In 2016 Nordstrom spent 1.7% of total revenue on advertising. Macy’s spent almost three times as much at 5.5%. What else do you need to see to stop investing in promotional schemes and start investing in people and authenticity? What is more, this didn’t surprise me in the least. I was so confident that this is exactly what I would discover before I looked it up that I had already started writing this paragraph.
Something that did actually surprise me was that both companies over the course of the five year period leading up to 2016 were running approximately the same gross margin, somewhere from 36-40%. This should be seen as an objective red flag to deal seekers when, if comparing two similar businesses, one is constantly giving you huge savings and one rarely discounts, you would expect the margins of the savings provider to be significantly slimmer. If, however, their margins are equal to those of the full priced merchant then it would seem that either the full priced merchant is actually giving their customers deals they just aren’t telling them about or something else is going on.
Of course I am aware that Nordstrom has an off-price business, and maybe they do partake in some of the nefarious pricing tricks discussed in the last article, but Nordstrom Rack is largely the outlet through which Nordstrom (and the brands it legitimately carries at full price) get rid of legitimate excess inventory. It serves the dual purpose of clearing excess inventory while keeping the mother ship’s pricing consistent.
But What About MY Excess?
I hate discounting as a promotional tactic to begin with. Every promotional sale has the short-term gain of exchanging your margin (when honest) for cash flow but carries the risk of upsetting customers who paid full price, while very likely having an impact on their future purchasing decisions. If you are just a store, whose value proposition is being there and offering a well timed item for consumption or immediate use then you can get away with more, but if you are a brand then start thinking like a brand. Is the alteration of shopping patterns or willingness to pay full price for each iteration of customers turned off, and further confused, by your discounting practices worth the day of sales you are generating? Absolutely not.
Are there times a business has no choice but to discount to generate cash flow? Yes. But, typically speaking, if a retailer is short on cash it’s because they are too heavy on inventory and an inventory reduction sale is a whole different animal than a sale with the expressed goal of driving revenue for growth rather than fixing a mistake. Forcing yourself to become more disciplined with your buys and finding creative ways to get rid of the additional inventory can go along way. For instance we often hold an off-site warehouse sale with several other retailers when we have more than we can comfortably clear out in the stores. This creates an event to which the deeper than normal discounts are tied, and typically gets rid of a ton of stock in a single day rather than having a large portion of your valuable square footage eaten up by margin killers that alter customer behaviors.
So What Should You Do?
- I am a broken record about this, but build real relationships with your customers and find ways to offer unique experiences. It’s a long term play that will likely cause lower sales in the transitional period or beginning (as compared to promotional tactics) but will pay dividends in the long run. The cliche about it being cheaper to keep an existing customer is born out in every promotional flyer, postcard, email, in-store signage geared towards value seekers.
- Actually offer a good value. If you are consistently around or below the pricing found elsewhere, and you develop trust through relationship building your customers won’t feel compelled to always look elsewhere. They’ll also understand they are buying more than a thing and be excited to support a brand they feel aligned with.
It’s the disciplined approach but one that always wins in the long run. Customers in the door and at the register are a dopamine hit that retailers get addicted to, but start asking yourself why they are coming in your door and up to your register. Running and endless loop of promotional sales gets you caught in a trap of analyzing your last year/quarter/season/week’s numbers and cash flow needs which forces you to keep doing more of the same as the only way to hit your targets. Discounting is a terrible way to win loyalty. Value, which means consistently delivering a price sustainable to both sides of the table, and service can create relationships that last the life of the business.