The Price of discounting

Mar 01, 2005 10:30 PM  By

Simplicity clearly has its benefits. Consider the days before the term “multichannel retailing” existed. A merchant running a brick-and-mortar store who needed to clear out some items could simply devote a table or a rack to the merchandise. Similarly, catalogers could include a few sale pages within their books to offload excess inventory.

Today, of course, most merchants operate through several channels: the Internet, catalogs, retail stores, outlet locations. This gives rise to a question that didn’t need to be addressed a decade ago: How do you price clearance items when you’re moving merchandise through several venues?

For the most part, multichannel retailers will want to strive for pricing consistency across all channels. “Consistency develops credibility with the customer,” says Robert Antall, CEO of Cleveland-based retail consulting firm LakeWest Group.

But achieving consistency, particularly with sale items, is sometimes easier said than done. A multichannel merchant may have too few clearance items to make advertising the goods in every channel worthwhile. Or the sale merchandise may be located in just a few stores, making it cost-prohibitive to move the items to a distribution center so that they can be sold online or through a catalog.

In addition, offering different prices can make sense at times, some consultants point out. After all, the cost of selling items via different channels can vary. And customers may be willing to pay different prices in different channels. “Charging a uniform price in this type of situation would leave money on the table,” says Frank Bilstein, managing director with Cambridge, MA-based pricing consultancy Simon-Kucher & Partners.

While there isn’t a cookie-cutter solution that multichannel retailers can apply to every discounting dilemma, there are several concepts to keep in mind. For starters, you need to consider the degree to which your customers shop in more than one channel. In addition, you want to take into account the quantities of clearance products available and their location. Finally, you need to consider customers’ acceptance of price variation by channel, as well as the cost to move goods through different channels.

THE GOAL OF CONSISTENCY

Many multichannel merchants agree on the goal of pricing consistency. “Our customers move from one channel to another,” says Chad Selvidge, senior vice president of marketing and merchandising for Camping World, a Bowling Green, KY-based cataloger/retailer of recreational vehicle supplies and services. “So we want a consistent price message no matter where they start.”

As is the case with most other multichannel merchants, Camping World has found that customers who buy through more than one of its channels tend to be the same ones who shop the most frequently and spend the most money. Therefore the company doesn’t want them thinking that shoppers in other channels got better deals.

On the other hand, achieving price consistency isn’t always a straightforward process. For instance, Camping World’s retail stores periodically offer discounts on satellite dish installation fees. Offering installation services to Web and catalog shoppers isn’t practical. So the company will offer an equivalent discount, such as free shipping, to customers who purchase satellite dishes via a direct channel.

Charlottesville, VA-based Crutchfield Corp., a cataloger/retailer of consumer electronics, periodically runs into situations where product prices appear to vary across channels. For instance, a digital camera manufacturer may offer customers a rebate on a compatible printer. Depending on the timing of the promotion, the rebate information may not make it into the print catalog. Because it’s easy to update information on the Internet, though, Crutchfield would likely be able to cite the rebate on its Website.

“Our strategy is to have prices match up,” says Rick Souder, executive vice president of merchandising for the $200 million Crutchfield. “It’s just that the Web is more immediate and flexible.” To minimize misunderstandings, the print catalogs include numerous reminders to customers to check the printed prices either online or via the phone. That way, regardless of which channel they choose, customers can take advantage of any promotions.

Souder notes that while about 60% of Crutchfield’s transactions take place on the Web, the company can trace about two-thirds of its business back to the 32 million catalogs it mails each year. This sort of channel interdependence makes price consistency especially important for Crutchfield.

Indeed, Simon-Kucher’s Bilstein says that the higher the proportion of multichannel customers, the more care merchants need to take before varying prices. Buyers of home appliances and electronics, for example, tend to use the Web to research their planned purchases before heading to a brick-and-mortar store. These retailers could anger their customers if items were priced differently in each channel.

THINKING LOGISTICALLY

In pricing clearance items, several logistical considerations also come into play. One is the location of the goods that are to be discounted. At Camping World, if the goods are stashed in a distribution center, discounting them via the Web is the first option, says Selvidge. That way the merchandise can ship directly from the warehouse, minimizing transportation costs. It wouldn’t make sense to move the goods to the stores just to offer them at a discount. In addition, the Web is a low-cost way to get the word out.

