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How to Get Your Customers to Pay Full Price

Discounting is rampant at retail, but these tactics can help you keep margins healthy.
Illustration by BoF
By
  • Lauren Sherman
BoF PROFESSIONAL

ANTWERP, Belgium — Graanmarkt 13, the Belgium lifestyle emporium that includes a store, restaurant and sleeping quarters, is unique in many ways. It's where fashion designers lunch, and art and film-world dignitaries rest their heads when passing through. But it is not immune to the trials of modern retail. Like many of its competitors, Graanmarkt 13 founders Ilse Cornelissens and Tim Van Geloven have often struggled to maintain profit margins in the face of rampant discounting across the industry.

“Sales are killing the market,” said Cornelissens, who described a vicious cycle that had her marking down product earlier and earlier in the season.

Fighting back was increasingly difficult. But almost three years ago, Cornelissens and Van Geloven met with their board of directors and made the difficult decision to end sales. Their thinking was that if they stopped marking down product at the end of the season, the customer would eventually acclimate to the change and buy at full price.

This shift in strategy immediately created plenty of new problems. Revenues decreased 15 percent in the first season at the store and 20 percent at the restaurant, although roadway construction that made it more difficult to visit by car was probably a factor, too. The immediate drop in sales explains why more retailers and brands remain beholden to discounts; especially large public companies that are judged on a quarterly basis, as well as independent brands reliant on markdown-happy department stores for a majority of their revenue. This sale structure affects smaller retailers like Graanmarkt 13, who must contend with the wider impact that rampant discounting has on the psychology of consumers who have been conditioned to wait for sales before buying.

Inside Graanmarkt 13 | Photo: Courtesy

But Cornelissens and Van Geloven stood firm. And to combat shrinking sales, they made some tweaks to their concept to sharpen the uniqueness of their proposition. They now almost exclusively carry local designers who aren’t sold in many other stores. They also think more carefully about each item’s value, and whether it can be justified in the eyes of consumers. And at the end of every season, instead of holding a sale, Graanmarkt 13 invites its customers to bring in 10 items from any designer. The retailer picks what it likes and sells those items at a special event. It takes no commission on the sales; instead, 100 percent of the proceeds from each purchase are given back to the customer in the form of a Graanmarkt gift certificate.

Today, Graanmarkt 13’s revenue is back up to what is was before making the move away from sales, and its gross margins are far wider, increasing to 52 percent in 2018 from 43 percent in 2016.

Of course, Graanmarkt 13 is only one small store in a small city in Belgium. And Cornelissens and Van Geloven had the support of the company’s board, and the luxury of being a privately held entity, to be able to make changes that would benefit the business in the long term.

Can it possibly work for others, especially in the US, where discounting culture is rampant? “Changing consumer behaviour is a gargantuan feat,” said Michael Ferranti, founder of BuyerGenomics, a data and analytics-driven marketing firm. In 2017, 92 percent of US consumers used a discount or coupon code at least once, according to the Public Religion Research Institute, a non-profit, nonpartisan group that conducts research at the intersection of religion, consumer behaviour and policy.

And retailers continue to comply. In a recent report documented by Quartz, trend-tracking firm WGSN analysed the sales cadence of over 100 apparel retailers online, finding that discounts on current-season products — defined as items released within the past three months — have increased by double digits over the past two years. As of December 31, 2018, nearly 40 percent of "new" product at women's stores was marked down, compared with just over 25 percent of new product at the end of 2017.

Yet, in recent years, several public US fashion companies — including Ralph Lauren, Capri Holdings and Tapestry — have made bids to pull back on discounting their brands, either by moving more of their business to direct channels or by holding fewer sales. Training consumers to become comfortable buying full price is not only good for margins, it's also good for branding. Luxury players like Louis Vuitton and Hermès don't discount, protecting their brand value from dilution.

In many cases, efforts to rely less heavily on discounting is working. Perhaps the best example of this is still-hot Gucci, which stopped discounting in 2015. "The full-price sell-through is super high, so even if I put them on sale now, the impact on sales would be tiny," chief executive Marco Bizzarri told BoF at the time. "The impact on the image would be too big."

But Gucci is not the only brand benefiting from a change in course. In Ralph Lauren's 2018 fiscal year, revenue per stock keeping unit (SKU) was up 16 percent and gross profits per SKU were up 22 percent from a year earlier. And while overall sales were down 7 percent to $6.2 billion — with North American revenue decreasing 15 percent to $3.2 billion — gross profits were $3.8 billion with a gross margin of 60.8 percent, 290 basis points higher than the prior year (when it was 57.9 percent). "We're on a journey to establish a healthy foundation to get the company back to sustainable long-term growth and value creation," chief executive Patrice Louvet said in May 2018.

It's clear that those unwilling or unable to break the cycle of discounting are suffering in the long and short-term. Consider Gap, which has a reputation for always being on sale, pushing promotions via marketing on a daily basis. In the 2018 fiscal year ending February 3, 2019, global sales at the Gap brand were down 5 percent on a comparable basis. Gross margins at Gap Incorporated, which includes several other brands like Banana Republic and Intermix, were 36.8 percent for the year, down from 38.3 percent, which the company said was driven by increased "promotional activity" at both Old Navy and Gap.

