Discount Addiction

Retail is addicted to discounts. The simple fact that a discount has an immediate positive impact on demand makes it hard to resist. Much like a drug user, the reality becomes one of constantly chasing the next high—the next discount.

Also like a drug user, prolonged use wreaks havoc on the health of a retailer. Margins gradually erode until they are next to non-existent. Narrow margins place further stress on the business and reduce buffers during slow periods. This, in turn, makes a quick boost of turnover using discounts more attractive.

Kicking a drug habit is not easy and often requires the use of drugs such as methadone, which allows a drug user to quit gradually. Going cold turkey is as likely to harm the drug user as it is to help them break the habit.

The same is true for retailers. But how do you do this?

Going Gradual

The retailer's equivalent of methadone can be found in a better quantification of the true impact of discounts. A gradual reduction in discounts is easier to achieve when those targeted are the ones that have the lowest impact on demand.

This is a domain excellently suited for AI models, which can predict the likely impact of a discount on a product. With this knowledge, planned discounts can be ranked, and the least effective ones can be eliminated.

Adding Detail

This may also require increasing the granularity of decision-making. Advertising "30% off everything" is operationally simple, but a more nuanced selection of discounted products must also be supported by the right sticker prices in stores.

Finding Better Friends

Competitors who are also addicted to discounts are a major problem. Trying to outcompete them on this front is a winner-takes-all game. Typically, only the largest player can guarantee the lowest price point most of the time.

Distancing yourself from these peers is not easy. Typically, it involves focusing on a specific type of customer whom you can serve better or offering a value-added service that your competitor cannot. This may require significant reinvention and an objective self-assessment.

Thinking Beyond Products

Finally, retailers should strive to think beyond individual products. The bigger questions lie at the level of transactions and customer relationships. Does a discount really make sense if it only attracts one-time customers who purchase only the discounted product? Likely not.

However, it may make sense to sell something close to cost if it attracts customers who are likely to purchase profitable products in the same transaction. Similarly, it can make sense if it draws in customers who become loyal shoppers in the future.

Want to know how to take action?

Course on data-driven retailing UGent FEB Academy : https://www.datadrivenretailing.com/course

Data driven retailing book Springer Nature : https://link.springer.com/book/10.1007/978-3-031-12962-9

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