The U.S. has a history with dollar-off, percent-discount, “doorbuster” sales. Take Black Friday and Cyber Monday — arguably the biggest examples of that history. Consumers have been conditioned to believe that they are getting a deal in purchasing something at a discount. The satisfaction of savings is understandable, because paying “less” feels like success. However, that belief is constructed by retailers whose business models have become dependent on offering discounts to customers to move merchandise that is too expensive to keep in stock. They are tangled in a multi-layered distribution model with the costly real estate and weighty supply chain it requires, and they’re stuck.
Consumers are ultimately cheated by sales, despite feeling psychologically satisfied with the perceived savings.
Not all retailers are in this death spiral. We are experiencing a “Post-Amazon” era, led by nontraditional retailers creating companies on the core pillars of brand value, quality and experience. These brands have shed the heavy cost of brick-and-mortar, expensive and complex distribution and massive marketing campaigns.
Traditional retailers turn to the consumer to shoulder the problem. They must move excess product, and they use specific sales tactics to drive consumers to buy immediately and in bigger quantities. However, there’s more to the reduced cost that we must consider.
Common retail business “solutions”
Three very different but common tactics are employed by major retailers to reduce the weight of a crumbling business model, and every consumer has likely been subjected to each of them. Coupon culture is the oldest and most elementary: The more we buy, the more we save. Retailers hope that the promise of saving money is alluring enough to overspend. Consumers believe they are benefitting — the mentality is “look how much I saved” versus “look how much I bought.” Stores reduce their stockpile, clearing out shelf space for a new mass of product to occupy.
Another tactic is the calendar manifestation of the sale: Black Friday and its digital sister Cyber Monday. The former came about by workers historically calling in sick after Thanksgiving dinner. Retail benefited — stores noticed a pattern of robust revenue, eventually becoming a critical day in growth predictions for the year. For a company burdened with too much stock, a Black Friday is essential for unloading product on customers.
The newest tactic is the flash sale, considered both a business model and a business method. The flash sale implies the ability to buy at a discount for a limited window of time. The leader of the flash sale movement, Groupon, just announced another round of layoffs earlier this year. But, when it announced its IPO back in 2011, consumers were excited to have access to these curated sales. Overstock gets an upgrade by playing into the concept of limited availability. Scarcity adds value, and Groupon made that its business model.
At a cost to the consumer
The association of “sale” as a positive for consumers is a misnomer. Behind the glossy sale signage, there is a different reality. When a T-shirt at a traditional retailer is marked down, it looks like a deal to the consumer, but the price (even at discount) often remains grossly inflated compared to production cost — an indication of overpricing to begin with.
When retailers’ profit margins diminish because of these discounts, it feeds into a vicious cycle of cutting costs wherever possible to increase profits and sustain a fundamentally broken business. Where those costs are cut, the consumer suffers, usually by a loss of quality and service. Consumers are ultimately cheated by sales, despite feeling psychologically satisfied with the perceived savings.
Eliminating costly product markdowns allows companies to invest in more of what matters to consumers in the first place — things like high product quality, excellent service and overall value. What consumers are instead funding with their dollar is a broken and inflated retail cost structure, and a product whose quality has suffered as a result. The discount model is a symptom of massive hemorrhaging from a collapsing retail model.
The new era of retail
Enabled by technology and the power of positive word-of-mouth, the new landscape of retail is free of these traditional model constraints. “Post-Amazon” brands invest in things that matter to consumers — not coupons, sales or flashy signage.
These brands are poised to thrive, because consumers today are spending their dollars very intentionally. With the proliferation of direct-to-consumer retail, we have the entire world at the tap of a fingertip; we are armed with infinite choice and therefore selective about where we shop. Customers are able to seek out the values that matter most to them, whether it’s where a product is made, or a focus on social good, or free shipping. When a brand resonates, today’s consumer will tell the world. Such is the power of social media, which can play a heavy hand in building a brand.
Ultimately, the extinction of the sale helps to usher in a new retail era. If a customer is given the value and quality she wants, retailers are able to drive sales without the need for price slashing. While the playing field might look a little different, it’s a great landscape to build a new retail brand.
Bayard Winthrop is the CEO of American Giant, which he founded after spending nearly 20 years running businesses in the consumer products space. Winthrop began his career in corporate finance at Donaldson, Lufkin & Jenrette, but soon left investment banking for a career as a business leader and innovator. He recently co-authored “I F**king Love That Company,” along with Randy Komisar of Kleiner Perkins Caufield & Byers. Reach him @BayardWinthrop.
This article originally appeared on Recode.net.