Going forward, Gap Incorporated is planning to close 150 Gap stores and recently announced that it would spin off Old Navy, its biggest brand, into a separate company. But whether the new focus will allow the Gap brand to pull back on discounts remains to be seen. At this point, the consumer expects them.

“This is systemic,” Ferranti said. “Everybody has the same issues.”

However, there are several steps brands and retailers at every level can take in order to get more consumers paying full price again:

Be prepared for the sales hit. Regardless of whether you're an independent outfit like Graanmarkt 13 or a multi-billion-dollar brand like Michael Kors, a slowdown in revenue is almost inevitable when you're pulling back on markdowns. It's important to take this into consideration when making financial projections and thinking about hiring for the next few quarters. Some things will need to be scaled back in the beginning, and you — plus any investors you have — must be willing to accept that.

Refine your targeted-marketing strategy
. Not everyone can pull a Gucci and stop discounting all together. But brands and retailers can be smarter about how they market discounts to their existing customers. Sending a promotional email to a customer with a history of paying full price — or buying a large volume of product on sale — is a bad idea, Ferranti said.

Consumers who have bought multiple times at discount-only are the least likely to change their behaviour. Instead, you should look for customers who have bought both full-price and discounted items. “Test marketing on them on a full-price basis with a value-based message,” he said.

If you’re targeting a customer who has only bought at full price, “the most important thing to do is to suppress discounts,” Ferranti said. “You can turn them into a discount buyer if you indiscriminately send discounts offers to them.”

Same goes for converting new customers. Today, most brands and retailers spend the majority of their digital advertising dollars on platforms like Facebook and Google. But converting customers via these channels is becoming increasingly difficult and expensive. While it’s less time consuming to simply target a consumer whose profile aligns with that of your existing customer, the more information you have, the sharper your targeting can get.

For instance, if you’re targeting a potential customer who lives in a neighborhood where most people send their kids to private school — which many consider to be a luxury purchase — there is a higher likelihood that person will pay full price. Consumers who make larger transaction sizes — whether or not the products are discounted — are also more likely to pay full price. Ferranti calls these insights “information advantages,” and said it’s also important keep refining campaigns instead of assuming something that was successful in the past will be so again.

“Value is going to come through compounding,” he said. “You’re going to have to keep segmenting and developing other information advantages again and again. When you look back at the end of the year, you’ll see that you’re shaping the quality of the customer.” This, Ferranti said, is not an instant-gratification solution but instead a long-term gain.

Create exclusivity — and scarcity. Graanmarkt 13 used to sell brands that you could easily find at global retailers like MatchesFashion.com, Farfetch and Net-a-Porter. When the retailer stopped discounting, however, it also stopped buying from many of its better-known labels, focusing on local designers instead, including internationally recognised Sofie D'Hoore and its own in-house trench line, Kassl.

For retailers, that means negotiating with brands to buy exclusive styles that create excitement and urgency. For brands, that means creating select items that are only available via certain channels. New York-based designer Gabriela Hearst, for example, only sells her popular handbags through her own retail channels, driving half of company's overall revenue along the way. She recently caught the attention of LVMH, which invested in the label through its Ventures arm.

Limiting inventory runs is another option. If high-margin products are perceived as one-of-a-kind, then they are likely to sell more quickly and for full price, which means you can sell fewer of them and make just as much money if executed properly. While consumers do more research than ever, impulse purchasing is as ingrained a behaviour as deal-seeking, which should be used as an advantage. (Impulse purchases represent 40 percent of money spent on e-commerce sites, according to a 2017 report from user-interface research firm UIE.)

When discounting is the only option, be creative about how you do it. Minimising inventory from the get-go is a good way to control overstock, but most brands and retailers will still end up with plenty of leftover goods at the end of the season because they've over-ordered certain styles. Some will offload that product into the off-price market — either selling it at their own outlets other through discount retailers — and others will burn it.

Now that it has two years' worth of backstock, Graanmarkt 13 is toying with the idea of hosting a private shopping event. But there are other ways to discount old product without it feeling like a sale. Comme des Garçons' "guerrilla" stores — temporary pop-ups where consumers could buy "seasonless" items drawn from current and past collections — were an early example of taking the cheap-feeling outlet store concept and treating it in a way that made it feel cool.

At Everlane, the basics label has a “choose what you pay” section on its website, where customers can receive a discount on overstock but are prompted to decide what they want to pay from three tiers of markdowns. The company said 5 percent of shoppers choose a price higher than the deepest markdown.

Graanmarkt 13 has also taken to adjusting prices slightly as the season goes on without alerting the customer that there is a markdown. For instance, an €800 cashmere sweater wasn’t moving, so Cornelissens recently adjusted the price to €500. It still hasn’t sold — she blames the warmer spring weather — but said other attempts to tweak have resulted in product moving within days.

For brands, it's time to ask for better terms with retailers. If you are a brand that relies on wholesale channels for distribution, try negotiating better contract terms that limit the time period in which your product can be discounted and for how much it can be discounted. (Brands that win the negotiation will often not be marked down until the second round of discounts, and those discounts will be limited to 40 percent off instead of 60 or 70 percent off.)

While department stores have long held greater power in most brand-retailer relationships, increased competition from online e-tailers and independent upstarts mean that they are no longer always in control, especially if you have a superior product. If you can walk away from a bad deal, do it, or limit the volume of product you allow them to buy. Retailers will fight for good product.

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