Why Discounting is Ruining the Retail Industry?

Discounting merchandise to increase sales has always been an important strategy used by the retail sector. However, in the past few years, the number of times that this strategy has been used has increased manifold. This is the reason why the strategy is no longer as effective as it once was.

The entire premise of having a “sale” period when products are deeply discounted was to entice customers into buying more. The basic idea is that if consumers feel that they are paying less and obtaining more, they tend to make reckless decisions. These decisions are often taken because of the fear of loss. In simple words, customers end up buying more because they feel that this is their only opportunity. If they let it pass, they may not get the same opportunity until next year.

However, nowadays discounting is done extremely regularly. Hence, customers don’t really face any “fear of loss”. They know that if they don’t buy a particular item in the Black Friday Sale, they can definitely buy it during the April sale or the July sale.

Race to the Bottom

The problem with discounting is that it tends to increase the top line i.e. the sale revenues. However, it is able to do so only at the expense of profits i.e. the bottom line. Retailers trying to compete with each other are pricing the entire industry out of the market. Online retailers are lowering prices to such an extent that even they are making losses even though they don’t have to bear several overhead expenses. Brick and mortar retailers don’t stand a chance in front of online retailers until they too start aggressively discounting their goods. It doesn’t take a genius to figure out that this is not really a sustainable strategy. Most companies pursuing this strategy will go bankrupt and even the winner is likely to be in bad financial shape.

Culture Change: Buy To Stock

Another major problem created by the abundance of discounting is that people have stopped buying products to be stocked and used later. Nowadays consumers only buy stuff when they need to use it immediately. Obviously, this is a concern for the retail industry. The entire premise of having a special discounted period is to urge people to buy goods for future consumption now. If people aren’t buying any more than they require for their current consumption, discounting is really a waste of money. This is because it isn’t really increasing the top line but is damaging the bottom line.

Culture Change: Buy Only Discounted Products

The problem with discounting is that it makes people who buy goods by paying the full price look bad. Imagine being a consumer who purchases a certain product for $100. Imagine walking into the same mall after six months and seeing the product on sale for $50. Even though the amounts involved are small and often negligible, customers often end up feeling cheated. Once again, this creates a culture wherein customers only buy during the discounted period. Price tags become meaningless and products priced regularly start appearing overpriced to customers.

No Brand Loyalty

A couple of decades ago loyalty was very important in the retail business. Customers felt comfortable buying stuff from the same shop over and over again if the goods were reasonably priced and of good quality. Loyalty was important for the business since it meant having a steady stream of cash flows.

On the other hand, the discounting culture has turned shoppers into nomads. They are now continuously scouting for better prices. As soon as someone is willing to drop prices, customers have no qualms about abandoning their previous suppliers and moving on to a new vendor. This has a significant impact on the quantum as well as predictability of cash flows for a business.

Also, since there is no brand loyalty, the market expenditure has to be perpetually high. This is because companies have to continuously woo customers. Dropped prices and increased overheads lay a double whammy to the profit margins.

Irregular Sales

Retail sales were never really stable throughout the calendar year. Of course, these sales fluctuate based on festivals. However, now the sales fluctuate based on discount offered by anyone in the industry. Since the demand fluctuates wildly, companies have to organize their operations around the same. Retail companies have to rely on temp workforce that they can call upon during the peak seasons. It is difficult and expensive to manage such ad hoc working schedules. However, it seems like this is what the retail industry has gotten used to nowadays. It is scary to think where the industry would be in a few years, if this indiscriminate discounting is not stopped.