Discount Strategy in Retail: How to Offer Discounts & Markdowns Without Slashing Profits

Discount promotions are one of the most common approaches for increasing retail sales. But just because discount promotions are popular doesn’t mean they’re always effective.

Lowering your prices might bring in customers, but if you don’t execute your sale properly, you could cut into your profits and even damage your brand and reputation.

It’s important to weigh all the pros and the cons of running a sale or discount and to define your goals and actions.

Here are some tips to help get you on your way.

What is a retail discount strategy?

Retail discounting is used to decrease the price of specific products for a set amount of time. In some cases retailers offer a store-wide discount to move excess inventory and create space for new collections. 

Retailers usually run discounts to attract new customers, increase sales, and clear out old inventory. 

Large retailers have an easier time selling low-priced merchandise in high volumes, but this strategy doesn’t always work for small to mid-sized retail boutiques. 

With discounting, it’s important to keep an eye on your profit margins, avoid conditioning customers to wait for a sale, and understand exactly why and when you want to discount products. 

Why do retail store owners offer discounts to customers?

According to a study by Software Advice, discounting is the top “pricing strategy for retailers across all sectors, used by 97% of survey respondents.”

Selling items at a discount is a low-risk way to drive more sales volume and bring in customers who have never tried your products or services before.

Getting a product at a discount can also make your customers feel good. A study led by Dr. Paul J. Zak, professor of neuroeconomics at Claremont Graduate University, discovered that shoppers who were given a $10 voucher experienced a 38% rise in levels of oxytocin—a hormone associated with trust and happiness—and were 11% happier than those who did not receive a coupon.

In addition, their respiration rates dropped 32%, heart rates decreased by 5%, and sweat levels were reportedly 20 times lower than their peers. In other words, they felt more relaxed—a state that can lead to positive associations with a brand.

Aside from making your customers feel happy, when done right, retail discounting can benefit your business in various ways, including:

Driving sales quickly and improving cash flow

Retailers use discounts because they are effective at quickly driving sales and increasing cash flow. Customers like a good deal and tend to spend money even if they weren’t planning on it. 

Attracting new customers

A lower price can make customers who have never tried your product or service before decide to take a chance on you. If they like what you’re selling, they’ll probably come back again, even once your sale is over.

Increasing sales revenue and profit 

Here your goal is pretty simple: sell as much product as possible. This can be done in various ways, including product bundles, conditional promotions, or rewards for loyalty program members.

Re-engaging past customers

Using a discount to encourage brand loyalty in casual customers can be done through promotions like loyalty programs. Research shows that 79% of consumers say loyalty programs make them more likely to continue doing business with brands. This not only makes your loyal customers feel exclusive, it also encourages new customers to become members and join in your loyalty program.

You can also offer personalized deals based on your customers’ past purchases.

Getting rid of old product

Sometimes you need to get rid of the old to make room for the new, and discounting products can help with that. For example, if you’re a clothing boutique, you’ll want to clear out your summer goods as the fall months get closer. The same can be said for clearing out holiday items after the first of the year.

“We stick to seasonal patterns—for us this means two sales per year,” says Shannon Ashford, founder of Tom Foolery. “We don’t like to offer sales too often because customers start to expect it and will wait to purchase when the sale rolls around. Sticking to two sales a year also creates more hype and excitement—it becomes an event customers want to act on quickly.” 

"We don’t like to offer sales too often because customers start to expect it and will wait to purchase when the sale rolls around."

Are discounts and markdowns bad for business? 

There is some inherent risk when offering a discount. Once customers have your product or service, they might feel like it’s lost its value. Research has shown deep discounts cause the consumer to believe that something is wrong. Regular discounting can lower the perceived value and quality of your brand, and some brands opt for a no-discount strategy.

Discount pricing also brings the risk of ending up without much profit. Some discount sales may come from new customers, but you also could lose some profit margins on customers who were planning to buy anyway.

