Should apparel brands start online outlets?
Pricing online is a transparent affair. Google and a wide range of comparison sites makes it increasingly easier for the customer to find the product of choice matched with the best total offer in terms of product price, various discounts, shipping and return policies etc.
Pricing is a central component when creating that decision but also very important to your overall business. The right pricing and mark-up policy can make or break it for your company as it is directly associated with your overall profits.
Since the big recession we have seen a lot of ecommerce tactics focused on discounts – product discounts, newsletter vouchers, flash sales sites and online outlets. Theses tactics will quite certainly drive more revenue to your shop and allow you to reduce sales acquisitions costs thus making your online marketing efforts much more successful.
But should you do it? It’s a very tough question and you really need to think twice and consider which problems discounts and reduced sales prices introduces along with the potential increase in revenue on both short- and long-tem.
Short-term problems are somewhat well known. For example one of the most commonly used tactics is a discount on shipping. It might be the last push to convert a user to a customer. But before the return period is up you won’t know, since free shipping and return also tend to increase the total return percentage from you sale. And it is not cheap to handle returns! You can actually end up in a situation where you loose money on the total order because of all the costs associated i.e. the initial order fulfilment and product shipment, the return shipping, new hangtags and re-packing etc. before the products is ready to sell again.
But discounts and dedicated outlets are also dangerous paths in a long-term perspective. Customers tend to get used to discounts and quickly learns your sales-cycles, so if you are not smart and cautious, you might end up in a situation where customers starts to substitute your full-prized items with discounted items. You might experience an increasing revenue, but if the customers has substituted full-prized items with discounted items you could experience your overall profit is shrinking at the same time because the product margin is gone caused by a lower total profit margin. Dangerous stuff and hard to roll back!
The catch is that the best growth possibilities are within the segment of discounted goods and outlets. This is where we have seen most of the growth in online shopping coming the recent years. So if you are still want to investigate the outlet and discount possibilities further you might want to look at how Nordstrom is executing. Nordstrom has for a long time had their normal ecommerce site Nordstrom.com with a discounted area and furthermore they had a flash sale site at HauteLook.com. But last year they decided to take their Outlet concept Nordstrom Rack online. They have separated the full-price and the outlet concepts and launched the outlet as a dedicated shop at Nordstromrack.com (just like offline). This allows them to make tailor-made communications towards the two different segments – one segment interested in news and trends and one segment interested in bargain hunting.
Some clear competitive advantages are created by this separation and it will be exciting to follow and see if Nordstrom’s “scale and separation strategy” is a winner. So far they just released a quarterly report showing strong growth in revenue – again. So for now it looks like the scale mission with increasing the revenue is well on its way.
But it seems like the margins are under pressure, which might be caused by customers swopping high margin products for lower margin products.
“Gross profit of $1.3 billion, or 35.3% of net sales, decreased 6 basis points compared with the same period in fiscal 2014.”
The pressure on the margins is obvious and establishes a constant demand for more aggressive top-line revenue growth just in order to stay on parity. So far it looks like they are strugling to get to that level of growth momentum.