There are 2 fundamental things to get right when discounting stock. (Quite amazing considering all the mistakes you see around the traps.)
Pick the right product!
Choose products with high elasticity. An increase in price would result in a decrease in revenue, and a decrease in price would result in an increase in revenue. Typically, most consumers would know the prices of a few ‘reference’ items. These items are termed KVIs à Known Value Items.
Pick the right markdown %
Perception of savings depends upon the way in which the price is presented. Discounts of 10% or less have little effect on consumer responses. Small discounts usually fall below the perceptual threshold – popularly referred to as JND: Just Noticeable Difference. Retailers are their own worst enemy in trying to stimulate sales with small discounts. (This works only on very high value items – for instance 10% discount on a new vehicle would be significant, but it is nothing for a t-shirt.) A small discount is counter-productive: it simply lowers the consumer’s price image for your store, creating expectations of lower prices without actually adding (sufficient) unit sales. As a rule of thumb it is preferable to take a 30% markdown early rather too late in the cycle.
There are of course a few other things too:
Present/Display it in the right area in the right way
Promote it appropriately
… and so forth.
But rules 1 and 2 are the fundamentals. Get this right, and the ‘price’ part of your offer falls into place. However, most of teh time ‘price’ should NOT be the focus of your advertising.
What should it be? That is the topic of the next post in the series.