Are retailers discounting too much? The build-up to this year’s Black Friday has been characterised by a host of leading retailers, such as House of Fraser, Selfridges and M&S, announcing that they will opt out of the discounting extravaganza, and instead, trade as normal.
But why is this?
Simply put, unthoughtful, short-term pricing strategies – which we often see on Black Friday – come with their own cost. The “pricing war” that Black Friday brings about can severely damage retailers’ overall profitability through severely diminished margins and a wildly unpredictable impact on stock levels, which can leave retailers in a poor position for the crucial Christmas shopping period.
Black Friday is still an important retail holiday for many consumers, and there is certainly good reason for discounting on a day when consumers expect deals. However, there is a crucial difference between intelligent, strategic discounting, and engaging in a damaging “race to the bottom” on price, which can do retailers more harm than good.
Considering this, let’s examine why retailers may be better served by avoiding a Black Friday pricing war in favour of a well-thought-out, long-term pricing strategy.
Avoiding a “race to the bottom”
There is no doubt that price is crucially important. As the buyer’s journey has become increasingly fragmented across a range of channels, offering the “best” price is now more important than promotion, place and even product itself.
Unfortunately, many retailers mistake offering the best price – which finds the optimal balance between driving demand and maximising margin per product – for simply offering the lowest prices.
“This creates a dangerous false economy which is particularly prevalent around Black Friday.”
This “race to the bottom” pricing strategy often does more harm than good. This issue was evidenced by John Lewis’ startling 99% profit slump, attributed to the brand’s overly-ambitious “never knowingly undersold” pricing strategy.
There is a myriad of factors to consider when pricing – such as competitor activity, sector conditions and price elasticity per product.
This, in turn, means that the best price for one retailer to offer will be very different than that for another – which is often ignored by retailers that focus exclusively on Black Friday.
In certain sectors, such as luxury goods, many customers will simply not want the lowest-priced item – instead opting for more expensive items which feel more premium and exclusive.
“Retailers that discount aggressively in these sectors may see brand reputation suffer.”
In other sectors, some goods sold will be inelastic – meaning that demand is less affected by price – than others.
If retailers opt to discount inelastic goods heavily, they may see profits severely hampered. This is because they would be undervaluing products that would still have sold at a far higher price point in the build-up to Christmas.
It’s time to price more intelligently
Consistently offering the best price points on the market on Black Friday – let alone for the rest of the year – can be a difficult and time-consuming process.
Of course, retailers can monitor factors such as market trends, stock buying prices and consumer behaviours, however, the sheer amount of work involved can make this problematic.
In the pre-internet era, retailers previously had to consider 4,000 price and marketing combinations per quarter to consistently stay ahead of competitors, however, that number has risen to 60,000,000 combinations a day – or 694 per second.
Dependent on the product assortment a retailer offers, and the dynamics of the industry in which they operate, it may be inefficient for many retailers to constantly monitor and adjust the price. The subsequent absence of up-to-date pricing data can, therefore, see retailers attempt to stand out by offering the lowest prices.
“This gives rise to “pricing wars” where consumers may occasionally benefit, but retailers are left badly out of pocket, with even discount brands such as Aldi being negatively impacted.”
As in so many other sectors, technology now provides an answer. Innovative technologies, such as machine learning, could genuinely transform retailers’ fortunes through automating these crucial ancillary processes, such as price monitoring and stock control.
This allows tremendous amounts of data to be processed instantly, and retailers can constantly offer the prices which best suit business and customer needs. Moreover, AI-driven automation frees up resource for the areas truly valued by customers, such as quality products, great value and top-tier customer service.
Retailers should follow the consumer’s lead
The current generation of consumers is savvier than any before them, having spent the past two decades with the power of the internet at their fingertips.
Customers today can research and compare products instantly, and will often discover that the best deals are not found on Black Friday. Therefore, there are opportunities to target consumers with smart discounting all year-round rather than prioritising Black Friday.
Indeed, according to research from B&Q, consumers now harbour greater trust towards brands that offer year-round affordable prices than those that discount on sporadic occasions such as Black Friday.
“Simply put, it’s time for retailers to realise – as consumers have – that there is a life beyond Black Friday.”
While offering the lowest prices on Black Friday might drive sales for a few days – technically just 1% of the year – retailers will likely feel the impact it can have on margins, consumer trust and overall profitability for far longer.
In a volatile retail landscape where more brands close their doors every day, is that a price beleaguered retailers can really afford?