The High Cost of Discounting

Discussion
Mar 20, 2009

By Tom Ryan

According to a Yankelovich survey, deep discounting – even during
a recession – can damage brands in the long run. When asked what they assume
when a brand lowers its prices during difficult economic times, 70 percent
of consumers responded, “The brand is normally overpriced.” Sixty
two percent said they assumed that “the product is old, about to expire
or about to be updated, and the company is trying to get rid of it to make
room for the new stuff.”

In contrast, when consumers were asked what
they assume when a brand does not lower its prices during difficult times,
64 percent said they assume that “the product is extremely popular,” and
64 percent assume that “the product is already a good value.”

“Lowering prices during a recession
clearly raises suspicions among consumers,” said J. Walker Smith,
Ph.D., president of the Yankelovich MONITOR and
executive vice chairman of The Futures Company, in a statement.
“Drastic price cuts like those seen during the past holiday season create
a double-barreled risk for brands. First, such price cuts generally fail
to generate enough business to pay for themselves, although clearing inventory
is of some value. Second, they create long-term difficulties in terms of
consumer expectations.”

Moreover, Yankelovich contends
that those “deflationary expectations” cause consumers to postpone
purchases because, when they see that a price is reduced, they anticipate
that prices will come down even further. About half to 60 percent of the
study respondents think that when companies lower prices, it means that
prices will go down further if they wait long enough. And roughly 50 to
70 percent think that brands that do not lower prices will have to do so
eventually.

“These expectations of deflation are
difficult to break and can keep a category mired in unreasonably low prices
for years,” Mr. Smith.

The RDD (random digit dial) telephone survey
was conducted in January 2009 among 1,002 adults ages 18+.

Discussion Questions: When is discounting
healthy to clear excess goods and when is it detrimental to a brand’s
equity? If necessary, what’s the best way to reduce inventories without
damaging brand equity?

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13 Comments on "The High Cost of Discounting"

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Carol Spieckerman
Guest
8 years 8 months ago
The study confirms my gut instinct, observations and personal experience. You would think that only folks in the retail trade would have such a sophisticated take on markdowns; as it is, some retailers and brands are obviously underestimating the complexity of shoppers’ value equations. (Not as simple as, “The lower the price; the faster the sale.”) I’ve commented before about how luxury brands in particular are playing with fire by executing drastic markdowns and hoping consumers will forget next season. This kills brand equity, especially when these boutiques tend to be clustered together and not everyone is marking down; context… Read more »
Tony Orlando
Guest
8 years 8 months ago

Discounting is a way of life in poor areas, because nothing sells at regular price. Why do you think everybody shops Walmart? I strongly disagree on this concept, that discounting a high-end product ruins future sales. Everybody wants a deal, and if we think they’ll pay extra when someone else is 1/3 less, than we’re kidding ourselves. Just my opinion, and if you check with the store owners on the street, you’ll probably get the same thoughts.

Marc Gordon
Guest
Marc Gordon
8 years 8 months ago

I don’t believe there’s anything wrong with lowering prices at any time, regardless of economy. But what’s key is how it’s done. There’s a big difference between having a sale and having a clearance event.

I have always found that instead of lowering the actual ticketed price, bundling products together offers the perception of premium value while not making it look like the price is actually being lowered.

As Richard Seesel mentioned Abercrombie, perhaps this is something they should try.

Gene Detroyer
Guest
8 years 8 months ago
Let’s not denigrate Abercrombie so quickly. Yes, they held their pricing. Yes, they lost market share. But, in retailing market share is measured on revenues, not realized margin. Much of the revenue that contributed to their competitors market share gain came at the expense of selling at little or negative margin. Remember Marketing 101 and the Four P’s? One of those P’s was price. Price is as important in a brand’s profile as the other P’s. Pricing communicates. Sometimes it communicates value. Sometimes it communicates quality. When price separates itself from the brand profile, the attributes of the brand start… Read more »
Nikki Baird
Guest
8 years 8 months ago
At the retailer I worked for, we never had a sale. We participated twice a year in the mall’s sidewalk sale, but most of the stuff we put out was scratch & dent stuff. I, along with others of us, would fight bitterly with the owner, insisting that if we had dishware that had been on our shelves long enough to gather dust, we needed to clear it out. But she refused, because she was worried about the expectation it would set with our customers–and thus kept a lot of our inventory dollars tied up with product that wasn’t selling,… Read more »
John Gaffney
Guest
John Gaffney
8 years 8 months ago

The problem is in setting expectations. I think that if retailers can convince brands to take the high-road on quality and pricing, maybe consumers will start to expect higher prices and be willing to pay them.

Mary Baum
Guest
Mary Baum
8 years 8 months ago
“I have always found that instead of lowering the actual ticketed price, bundling products together offers the perception of premium value while not making it look like the price is actually being lowered.” Marc’s comment here is spot-on. In our GKIC chapter meetings (www.gkic-stlouis.com) we spend a lot of time talking about how to justify a discount without devaluing an offering for the long term, and bundling is one way. Other ways start with adding bonuses and premiums, which we can do just as well on the selling floor, and with a little thought we can certainly go beyond BOGO… Read more »
Herb Sorensen
Guest
8 years 8 months ago

The least creative way to sell anything is to “pay” the customer to buy it. In the world of CPG/FMCG, retailers love to give shoppers their brand suppliers money. It makes more sense to buy “reach,” endcaps and other promotional PLACES than it does to mark down the price. Place is more important than price for promotion.

David Biernbaum
Guest
8 years 8 months ago

I agree that deep discounting hurts many types of brands in the long term. However, if the retailer offers a blanket discount, or EDLP, for the entire shopping experience, the brand is not specifically affected.

Bob Phibbs
Guest
8 years 8 months ago

If the only arrow you have in your quiver is discounting, you can only do so much before exhausting its effectiveness and destroying your business. We saw this last fall beginning with Neimans and spreading like wildfire.

What is missed is that all the merch becomes jaded, offsprings of the damned that no one wants–and people remember the parents/labels they came from. More on discounting here.

Dick Seesel
Guest
8 years 8 months ago
This question is more nuanced than the expert from Yankelovich would have us believe. Whether lowering prices is a smart idea or not depends more than anything on the brand positioning of the retailer, not on the ups and downs of the economy. Certainly Walmart has built an empire on its mission of offering lower prices whether the U.S. is in recession or not. And many other value-oriented retailers (JCPenney and Kohl’s, to name two) embrace sale events as part of their strategy. Where Mr. Smith has a valid point is the runaway discounting that happened in the luxury arena… Read more »
Dr. Stephen Needel
Guest
8 years 8 months ago
We’ve conducted a number of studies that show that brands with good to high equity are hurt when their prices drop relative to competition. We’ve seen in this forum the assumption, at times, that lower prices = better value to the consumer, but there is little evidence for this, even in tough economic times. In tough times, shoppers want to spend their money a little more wisely–branded products offer that security, that you’ll get a quality product for your money. For FMCG products, I would not think discounting to reduce inventory is all that necessary or common, but I’d ask… Read more »
Lee Peterson
Guest
8 years 8 months ago

I think you’ve got to do what’s brand right. Perfect example is Abercrombie’s Mike Jeffries statement, “we’re a regular priced brand”–so they don’t veer from that, even though sales are temporarily down. In contrast to that, there are several brands that consistently run sales, so it doesn’t seem off.

The study is spot on. All you have to do is look at the fix Department stores are in as they’ve discounted away any brand credibility over the years to the point where they’re no longer relevant.

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