Let’s look at how retail discounting can be bad for business:

It can dilute your brand

We tend to equate higher prices with higher value. If you’re constantly marking down your product it could dilute your brand and lower the perceived value of your products. Huge discounts may also create suspicion, and shoppers will think the deal is too good to be true. 

“No matter how badly you need to clear out inventory, don't mark the price lower than the cost of production,” says Ashford. “Offering a quality product for less than it’s worth sets a bad precedent for the value of your product.”

"No matter how badly you need to clear out inventory, don't mark the price lower than the cost of production."

Discounts can lower your profit margins

If you run discounts too often or don’t do the math to make sure you’re still making a profit, you run the risk of slashing your profit margins and losing money. 

“End of season sales are a great way to clear out inventory and still cover the cost of production,” says Ashford. “At Tom Foolery, we offer 20%–30% off, sometimes even 40% if we really need to move inventory. This way production costs are covered and there are a few dollars to spare for shipping.” 

"End of season sales are a great way to clear out inventory and still cover the cost of production."

Constant discounts are not sustainable for small businesses 

Large retailers are able to offer discounts more frequently because they tend to have a lower cost structure than small businesses and sell more volume. As a small to mid-size retailer, it’s crucial to build a retail discount strategy that’s sustainable for your business.

You can attract conditional shoppers instead of loyal customers

We all love a deal, but some people only buy if there’s a discount. In this case, the new customers that you acquire—because of a discount—may not really be interested in the products you offer. They’ll likely only return when you have a sale and won’t contribute to the overall growth of your business. 

How and when do you offer discounts to customers? 12 retail discounting methods to try

Once you’ve decided why you want to discount certain products and what you’re hoping to achieve, choose the discount method that works best based on your objectives.

Here are a few retail discount methods to try: 

Offer special discounts to first-time customers 

Offer new customers a small discount to move them through the sales funnel and convert them from browsing to paying customers. You can do this in-store with 10% off their first purchase. It’s also common to see this online in exchange for a visitor’s email address. 

Build a customer loyalty program

Build a rewards program for loyal customers to increase customer lifetime value (CLV). CLV is the total amount of money a person spends at your retail store during their lifetime as a customer. 

Loyalty programs also let you personalize rewards based on your members’ prior shopping behavior. 

Example loyalty program: Sephora's Beauty Insider program

Create early-bird discounts on new products or pre-orders

Offer limited time discounts on new arrivals or pre-orders. This can help you sell through some inventory before it’s even on your floor. 

Use this strategy for your entire customer base or pick specific segments, such as people who are part of your loyalty program. You can also use it to re-engage shoppers who, for example, haven’t made a purchase in the last three months. 

Launch a retail referral program 

People trust products that their friends tell them about. In fact, when referred by a friend, customers are four times more likely to make a purchase, and customers acquired through referrals have a 37% higher retention rate.

An example of a retail referral discount is inviting an existing customer to refer a friend and get 20% off their next in-store purchase. Plus, their friend will get 20% off their first purchase. 

Image: An overview of Lively's "Refer a Friend" program

 

Implement personalized offers 

Use personalized offers to retarget past and present customers based on their buying behavior or personal details. 

For example, reward frequent shoppers with an occasional discount on products similar to items they’ve purchased in the past. Ask people for their birthday at the checkout counter and send them a personalized discount offer on their special day. 

Both of these offers can be sent via email when the time is right.

Post event promos

After hosting a pop-up event (or any type of event) at your retail store, follow up with attendees via email. Thank them for attending, and give them a discount to incentivize them to come back and buy from you. 

Time-sensitive discounts

Limited time discounts encourage customers to pull the trigger quickly. Promos with expiration dates or limitations create a sense of urgency, and shoppers won’t want to miss out.

Make the offer available only to the first 10 customers who redeem it or include an expiration date. This could be a one-day sale or an exact time and date (in the near future) that the offer ends. 