But if the majority of the merchandise is already in stores, it usually makes sense to keep them there, says LakeWest’s Antall, again because of the transportation costs.

That said, the amount of product you have, how deep a discount is required to move it, how great the demand for it is elsewhere, how much cash is tied up in the product, and how quickly the merchandise is becoming obsolete should influence your decision, Antall explains. If historic and current trends suggest that your stores won’t be able to offload all the discount merchandise they have on hand before the products have outlived their stylishness or usefulness, by all means send a portion of the goods to your DC and promote the merchandise via a direct channel.

For its part, Camping World does not include sale items in its regular catalogs — it rarely has enough discount inventory to last the length of a catalog’s shelf life, which is generally six to eight weeks. But it might include the items in its retail fliers, which have a shorter shelf life of three to four weeks, if it determines that it has enough quantities of particular SKUs to satisfy demand.

To calculate how much product is enough, the company will look at sales history to assess how quickly it can expect to sell through the items and the estimated bump in sales once the price is cut. For instance, if 600 widgets are on hand and only 100 have been selling a month, Camping World would likely promote them at a reduced price in its next retail flier.

What it won’t do is advertise the same sale items in consecutive fliers. That’s just in case the sale product ends up flying out the door — the company doesn’t want to be caught without inventory when the subsequent flier hits the mail.

In fact, the fewer items left on hand, the more it makes sense to try to get rid of them via the Web rather than a print catalog (assuming the goods are in a central location). Once no more are left, it’s easy to delete the product from the Website, and the result is immediate. In contrast, promoting minimal quantities of clearance items via a catalog can result in customer service issues, notes LakeWest’s Antall. “You can get lots of orders for things that are out of stock.”

Besides, customers have been trained to seek aggressive pricing on the Web. “We are constantly challenged with price competition on the Net,” says Karen Stern, director of e-retail operations with FootSmart, a Norcross, GA-based merchant of foot products.

As with Crutchfield, FootSmart has found that its catalogs drive a significant portion (45%) of the company’s online traffic. So the company wants customers to see consistent pricing across its channels. But FootSmart also recognizes that many customers use the Web to find the lowest prices on goods, Stern adds. One indication of this: 89 million consumers used comparison shopping sites in 2004, up from 54 million in 2003, according to information from online comparison engine NexTag.

In addition, transactions completed via the Web cost FootSmart less than those completed via its call center. As a result, FootSmart runs Internet-only specials two or three times a year. These may take the form of so many dollars off orders over a certain size. Or the company may offer a discount on shipping charges. So far, the offers seem to be generating sales without turning off customers used to shopping other channels, Stern says. Response rates have varied from 2% to an impressive 45%.

Overall, says Bilstein, “you see a lot of discounting on the Web, less in stores, and the least in catalogs.” But this isn’t to suggest that the Web will morph into a virtual outlet mall, he adds. In fact, consumers have shown a surprising willingness to pay a bit extra — typically in the form of shipping and handling costs — for the convenience of shopping from the comfort of their home laptop. “They tend to accept this as a cost of doing business,” says Dennis Veltre, president of New York-based Clicks & Mortar Consulting. “There’s definitely a lot of room for profitability.”

Plus, retailers run risks in offering promotions or specials exclusively on the Web. “Customers may become used to the promos and delay purchasing until a promotion is in effect, even though they prefer to use that channel,” says Veltre. What’s more, offering channel-specific promotions can damage the image of a seamless enterprise.

Just as important, multichannel retailers will want to recognize that developing an effective pricing and discount strategy typically is an ongoing process. Camping World, for instance, found that some promotional e-mails generated greater-than-expected response rates, leading to out-of-stock situations. The company is using those experiences to try to more a ccurately forecast demand in the future. “It’s been something that we’ve been learning,” says Selvidge.


Minnetonka, MN-based freelance writer Karen M. Kroll has written for Inc. and IndustryWeek, among other business publications.