BrainTrust Query: In a Deep Discount World, Is 10 Percent Enough?
Through a special arrangement, presented here for discussion is a summary of a current article from the Hanifin Loyalty blog.
The daily deluge of "deal of the day" offers with Groupon, Living Social and others assembling collective buying discounts continues to flood our e-mail inbox. I have noticed the range of offer sponsors to be widening, now including chiropractors and other medical professionals as well as the local newspaper. National restaurant chain Quiznos has created a campaign with Groupon intended to blend the traditional punch card offer with the discounts expected from collective purchase.
The Quiznos Groupon offer — eight regular subs for $26 — is positioned as a way to create repeat business, but let’s see how that goes. If I were privy to the data, I would be interested to understand how many single-use cherry pickers are converted to multiple-use cherry pickers.
I’d also like to know if the element of captured loyalty (I’ve paid for eight subs and had better use them up) results in continued use after expiration of the Groupon or if brand boredom takes hold and these same customers don’t come back for months. It’s all entirely possible.
Amidst all the Groupon-like activity, I received an email from Best Buy touting (gasp!) a 10 percent discount on a variety of products leading up to the Memorial Day weekend.
I have to wonder openly if a 10 percent discount, with restrictions by product category that require reading of the "smaller print", are still changing consumer behavior these days. There are a few possibilities:
- Best Buy is smarter than the rest of us: If your numbers tell you that 10 percent works, why play the deep discounting game? Doing so would be akin to creating a Facebook Fan page with no idea why you are doing so.
- Best Buy is weathering the deep discount storm: Hoping that collective buying is a fad that will go away soon, the company could be persevering with proven tactics hoping to preserve margins as long as possible.
- Best Buy is asleep: Sure, they could be missing the boat, watching as the market moves away from them, but this is highly doubtful. The folks in Minneapolis are very good at their trade and the collective buying storm has mostly been directed at local merchants rather than national chains, Gap a notable exception.
For many retailers, 20 percent has been the magical number at which consumers give attention and reach for their wallets. Ten percent is just plain uninteresting, in my book, and the fact that I have to spend time to understand which products qualify is mildly annoying.
The attraction of coupons to me is clarity — WYSIWYG — but offering coupons is a mercenary game in which the bigger numbers get the most play. It’s also a highly destructive game — to profit margins that is.
Though collective buying is "something we sell" and "something that is working" these days, I’d rather advocate "something I believe in" which is integrated customer strategy that yields measurable results over the long term.
Discussion Questions
Discussion Questions: Is the effectiveness of promotions at traditional retail being diluted by “daily deal” coupon offers? How may couponing and other promotional efforts have to be restructured?
Traditional retailers would be smart to develop their own “daily deal” concepts, and in fact some of them are starting to do so. It’s one way to reach your most loyal customers with targeted offers that might be more compelling than your usual discounts — and can also be used to move inventory problems or to partner with key suppliers to drive sales.
But there is still plenty of room for “traditional” discounting, which tends to be offered on broader assortments of items and categories. Best Buy, in fact, runs plenty of sale items every week at discounts deeper than 10%, with the extra savings thrown in on occasion. The overall margins in electronics probably don’t allow for much deeper offers than 10%, but Best Buy ought to have enough margin built into its private brands (Dynex, Insignia) to get more aggressive.
The effectiveness of retail promotions are not necessarily being diluted by social media but more so because retail promotions suffer from conformity and total predictability. Almost every retail chain, particularly in food and drug, are promoting the same types of consumer products, mostly commodities, at pretty much the same discount prices, all in the same way, on a consistent basis. What retailers need to learn to do is to create greater destination traffic by promoting an edge.
There are so many reasons Groupon, et al, and discounting in general are so bad for all business, it’s hard to pick one. If you’re not up on the list, check out Bob Phibbs new book on the subject, “Groupon: You Can’t Afford It”, for a complete rundown.
Suffice it to say that price as a differentiator is a loser unless you’re Walmart. Oh wait a minute–that’s not even working for them so much anymore. If you want to stay in the business you’re in and grow your customer base, you better have a something more to offer the customer who makes the trip than a discount.
Bill, as usual your points are right on, especially questioning the long-term viability of discounting and its role in integrated customer marketing strategy.
