Bad Discounts

This past holiday season several major retailers (Lands’ End, Ann Taylor, Eddie Bauer and more) all offered early and deep, 50% off discounts. I blogged about Lands’ End’s discounts at the time, from a creative perspective, in I can feel your desperation. The idea of big, BIG discounts early on bothered me, but I couldn’t put my finger on exactly why. It took me some noodling, and time with a spreadsheet, to figure out why it was bothering me.

From what I can figure, going in early and deep is probably the least profitable strategy you can use.

Bad discounts spreadsheet

So here we go. In the first scenario 30% of sales were early, 30% were mid cycle, 30% were late, and 10% were liquidation. It’s the bland, vanilla scenario for traditional marketers, in traditional times, when things go according to plan. All scenarios assume 1000 units old and a non discounted price of $50. For this scenario, total sales were $43,000.

In the second scenario early sales are down by 50% (Zoiks!) and normal mid season discount of 10% is increased to 30%, the late season discounts are increased from 20%, to 50% and the clearance goes from 50% to 65%. Profit takes a major hit and goes down to $31,125.

In the third scenario, the deep and early strategy, same basic premise: early sales are off by 50%, and 50% off discounts are used. They work, and the mid season sales pick up an additional 10% in units sold, late sales are almost on track and liquidations are on plan at 10%. But look at the total sales. What seems like a “We saved the company in the face of certain annihilation!” kind of scenario actually lost $2,875 more than the second scenario. Hmmm.

In the fourth scenario I looked at what would happen if the traditional discount strategy was kept in place even with sales going down by 50% in the early season. I assumed that the lost sales would never be recovered and would go to liquidation. This turned out to generate the most sales dollars of all the scenarios. Simply not panicking may be the best way to go.

In the fifth scenario I wanted to try to see if a continued erosion of sales after the initial early sales being down 50% would be the worst case scenario. So early sales are forecast down 50%, mid season sales are off plan by -10%, as are late season sales. Clearance is 45% of inventory sold. This is a very, very dark time for my imaginary company and it STILL generates more sales dollars than the early 50% off strategy.

I don’t know what the right answer is for you. My only hope is that you won’t assume that if the big guys are doing it you should too. Run your own numbers, think for yourself, don’t panic.

All the best,

Sarah Fletcher

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