Discount timing and depth: what McKinsey, Bain and Deloitte found

A sale is a price cut with a depth, a start and an end. The research below comes from large retailers and consumer surveys, not small Shopify stores, and none of it tests an app.

A price cut comes straight off profit

McKinsey’s “The power of pricing” works through the average income statement of an S&P 1500 company: “a price rise of 1 percent, if volumes remained stable, would generate an 8 percent increase in operating profits.” A cut works the other way: “bringing down operating profits by that same 8 percent if other factors remain steady.”

On the volume needed to make up for it, the same article says “volumes would have to rise by 18.7 percent just to offset the profit impact of a 5 percent price cut.” The analysis is an older one and uses an average company, so treat the numbers as a picture of the maths. Your margins decide your own break-even.

Deeper is not always better

Bain looked at discount depth in soft goods retail. At one retailer, “the sweet spot for profit maximization for a popular apparel category was a 10% discount, but it rose to 50% for sales maximization.” The depth that sells the most is not the depth that earns the most.

Bain also describes a US mass retailer in a basic apparel category: “Upping the discount from 20% to 30% yielded an extra 7% of sales, but a similar move from 50% to 60% backfired, cutting sales by 3%.” That is one retailer’s result, not a rule.

McKinsey lists two common markdown missteps: “marking down items that are performing well … that would most likely continue to sell at full price” and “applying markdowns that are deeper than they need to be to hit sell-through and/or margin targets.”

Timing and length

McKinsey says best-in-class retailers “apply markdowns in phases, starting with a smaller discount” and then lower prices further depending on how items perform. Its “typical mistake” is “failing to revisit markdown decisions.”

Bain names “the timing and the length of the promotion” among the levers of a promotion, and adds “(short, well-spaced offers tend to work best).”

Deloitte surveyed 4,270 US consumers: 89% planned to seek out deals, “which includes shopping during promotional weeks (75%), and adding items to wish lists and waiting for deals (49%).” This is a statement of intent, not measured behaviour.

Our reading, not a source’s figure: if shoppers plan around a promotional window, a window that slips or drags on gives margin away.

What the 400 to 800 points covers

McKinsey: “We’ve found that markdown optimization can improve margin rates by 400 to 800 basis points.” That is full markdown optimisation at large retailers: depth, timing and item choice together. Running a sale on time is only one part.

What to do this week

• Work out the sale depth your margin can carry before you pick the number.
• Leave out the items that already sell well at full price.
• Write the start, the end and the timezone, and announce exactly that.
• After the sale, check every price went back, then compare the sale weeks with ordinary weeks.