The retailer’s dilemma of discounting

How does a retailer decide if the discounting scheme is good or bad? How can he decide quickly if his discounting strategy is earning or eating his profits? Well , let us analyze a real case of an apparel retailer in India.

The apparel industry in India is typically known for having exclusive fresh season – Spring Summer and Autumn winter in a year.

Let us see a practical real-life case of an apparel retailer if their discounting strategy really works. All big brands have fresh season and discount season sale. Generally, the effectiveness of the discounting scheme can be measured using simple metrics like Average ticket size and Average basket size.

Now what do Average ticket size and Average basket size mean and how to calculate these metrics?

Average ticket size refers to the average bill value.

Average ticket size = Total sales/ No of Invoices

Average Basket size refers to the average number of units moving in one single bill.

Average Basket size = Total Units sold/ No of Invoices

Every retailer would love to sell his garments at full price to earn profit during the fresh season. Due to competitions, sales targets and other reasons, the retailers are forced to give discounts even during fresh seasons. Does this really work for him or is he eroding his brand value due to discounts?

Let us analyze their sales transaction and use the metrics discussed above to check it.

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From the graph given above for the discount spend data, we can conclude that the budget for the discounting has been increasing steadily over the years. In fact, there is a 54% increase in the discounting budget from 2017 to 2018.

To understand the impact of discounts in sales, let’s check the average bucket value and average ticket size.

Average Ticket Size - 3 years

As you can see from the graph, the average ticket size for the full price items sold has not increased drastically even though we are seeing a 54% increase in the discount disbursement from 2017 to 2018.

What does this say about this brand?

This says that it is making its customer to get accustomed to discounts rather than creating brand value. It is not really focusing on creating true loyal customer.

Now, what about the Average basket size? Has the basket increased due to discounts? Let us check it.

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The average basket size ,even after discounts, is not very impressive. It has not shown any drastic increase, instead, remains flat or in some cases even decreased.

Now what should this retailer do to try to come out of this discounting quagmire? He has the below areas to work upon to improve his position.

1.      Cost reduction

2.      Dynamic discounting strategy

3.      Customer engagement

Author: Balaji Balagangadharan

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