Shoppers queueing outside Selfridges

When it comes to markdowns, heavy discounts may keep products in inventory longer and result in lost revenue, according to an analysis by Edited.

The data analytics firm said that in an analysis of 114 online retailers it observed in 2016, $9.24 million worth of revenue was lost due to discounting “missteps.” This error was a result of miscalculating the “optimal percentile” when discounting items. The analysis appeared to suggest that discounts between 30 and 40 percent were most effective in terms of turnover and sales.

Edited calculated the total amount of lost revenue for the period of Jan. 1, 2016 to Dec. 31, 2016, and the analysis included categories such as luxury goods, premium and mass-market men’s, women’s and children’s apparel, accessories and footwear.

Key findings included that discounts for women’s luxury goods, which suffered the biggest loss, accounted for almost half of total missed revenue of the online retailers studied, at $4.3 million. With discounts as high as 40 to 50 percent, products were left on the shelves 19 days longer on average than items marked down 30 to 40 percent. Men’s wear lost over $687,000 in revenue when discounted at 40 to 50 percent versus 30 to 40 percent, an oversight that kept products in stores for 11 additional days on average.

 

Markdowns during the fourth quarter impacted gross margins.  Shutterstock / Studio KIWI

Additional insights showed that even after discounts, luxury items take the longest to sell. High-end women’s wear and men’s wear sits in inventory for over three months, an average of 106 days and 112 days, respectively. It seems the magic number is somewhere in the range of 30 to 40 percent for women’s wear and 20 to 30 percent for men’s wear. Mass-market men’s wear retailers lost over $517,000 in potential sales when items are discounted in the 30 to 40 percent range.

Katie Smith, the senior retail analyst at Edited, said, “Discounting tends to happen once retailers have worked out [that] consumer demand isn’t high enough, but our analysis proves that an aggressive price reduction is not always the best approach.”

Smith added, “The extent of how much a retailer discounts its products depends on a multitude of factors – including timing, product type, category and popularity. Having this level of granularity can quite literally mean that a retailer adds — or loses out on — hundreds of thousands of dollars per year in revenue.”

Edited’s clients include Topshop, Net-a-porter and Ralph Lauren.

For more on retail trends:

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