Collaborative discount partnerships

Round up a few of your local retail shops to offer a collaborative discount to customers in your area. For example, if you have an activewear boutique and the retail boutiques near you sells flowers and home products, work together to create a neighborhood discount package.

It could look something like this: “Buy a pair of leggings, a dozen tulips, and a throw blanket, and get 10% off your next purchase from each store.” You’d have to carefully monitor this and create a system to keep track of customers who participate in the event.

Bundled discounts

Lower the price of a group of items bought together as opposed to lowering the price on just one product or service. These bundling discounts can help you increase your average transaction size because you’ll be selling several items within a single order. With each sale in this scenario, more items are sold, more revenue is made per order, and costs per order are decreased.

This is also a chance to pair items that aren’t strong sellers with products that have proven themselves as bestsellers. Make sure you measure the sales of the less popular items to see if they increase after the discount, and consider bundling items that customers are already buying together or that can help solve a similar problem.

For example, group together a body wash with face lotion or a cookbook with local spices.

Image: Bundling example from LOVESEEN

Buy one, get one free (BOGO)

Sometimes a discount isn’t enough to attract more interest. Shoppers tend to see more benefits in “free” than high quality items at a discounted price. BOGO is a proven sales strategy that creates a sense of urgency and encourages customers to buy. Why? It’s easier to do the math on “free” than it is to work out a percentage.

A different survey found that 93% of all shoppers have used a BOGO, and 66% of them say it’s their favorite type of discount. Buy one, get one free (also known as BOGO) is great for attracting impulse buys, moving inventory, and acquiring new customers, but you can also offer a free gift with a full-price purchase. 

Try offering a popular high-margin product with a freebie that’s less expensive but hasn’t sold well, or even offer free shipping for your online customers or customers who buy in store, ship to home (if you offer that option).

For example, maybe there’s a scent of lotion that hasn’t been flying off the shelves. If you offer it as a free gift with the purchase of a more expensive, more popular face wash, you’re moving twice the inventory and getting a higher sale.

Conditional promos

If you’re looking to implement discounts while protecting your margins, conditional programs are a good choice. Instead of running a straight deal like “$5 off any purchase” or “15% off all items,” set limitations or conditions that shoppers need to meet in order to redeem the offer: “Buy 10 items and receive 20% off.”

You can also use this strategy without putting the first item on sale. For example: “This month, buy one pair of jeans at the full price of $60 and each additional pair is just $50.”

Other conditional promotions include seasonal or limited-time discounts, like the ones you often see in the lead up to Black Friday Cyber Monday.

Win back abandoned carts

The average online shopping cart abandonment rate is 69.8%. If you also have an ecommerce store, win back sales by offering a discount after a shopper abandons their cart. 

Create a pop-up that appears when the customer is leaving their cart and include discount details and a call to action (CTA) to complete the sale. 

This method can lead to shoppers intentionally moving away from the cart page just to get a discount, so avoid using it too often. 

Image: Abandoned cart email example from Fifty Three

How to stay profitable

After weighing the pros and the cons of offering a discount, focus your mission so you can remain profitable while offering a lower price. Different reasons call for different types of discounts, which is why you need to know your objectives. It’s important to calculate whether your discount will still allow you to be profitable.

Before you start testing different retail discount strategies, it’s important to consider the following factors to stay profitable: 

Know why you’re discounting products, and set goals and objectives 

What is your reason for discounting products? Do you want to reduce inventory, increase profit, attract new customers? Maybe it’s all of the above. 

Different objectives require different discount methods. For example, if your goal is to acquire more customers, you may choose a more aggressive approach to attract more people. If you’re looking to re-engage past customers, personalized offers and custom deals are a better strategy.

Whatever the reason is, make sure to think it through and build a discount strategy to reach your goals.

Build shopper segments and personalize offers accordingly

Segmentation isn’t only used in ecommerce. A surefire way to increase in-stores sales is to create offers and discounts based on your customers’ past shopping behaviors and preferences. 

