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How Retailers are Taking a Calculated Risk When it Comes to Markdowns

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Tis the season for deep discounts. Even well before Black Friday this year, retailers were baiting would-be gift-givers with sale signs, emails and alerts.

And though markdowns this holiday are expected to be in line with past promotions, shoppers may notice one thing: calculating those savings is easier.

As retailers began their deep introspections at the beginning of the year, they noticed that their barrage of coupons, store money and bonus discounts were adding up to a headache for shoppers and totaling fewer sales in their stores and online.

“We’ve conducted quite a few focus groups, and we spent a lot of [time] understanding what types of promotional cadence and marketing handle resonate with customers. And what we found out in a lot of cases is that we were just overly confusing and overly complicating what price and value really stood for,” said Marvin Ellison CEO and chairman of J.C. Penney.

The revelation led to the department store chain deciding to take the work load off of the consumer. The first step was to calculate the final price after discounts for shoppers using the JCP app. The result? The company said conversions and sales went up.

More than the numbers themselves, Ellison said, it’s the simplicity of the price and value messaging that shoppers are looking for.

Similar thinking has led Kohl’s to launch Your Price, a feature that presents customers with the final price after any general promotions the store offers. So no longer does an item present as 20 percent off. Now shoppers know that a $60 top is $48. No calculator necessary.

“It just provides a lot more clarity, and it makes the process of customers understanding the value exceedingly better,” CEO, chairman and president Kevin Mansell said during an earnings call after the initial test in April. “It had an incredibly positive impact on both conversion, but also on sales lift as well.”

Though both retailers have seen positive results by reducing the amount of math their customers have to do, Cynthia Cryder, an associate professor of marketing at Washington University in St. Louis told The Wall Street Journal there can be a down side.

“Multiple mental deductions based on promotions can result in consumers perceiving that their costs are lower than they actually are, which can increase spending,” she said.

Value messaging

Like Kohl’s, Jeff Gennette said Macy’s will remain “very promotional,” but it’s also trying to clean up its act. “What we’ve spent a lot of time on is reducing the overlap of promotions, reducing the amount of overlap of discounts on top of each other.”

Looking ahead to the fourth quarter, the Macy’s CEO said during the company’s second quarter earnings call that it was focused on providing value during the season.

That value messaging is part of Target’s Target Run & Done campaign, which emphasizes its everyday pricing on home essentials. It is the centerpiece of the company’s strategy going forward—with a portion of the marketing dollars allotted to this messaging even during the holidays, according to the Star Tribune—as it too hopes to wean itself off of the over-reliance on discounting.

But it’s a tricky endeavor.

“Specifically, as we move towards a stronger everyday price proposition in our business and pullback on excess promotions, we can expect an adjustment period before value perception proves and consumers respond,” CEO and chairman Brian Cornell said, adding in the meantime the commitment could create headwinds though the retailer achieved “a meaningful increase in the percent of our business done at regular price and a meaningful decline in the percent on promotion.”

Given that we consumers have been conditioned to wait for a price break before reaching for our wallets, it’s understandable why retailers would prefer to pivot to a value conversation rather than one that sees their margins eroding beyond repair. But stepping away from the markdown madness needs to be a measured approach, according to Barbara Kahn, a marketing professor at the University of Pennsylvania’s Wharton School. “People don’t judge prices absolutely, they judge them relative to some comparison,” she told the Journal.

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