to expect lower prices, which can make it difficult to raise prices in the future.
By automating advertising decisions, based on decision intelligence, businesses can free themselves of their addiction to discounting, which comes with a heavy cost.