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How retailers can adapt and maximise margins on markdowns

Markdowns are a proven strategy for encouraging customers to buy more, both online and instore. But with Aussie retailers fighting to remain viable during the pandemic, this can pile on even more pressure on already reduced margins.

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Australian shoppers are addicted to discounts, with almost seven in ten Australians saying they always look for sales or discounts when buying online, according to PayPal’s latest mobile commerce report. Younger shoppers are even more inclined to chase a bargain according to the report, with 77 per cent of Generation Z and 73 per cent of Generation Y shoppers saying they’re constantly looking for sales.

This is now one of the biggest challenges facing retailers. How to wean consumers off price-based promotions and manage the impacts of the pandemic on viability?

Endless sales cycles have conditioned generations of consumers to expect monthly discounts and regular clearances – back to school sales, mid-year sales, New Year sales, Black Friday and Cyber Monday sales, Click Frenzy not to mention sales for Mother’s Day, Father’s Day and increasingly Australia retailers have also adopted Singles Day and other international sales events.

Between regular sales and an abundance of deals, why would consumers ever want to pay full price? Given this consumer sentiment, retailers today need to know how to maintain their margins—especially when offering discounts. How can retailers satisfy customer demand for discounts but still maximise margins?

Technology is your secret weapon

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Not all inventory is equal. Stock in some locations has more ‘built in costs’ than other locations. This could be due to higher markdowns in a particular store, already incurred transportation costs, or the likelihood that the inventory will sell. So, when you receive an online order, many factors can influence the best place to source and fulfill the order.

With the right distributed order management system, retailers can source from the location with the highest markdowns in a given store, most inventory, lowest sell-through rate and oldest inventory. The priority of each will vary based on your business and potentially the inventory type.

The technology you use has to enable you to be as flexible as possible to fulfil orders without compromising profitability and the bottom line.

Treat seasonal inventory differently

When the sale of that inventory is weather dependent, it is also worth considering the latitude of the inventory location. You may want to ship summer merchandise from a store in Queensland or Western Australia that has a long summer season, or a store where the weather will be colder sooner such as in Melbourne and Tasmania. You can apply this same logic to store replenishment as well.

When it is late in a season, consider replenishing stores via store transfer rather than a warehouse. This is when stores with low stock in a more favourable climate are replenished from stores with high stock in a less favourable climate where it’s less likely to be sold or more likely to be heavily discounted.

Conversion is based on more than just price

KPMG’s Global Online Consumer report found that having the most competitive price won’t necessarily guarantee a sale. Although price was cited by 57 percent of consumers as a top factor in deciding where to buy from, the next key attributes were enhanced delivery options and easy return policies. It is still possible to compete on convenience and being easier and faster to buy from.

In short, there’s more to a sale than just discounts. Advanced sourcing strategies made possible by a distributed order management system, let you combat straight price comparisons with valuable services like quicker fulfillment, free shipping and easy returns. If you have accurate inventory visibility across all your locations, you can fulfill from the location closest to the customer whether it’s a distribution centre or a local store.

Increase the order size but keep shipping costs down

When you sell an item at a discount, one of the best ways to offset the markdown is to increase the size of the order. Typically, through complementary product recommendations. But smart retailers are applying additional logic to their cross-sell offers. They display items that can be sourced from the same location as the primary item on the product detail page. That way, they encourage orders that can be shipped or collected from a single point of fulfillment. No split shipment or order consolidation required. This means customers get their order quickly while retailers keep their costs down.

Customer desire for markdowns isn’t new, nor will it go away. However, with the right technology, retailers can use several strategies to hedge against discounts through fulfillment optimisation and ultimately protect profitability during uncertain times.

Graham Jackson is CEO at Fluent Commerce