Finding the sweet spot in discounting

In a perfect retail landscape, brands and retailers would be able to order the exact number and style of products to satisfy consumer demand, without fear of ending up with an surplus. However, since we live in a volatile world which is constantly changing, certain practices of the industry such as discounting and sales are unavoidable.

Although some retailers blame discounting for cutting into their margins and profits, especially during the holiday season, if applied in strategic manner discounting can entice and win over customers. The challenge is finding the right balance, or the sweet spot, in discounting. Retail analytic firm Editd took up the task and tracked 1,007,865 products from 79 mass market retailers on May 5 across the US and UK, including key players such as Topshop, Next and Gap to determine the optimal discount range for fashion brands.

The discounting sweet spot lies between 36 and 40 percent

The results were surprising, as the data indicated the discounting sweet spot lies between 36 percent and 40 percent discount. The firm found stock discounted between these two discount brackets depleted even faster than products with even deeper discounts, for example 50 percent or more.

"Our research revealed that 31 to 35 percent and 41 to 45 percent are underutilized compared to surrounding percentiles: there are twice as many products discounted by 46 to 50 percent as there are 41 to 45 percent," noted Katie Smith, senior fashion and retail market analyst at Editd. "Nordstrom knows the drill. It frequently promotes ‘up to 40 percent off' sales."

The research also showed the numbers of days for a products sell-through actually increased when the discount was 50 percent or more, with 56 percent to 65 percent taking the longest. "Our sample showed on average products reduced by 36 to 40 percent sell out in 154 days, compared to 172 days at 21 to 25 percent and 184 days at 51 to 55 percent," added Smith.

The reasoning behind the discounting range is varied, with the firm suggesting the sweet spot was enough to convince consumers they are getting a bargain as it lies slightly higher than the common discounting bracket of 26 to 30 percent discount, or that products discounted at 50 percent or more may cause consumers into thinking the item's value is diminished.

The results show that deep discounting may not be the best strategy as consumers are not always convinced by a 'less is more' mentality.