Katie Smith

May 7, 2015

Finding your discounting sweet spot

Discounting strategy for the mass market: what is the best amount to reduce product by? We've found 36-40% has the best sell through rate.

In an ideal world, to avoid dramatically slashed prices, brands and retailers would be able to order the exact quantities of product to meet demand. While certain parts of the industry may be moving closer with just in time production, it’s impossible to guarantee perfection. Discounting is unavoidable, in fact, a little discounting can be desirable. It plays a key part in merchandising strategy to keep customers interested. So how can you strike the right balance? And what’s the best way to clear stock, without sacrificing margins?

We looked at over a million products* currently in stock at 79 mass market retailers** across the US and UK markets, including Gap, Topshop and Next, and found that the discounting sweet spot is between 36% and 40%. At that level, stock goes quicker than products with even deeper discounts, say 50% or more.

The discounting sweet spot is between 36-40%. Products here sell faster than those with deeper discounts.

The way the mass market discounts currently.
The way the mass market discounts currently.

Surprisingly, we found that the number of days for sell through increases when products are reduced by over 50%, with 56-65% being especially problematic. Even compared to these larger discounts, the lower discount range of 36%-40% moved stock faster. But why? Is it because it’s significant enough that people think they’re getting a bargain? Is it because it’s higher than the most common discounting bracket, 26-30%, and consumers snap the deals up faster? Or is there another psychological driver coming into play, one where big discounts, 50% and above, are a warning that the product’s value is diminished?

Interested in working out your own discounting sweet spot? Here’s how it’s done. Start by looking at the levels of discounting within each percentage range – how are your products distributed over the different discount rates? This will highlight a percentage range that’s under-used, or completely ignored. Our research revealed that 31-35% and 41-45% are underutilized compared to surrounding percentiles: there are twice as many products discounted by 46-50% as there are 41-45%. Is there a similar pattern in your category?

Next up, look at the average time it takes for products to sell out at each discount bracket – this will flag up the fast moving ranges, and those which maybe need manipulation to encourage your customers to buy. Our sample showed on average products reduced by 36-40% sell out in 154 days, compared to 172 days at 21-25% and 184 days at 51-55%.

You could even look at the final reductions on discounted products in the last period. Did dresses that were reduced by 25% sell out at that level, or did they have to see further reductions before they cleared?

The data here shows customers aren’t always driven by a ‘less is more’ mentality. Why not get it right first time? You can make sure that products clear when you need them to, at the best price.

By taking the time to analyze your discounting sweet spot, you will reduce the risk of tired stock, you’ll free up space for the hits; and ultimately, you will secure the final price point of a product.

*Or to be specific, 1,007,865 products. Everything those 79 retailers had on their sites on May 5 2015.

**EDITD determine a mass market retailer based on price architecture, assortment size and product mix.

P.S. Nordstrom knows the drill. It frequently promotes ‘up to 40% off’ sales: