By Lennon Barrow, Business Analyst Intern
A few weeks ago, we asked ChatGPT about ourselves and inventory management. The responses were fascinating—our new AI friend had a lot to say. Consequently, I was inspired to tackle the age-old question: to discount or not to discount? Retailers can face a lot of uncertainty when evaluating their promotional strategies. Should they markdown a product to boost sales? How much is too much? What will happen to their bottom line? Here is what ChatGPT had to say:
What is the optimal amount that a retailer should markdown a product?
The optimal amount that a retailer should markdown a product depends on various factors such as the product category, the demand for the product, the competition in the market, the current inventory levels, and the desired profit margin.
Generally, retailers use markdowns to clear out inventory that is not selling well or to create demand for seasonal products. The goal of a markdown is to sell the product quickly while still making a profit.
A common rule of thumb for markdowns is to start with a 20-30% discount and then adjust the price based on how the product sells. However, this is not a one-size-fits-all approach and the optimal markdown amount may vary based on the factors mentioned above.
It’s important for retailers to carefully consider their pricing strategy and analyze sales data to determine the most effective markdown amount for each product. They may also want to consider offering additional incentives such as free shipping or bundling products to increase sales.
Can a retailer survive without lowering prices?
Yes, a retailer can survive without constantly lowering prices by focusing on other strategies to attract and retain customers.
For example, retailers can differentiate themselves by offering superior customer service, high-quality products, a unique shopping experience, or by specializing in a particular niche market. They can also focus on building strong relationships with their customers by offering loyalty programs, personalized recommendations, or exclusive deals and promotions.
Another strategy is to focus on value rather than price. This means offering products that are perceived to be of higher quality, more durable, or more convenient, which customers are willing to pay more for. By emphasizing the value of their products, retailers can justify charging higher prices and still retain customers.
Additionally, retailers can leverage their online presence and social media channels to reach a wider audience and engage with customers on a more personal level. By building a strong brand and online community, retailers can create a loyal following that is less price-sensitive.
Ultimately, while price is an important factor in the retail industry, it is not the only factor. Retailers can survive and thrive by adopting a multi-faceted approach that focuses on offering value, building strong relationships with customers, and creating a unique shopping experience.
Can retailers go out of business from promotions?
Yes, retailers can go out of business from promotions if they do not manage their promotions effectively.
Promotions, such as discounts, coupons, and sales, can attract customers and increase sales volume, but they can also have negative effects on a retailer’s bottom line if not properly planned and executed.
For example, if a retailer offers promotions that are too frequent or too deep, they may not be able to maintain their profit margins and may not generate enough revenue to cover their costs. Additionally, if the promotions are not targeted to the right customers or if they do not resonate with the target audience, the retailer may not see the desired sales lift.
Furthermore, retailers may create a culture of discount-seeking customers who only shop during promotions and are not willing to pay full price for products. This can make it difficult for the retailer to maintain steady revenue streams and build a profitable business over the long term.
Ultimately, promotions can be an effective way for retailers to drive sales and attract customers, but they must be managed carefully to ensure that they are profitable and sustainable. Retailers should carefully evaluate the costs and benefits of each promotion and develop a strategy that balances short-term gains with long-term profitability.
To discount or not to discount? Well, it depends.
After receiving these responses, I checked with the ERS team and got nearly identical answers. ChatGPT was spot on. Although there is not a “one-size-fits-all approach,” retailers can evaluate their promotional strategies with POS analytics.