The Shopify POS app lets you sync customer profiles and collect contact details so you can send personalized marketing messages. It also has an integrated loyalty program so you can reward customers for shopping with you in-store. 

Make sure your margins are healthy

This calculator will help you determine selling prices for your products in order to save money and increase profits. In order to keep your margins healthy, it’s important to keep your marketing costs low. You need to promote your discount, but not at the literal expense of your profits.

Start by marketing your discount to consumers that you’re already in contact with, such as existing customers, email subscribers, and social media followers. When spending to attract new customers, compute your projected profits from the discount and account for these marketing expenses.

Another way to watch your margins is to segment shoppers and tailor offers accordingly. For example, offer the discount to first-time customers rather than customers that have a history of being repeat buyers, or vice versa. In the former example, this increases the chances that you lure in new sales without losing out on the margins of sales that would have happened anyway.

With the latter group, you can use your point-of-sale system to get a history of what shoppers previously bought, then create tailored discounts based on what that customer has purchased in the past. Both tactics can greatly increase conversions.

Know your customer acquisition costs 

It’s critical that you know how much you’re spending to get a new customer because that number will change when you offer discounted products or goods. Make sure you add your lost margins during the sale, as well as your additional marketing expenses.

You can keep your costs down by converting those new customers into repeat buyers. Offer upsells and cross-merchandise items in order to get the maximum return on that new customer’s first order.

Optimize your website to reduce shopping cart abandonment. Make sure there are no technical speed bumps creating friction at checkout and send a reminder email a few hours after a customer abandons their cart to encourage them to go ahead and make their purchase.

Many digitally native brands are even moving into physical retail to lower their customer acquisition costs. 

Look at your sales history 

Before discounting products, take a look at their regular-price sales history. Review your profit on each unit sold at its regular retail price and how many units you typically sell in a specific time period. For example, in a week or a month. 

Let’s say a pair of jeans costs you $10 wholesale and you sell it for $20, your profit is $10 per pair. Based on your sales history, if you typically sell 20 pairs of jeans a month, you can expect to make $200 profit each month selling the jeans. 

If your objective is to sell through more inventory in a month, consider offering a 10% discount to sell 30 pairs instead of 20 to reach a higher profit goal. 

Let’s do the math: 

• 10% off of $20 is $18 retail per pair. 
• $18 retail per pair multiplied by 30 units sold is $540 in sales.
• Each pair costs you $10, so $10 multiplied by 30 units is a total cost of $300.
• $540 in sales minus $300 in costs leaves you with a profit of $240.

In this case, you make a higher profit overall, but less per unit. 

Be strategic about the timing of discounts 

With special offers and discounts in retail, timing is equally as important as setting goals and being relevant. Promoting discounts at the right time leads to an increase in sales conversions. 

For this reason, it’s important to observe when shoppers usually buy from you. For example, if you notice that many customers buy in the beginning of the month, run discounts around that time. 

Another strategy is to keep a consistent schedule for introducing new products. Let’s say you drop at least one new product on the 15th of each month. Your regular customers will likely catch on and start to come in around that date. During this time, advertise new arrivals to get customers in the door, and promote discounts on new arrivals or other products to encourage visitors to spend more. 

Test various discount strategies 

Finding the right retail discounting method for your store doesn’t happen overnight. It requires trial and error and varies depending on your business, merchandise, and customer base. 

The best way to reach your goals is to test various discount strategies—one at a time—track if they are successful, and then focus on what works best.

For example, you may have more success with percentage discounts like 10% of $20 while other retailers do better offering a certain dollar-amount discount off the regular retail price. For instance, $5 off a product that retails for $50. In the end, they’re both 10% off but may be perceived differently by the customer.

Moving forward with retail discounts

Discounting can be a great way to bring in new customers, reward loyal customers, and move a lot of inventory in a short amount of time. You just have to have a strategic approach and know your goals in order to increase your sales and revenue.