The High Cost of Discounting

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?

BrainTrust

Discussion Questions

Poll

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Carol Spieckerman
Carol Spieckerman
15 years 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 and contrast become a second killer with the full price retailer “wining” the brand equity game.

I’m amazed too when retailers such as J.C. Penney bring in brands designed to build out their higher-end offerings, only to forfeit the opportunity by plugging them into the store’s existing “always on sale” pricing strategy on day one (American Living anyone?).

Tony Orlando
Tony Orlando
15 years 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
Marc Gordon
15 years 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
Gene Detroyer
15 years 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 to get confused in the shopper’s mind.

Absolute pricing is the key. High quality brands should always be cheaper at Wal-Mart than at other retailers. The consumer understands that. What is important is if a brand takes a high-price position, is that its position vis-à-vis competition at various retailers is the same.

Is there really any question that we teach shoppers to wait for heavily discounted pricing? Let’s look at what retailers have accomplished over the years at the Holiday Season. Why would any shopper purchase any Holiday gift at full price? Why would any Holiday shopper not wait until that gift is priced at least 50% off?

Shoppers understand that they get discounts on last year’s models. This price discounting can be done without fear of denigration of the brand. Do you want to buy last year’s lap top at a ridiculously low price or this year’s faster, more powerful one at list?

The more a brand or retailer uses pricing to move product, the more pricing becomes an important factor in the consumer’s mind to the detriment of the other ‘P’s’.

Nikki Baird
Nikki Baird
15 years 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, while we didn’t have the funds to buy more of the stuff that was selling.

It’s not an easy problem to navigate. I did think that many retailers were not doing themselves any favors over the holidays this last year, but mainly because they were doing it as promotional discounts. If you communicate clearly the difference between a markdown/closeout and an “I’m desperate for any sale” promotion, then you’re going to be OK–as long as the markdowns number a relatively small percentage of the items you offer so you don’t cannibalize sales from full price merchandise.

Discounts themselves aren’t inherently bad, but sometimes I think it would be better for a retailer in the long run to pack certain merchandise back into the warehouse for next season rather than discount it deeply in this one. It’s all about how you manage customer expectations.

John Gaffney
John Gaffney
15 years 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
Mary Baum
15 years 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 and gift with purchase. We can stay in control of the process with language like “We’ll treat you to…” or “Be our guest….”

If a brand wants to acknowledge its customers might be falling on hard times, it could even use the language of the fallen aristocracy: “Let us help you…” or even “Here’s some help keeping up appearances…” or, “keeping up your look in tough times….”

A couple of keys:

1. Highlight the regular price of every item, so the customer knows the full value of the whole package before any discounts, and the full value of the resulting discount.

2. Use language that keeps the brand in control of the discount and reserves the right to revoke those discounts at any time.

3. Strictly limit the time the discount is in effect and LET THE DISCOUNT EXPIRE.

One thing Talbots and Lands’ End are both doing wrong, in my view, is sending me emails that count down the days until the expiration of their not-unattractive free-shipping and percent-off deals–and then starting new, nearly identical sales the very next day! No, no, no–they need to bite the bullet and wait several days, at least. As a customer, I’ve lost any urgency about those emails and now throw most of them in the trash.

Herb Sorensen, Ph.D.
Herb Sorensen, Ph.D.
15 years 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
David Biernbaum
15 years 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
Bob Phibbs
15 years 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
Dick Seesel
15 years 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 last fall. (It’s going to be tough to get the regular-price genie back in the bottle.) But most retailers learned the hard way last fall to offer better value if it wasn’t already part of their DNA. Abercrombie stands out as a retailer that staked out a lonely position on maintaining regular-price integrity, and suffered the consequences in terms of lost market share.

Dr. Stephen Needel
Dr. Stephen Needel
15 years 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 the other readers to comment on that. If it were necessary, I would think POP material announcing a “discontinued item,” like Kroger does, would help maintain equity in a brand.

Lee Peterson
Lee Peterson
15 years 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.