Yes, at least potentially.
Discounting in post-COVID retail – especially if handled improperly – could easily damage your brand in ways that might take years to repair.
It isn’t a retail cure-all, especially in a world of faltering supply chains, damaged liquidity, cancelled orders, and unsold inventory.
The Dangers of Desperation Discounting: Reputation, Retaliation, and Margins
The primary points of damage small retailers may experience, regardless of their industry or segment, have to do with brand reputation, retaliatory competition, and margin destruction.
Conventional discounting can batter your brand reputation.
Your brand’s reputation rests on the perceived quality of the products you sell. Your prices and product availability, at least from your customers’ perspective, are among the key indices of your brand quality as they’ve come to perceive it.
If you have a glut of product to move, then even without competitive pressure, you can only discount so far and for so long before you set a new – and lower – bar for your brand’s perceived quality.
If your business is struggling with overstock issues and you’re having trouble meeting your overheads, you’ll be tempted to offer large discounts that will eventually weaken your brand reputation. You’ll also be tempted to keep offering discounted prices for longer periods of time.
When you do that, you build new, lower expectations in your customers’ minds.
As their expectations of your brand drop with prolonged discounts, you create a “new normal” for buyers.
You know what will happen if your business survives and you reach the point at which you want to raise prices to their normal levels again…right? Those normal levels aren’t normal any longer.
It won’t work, especially if your competitors are continuing to discount. You’ll struggle or fail unless you drop back down to the level of your discounting competition, and stay there. Your brand reputation diminishes accordingly, right along with your margins.
Discount wars have no winners and can destroy your brand overnight.
Discount wars are usually no-win situations because, in a healthier economy, the combatants get their retail egos involved, even if their margins shrink almost to nothing. That sort of retail thinking has been destructive for years, but it’s now more serious.
We’re not in a healthy economy, and many small retailers are on the edge of panic. If you’re one of them, you may have good reason. But if your desperation leads you to keep eroding your margins in order to move product, you risk losing everything.
After all, if you succeed in moving all your stock on hand at near or even below cost but have no reserves or resilience to help you move forward, what did you really gain from participating in a discount war with competitors? A cleaner winding-up of your business?
If the war’s outcome is the destruction of your brand, then your discounting served no positive purpose.
Assuming your business survives, if the perception of your brand diminishes so that you look like a cheap discount vendor rather than a reliable retailer of quality product, that sort of change in brand perception is very difficult to correct.
Post-COVID discounting can cripple your cash flow, destroy your margins, and wreck your credibility.
Chronic discounting reduces your margins.
You might be able to live with that for a while. But if you’re an overstocked, cash-strapped small retailer today, you never designed your business to handle long-term discounting or deep-discount wars as survival mechanisms.
You set your margins and overheads, built your supply-chain relationships, and regulated your cash flow on a whole different set of assumptions. If you’re like many small retailers, you didn’t think about building in resilience, reserves, and flexibility to account for economic conditions you never thought could arise.
And yet here you are.
Of course, if you fall into chronic discounting and your margins shrink, you’ll look to reduce overheads, and there are only so many ways you can do that and still keep your doors open.
What will you do next?
Will you lay off your loyal employees? Will you break commitments with suppliers, or insist that your landlord should alter the terms of your lease so that you can have an easier time staying afloat?
Whatever you do, get this: improperly handled “desperation discounting” is a slippery slope. If it leads you to do any of these things, it isn’t actually you that’s heading for the slope.
It’s your brand. Any negativity others see as a result of your actions or inaction will stick to your brand, and it won’t come off with soap and water. Instead, it will eat way at your brand’s credibility with your customers, your employees, your suppliers, and your landlord until your brand reputation is gone.
In that case, even if your retail business survives, your brand becomes something else, something less – and you lose.
Let Purple Dot Help You Avoid Desperation Discounting
Purple Dot’s smart discounting is a key strategy for proactive online retailers who want to avoid the dangers of desperation discounting.