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The price of promotions for retailers

One of the most pervasive features of the debt crisis in retail is the now commonplace tactic of price promotions. While many retailers might claim that this is all about the customer’s insatiable appetite for bargains, the reality is very different. Retailers have driven the vastly more promotional market we have today, and it is rarely out of choice. The years since the fall of Leman Brothers have seen a fundamental shift in the relationship between supply and demand. After decades of relentless economic growth, led by consumers’ increasing spending power, everything has gone into reverse. Now there is far too much capacity, the result of relentless space growth coupled with the burgeoning online retail sector. The Internet has not in our opinion persuaded consumers to spend more, just differently. And online retail spend has been siphoned off from physical stores.

Weak demand has helped to create a market where demand is exceeded by supply. Not just too much capacity, but far too much product too. Turning stock into cash has become an imperative for many retailers.

Winning retailers

Looking at the winning retailers in this market highlights a number of common threads. Perhaps the main theme is they all enjoy the luxury of being less promotional. They tend to suffer much less from excess stock. Their cash flows are stronger and they can buck the trend with sales and profits growth. How do they manage this?

We believe the answer lies in their customers, and the fact that they understand them far better. This understanding allows them to edit their ranges, providing a much more tailored offer, promoting as a reward, not to clear stock. So many retailers today have been seduced into the idea that choice equals lots of options. In our view this is a fallacy. The strongest retail customer relationships involve the shopper’s confidence in the retailer’s ability to understand what she (or he) will want. This creates a virtuous circle, and creates the strongest form of customer loyalty there is.

The virtuous circle of customer insight

Building this virtuous circle and sustaining the loyalty that flows from it is all about customer knowledge. And today, technology has allowed retailers the opportunity to capture the intelligence throughout the customer journey, not just at the point of purchase. It is how this intelligence is leveraged that will determine the winners.

Getting prices right first time is essential. Avoiding huge stock mark downs is the same. Too many promotions is simply a ruinous zero sum game. The solution to getting off the promotional drug lies in understanding the customer, and putting that understanding at the heart of everything the retailer does.