How US Retailers gave away $9.2 million in 2016 by mistake.

Discounting is dominating industry headlines. And here’s why: 43% of all apparel products we track worldwide are currently discounted.

Stoked by brand closures, department store unsteadiness and the growth of  off-price retailers, discounting has spent the last decade changing what it means to buy and sell clothes. Right now, no one is feeling the sum of those things worse than US retail.   

We know because, by looking at the discounting strategies of 114 US retailers and identifying when and where retailers were needlessly over-discounting at the first reduction, we can put a number on how much that cost in 2016.

That number?

$9,241,529.81  in 2016.  

That’s as much as 100 seconds of Super Bowl advertising just given away.

Let’s figure out how to put an end to that.  

What’s going on in the USA?

For one, 45% of products that have dropped this this year are already advertised as discounted. That compares to 9% in the EU and 13% in the UK.

And not only is the volume of discounts greater, the US typically eliminates more than one-fifth of a product’s value on the first discount.

We know those two charts don’t exactly illustrate a problem that looks easily solved. But there
are ways to do it.  

First, let’s look at some data to get a better understanding of when and why discounts happen. Then let’s use that insight to see how retailers can optimize their own sale timings and concentrate on creating product that won’t need to be reduced.  

When discounts strike

In the US, more than a third of the entire year’s discounts occur in Q4. Within that, discounting is highest in November (no surprise) when Black Friday storms through town and turns everything in retail upside down.

At the other end of the scale, just 16% of the year’s discounting occurs in Q1. February is the quietest month of the year, hosting just 4.6% of the year’s reductions. That’s good and stabilizing. Given that’s when Spring stock is arriving, you wouldn’t except much discounting. Over in the middle stretch of the year, Q2 accounts for 27% of discounts and Q3 for 22% of the year’s reductions.

How average first-reductions shift

October has the lowest average when it comes to first discounts, with just 5-10% off – a slow run up to the deep discounting to come late November. March has the second lowest – averaging 20-30% off at first reduction. The highest first reductions occur in June, when the first discount is typically 40-50% off – that’s retail’s attempt to clear highly seasonal product while the weather still suits it.  

Okay, so what does all that tell us?

For one, February and March are retail’s best full price opportunities. For two, June is a good time to clear dead stock, as is any time outside the busiest discounting seasons.

But knowing when to discount is only half of the battle. How to discount goes a layer deeper.

How to find your market’s discounting sweet spot

Good discounting is the artful game of clearing a product quickly while maintaining margins. Discount too deeply and it’ll push items out the door faster but sacrifice margins. Discount too lightly and it can leave shelves loaded with reduced merchandise for longer – sending the wrong message to consumers. There’s a sweet spot, you just need to know where to look.   

For that, we used our software to pinpoint that exact spot at several market segments.  

Luxury:

• The discounting sweet spot is 30-40% off. In that percentile things move fast. Despite that, 40-50% is the most common first reduction. Retailers are really sacrificing margin needlessly here.
• 10-20% off is catastrophic for luxury products, more than doubling the length of time it takes a product to sell out.

True luxury shoppers aren’t motivated by those lesser reductions – it underwrites the value of goods positioned to be of high quality.  

If a product isn’t selling, retailers should use content to educate consumers of its value or alternatively clear the product faster with larger reductions.

Premium:

• The discounting sweet spot here is much higher, 50-60% off moves product fastest. Yet 40-50% off is the most common first reduction.
• Product sells slowest with a 20-30% discount.

Unlike luxury, where consumers expect the highest quality products, and mass, where consumers expect to score product cheaply, premium is harder for consumers to define. Conversely, it’s the market where sellouts occur fastest, but rates of discounting are highest.

Mass:

• Products reduced by 30-40% off on average sell out 12 days faster than those discounted by 40-50% off, making it the fastest sell out percentile.
• 30-40% off is the most common first discount – mass market retailers, closing watching one another, are locked into an unproductive cycle.

Mass market retailers looking to shift stock should avoid 40-50% off as the first discount. It signals to  consumers that instead of getting a bargain for something they want, they’re getting the leftovers no one else did.  

And on that note, let’s go back to those many millions US retailers lost out in unproductive and over-generous first discounts.  

How 114 US retailers gave away $9.24 million by over-discounting.

Many of those reductions that didn’t need to happen and with tiny fixes margins could have been recouped. For instance, the needless reductions in mass market womenswear: a 30-40% drop  as first reduction would have helped products sell faster than a first discount of 40-50% off (meaning a shelf life of 111 days versus 122 days). In 2016, 17% of discounted mass market womenswear had a first reduction of that slower range 40-50% off, costing our sample of 114 US retailers $1.59 million alone.

The market is rushing into discounts without foresight. Tiny incremental changes — made visible now thanks to big data — will mean products not only sell faster, but with better margins too.

Last week we talked about some of the tools we’ve honed to equip retailers in this incredibly challenging climate. But it’s the insights the software is now making possible that are both alarming and call for immediate industry action.

Things which previously would have taken analysts days  to unpeg are now put in plain sight, at the click of a button. And we’ve seen the US discount addiction is where things have to change first. Let’s make it happen.