How Do Consumers React to Markdowns?

Retailers—both online and offline—often use markdowns as a method for enticing shoppers to make purchasing decisions. But what does this practice do to shoppers’ mindsets and expectations about markdowns? And is that effect something retailers will benefit from in the long run?

Holiday sales drive markdown madness

Consumers have been conditioned to seek out markdowns year around, and holiday discounts are what have fueled this fundamental change to the way consumers shop.

There might be no better time to witness the holiday markdown craze than Thanksgiving. The steep markdowns consumers knew they’d see on Black Friday created such a craze that retailers began offering significant sales in the days leading up to and following Black Friday to mitigate the markdown madness.

Recent research shows that a whopping 70% of consumers expect to see markdowns of at least 31% during the end-of-year holiday season, and more than half of consumers expect the best deals of the year to be found in the three to four days directly following Thanksgiving. A survey by the National Retail Federation and Prosper Insights & Analytics found that, for more than a third of shoppers, 100% of their holiday purchases were sale purchases.

But consumers’ expectations for markdowns don’t stop with the conclusion of the calendar year. The steep markdowns they experience during holiday season not only create an expectation for further markdowns throughout the year, but this expectation significantly changes their overall approach to shopping.

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The Effect of Year-Round Markdowns

Consumers’ expectations for markdowns have impacted their willingness to pay full-price. For example, the majority of women will no longer pay full price for an item, and are instead only willing to pay 76% of full price, according to recent studies. Moreover, nearly half of female shoppers require a markdown of at least 41% before they even enter a store!

Knowing another markdown is never too far off in the future has also impacted the way consumers determine product value. A lot goes into a person’s consideration about whether to pay full price or wait for a markdown. Namely, the decision revolves around three components:

  1. The extent to which they want or need the item right now
  2. The likelihood of being able to get it when it goes on sale
  3. The degree of the possible markdown

Considering the range of occasions retailers have found for offering markdowns – one-day sales, anniversaries, back to school and more – today’s consumer will more often than not wait for a sale rather than pay full price.

Who does all of this hurt the most?

Big brand names top the list. Today, 45% of consumers will only buy brand name items when they’re on sale. This in turn creates a huge disadvantage for luxury and boutique retailers, as the vast majority of consumers no longer believe these retailers can offer worthwhile value. Brick-and-mortar retailers also take a hit, with the majority of consumers believing they can find better markdowns online. The online price comparison tools that often come integrated on product pages with e-tailers like Amazon further fuel this trend.

How Retailers Can Increase Margins & Profits Through Markdown Pricing Strategy

With consumers looking for markdowns year around, retailers can easily get swept up in the “markdown epidemic,” operating as though they need to be offering markdowns all the time in order to keep making sales. But this approach can seriously hurt profit margins. For example, while consistent markdowns can attract new customers, customers who would otherwise be willing to pay full price end up paying the markdown price, as well.

However, there is a way for retailers to cater to the markdown lifestyle without hurting their profit margins. By factoring behavioral economics into their decision-making about when to offer markdowns and how much to discount, retailers can offer even higher markdowns than consumers expect while generating more revenue. This approach requires that retailers create unique incentives that align with their customers’ current and past behavior along with actual product data that offers insights on perceived value.

Retailers now have access to new technologies that can help them design target markdown structures that consistently convert shoppers to customers, encourage customer loyalty and drive profit growth. Tools that design personalized incentives can be used hand-in-hand with product lifecycle data to enhance shopper engagement while also ensuring that retailers are able to supply products in a timely fashion. By making data-driven decisions about both consumer preferences and product lifecycles, retailers can thrive in the current markdown culture and continue growing through a changing consumer landscape.

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download our eBook: Behavioral Economics as a Key Marketing Driver. Contact us, today.

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