What’s really striking is the contrast between “Grouponing” and the fact that customer loyalty is now the top strategic objective of 80% of retailers recently surveyed (source: NRF’s “Retail Horizons: Benchmarks for 2010, Forecasts for 2011” study).
While we always focus on relevance, part of relevance is value and that includes the offer, especially when it is promotional. The challenge for retailers with the Groupons of the world is whether the customers buying are new or existing. Sales to existing customers via Groupon are likely dilutionary. Sales to new customers require the right foundation to extend the customer relationships. That foundation includes the CRM infrastructure supporting the right, long-term, sustainable brand and customer proposition(s).
Like the Quiznos example mentioned above, it’s our expectation that the majority of customers will tire, not engage and that the upside becomes one of breakage and not of customer lifetime value. Good for Groupon in the short-term, hence their IPO.
The deep discounts offered by Living Social, Groupon and the other couponing sites have altered the landscape of traditional discount promotions. Retailers should consider using couponing sites as part of their marketing plan, but not as a substitute for a smart promotional campaign. And they need to find a way to incentivize repeat visits after offering a deep, coupon-based discount.
Promotions are selected to get the retailers name “out there” on a regular basis. The idea that even greater discounts are needed to move the needle shows how bankrupt retailers are on the basics of business–unique products with an exceptional experience. The race to the bottom is paved with deeper discounts.
Like many things, the use of coupons (and excessive use for that matter) is nothing new, but has become more noticeable because of the technology and, to some extent, the connection of companies that not only collect the lists, but also produce the coupons as well. This model has proved very successful in an environment where building market share is a key to growth.
As far as the viability of a 10% discount, when Sears first did this years ago, I had the same reaction, namely “Are you kidding, who’s going to drive to the mall for this?” After some reflection, however, it makes sense when you consider that 10% of a higher-priced item–TVs, Washers, etc.–is real money. The 10% will tend to push sales into higher price point items, which will bump total sales faster than 20% on lower price point merchandise. In other words, you can get a much bigger bump selling an additional 10 big screen TVs than you can selling an additional 50 t-shirts. Given the number of big ticket items in a Best Buy, this is actually pretty clever.
I think we may be overlooking a simple fact–most customers understand there is no such thing as price integrity at retail and view all discounts with suspicion.
The fallacy of the whole discounting approach is that customers somehow see it as a reward or incentive when in fact they have come to expect it. Only the slowest of the herd, for example, believe that those mall jewelry prices have been cut in half or that retailers are losing money on BOGOs or 70 percent offers.
So…it’s like an auction. People jump in when they think the price has reached the limit even if they secretly believe it could go lower.
Retailers have made pricing a game and their customers have been playing it better than they have for years.
For the most part, I find the Groupon offers I get are for local businesses, that I generally haven’t heard of. The gamble on their part is that I come back a second time so they can actually make some money on me.
As for Best Buy….my vote is resting on laurels bordering on wandering in a daze. Definitely not smarter than everyone else anymore, not doing a very good job of weathering a ‘deep discount storm’ and as you point out, not making it very easy to do business with them.
In Best Buy’s defense though, NO ONE wins in a race to the bottom. So all that’s missing from the formula is service and cross-channel consistency.
Not only is 10% uninteresting…I believe we are going to see much less of it, and more than likely not see any more of it at all. More and more retailers, from Whole Foods to Supervalu, will not even pass on promotions that are at 20%. These deal are not only 20% from cost, but they want a 20% reduction on the shelf retail price.
This makes sense when you look at the costs involved for implementing price changes and the effort of changing consumer habits, but I think the bigger issue may be the impact of EDLP programs like Wegmans and Walmart that are not trying to change consumer habits but reinforce ongoing habits. Don’t be surprised if that over time the issue becomes about how many items we really need to support an EDLP approach and we circle back to category management issues of assortment.
Profit margins are based on an overall strategy that includes discounting. If retailers are undermining their plans by discounting at random, they probably haven’t really planned well.
Groupon and other sources for discounted products, including the retailers themselves, help develop the mindset that buying at retail prices is the sign of an “uneducated” consumer. Marketers are well advised to monitor how shoppers think of their price value proposition. That insight will help them adjust their promotions and communication strategy.
At the same time these marketers will have to effectively execute and send the message. Without awareness of their claims, in the store or through other media, shoppers can’t be expected to respond.
As an independent retailer, I question the value of discounting and daily deals and the usefulness of assaulting our market with more and more discounting. As an independent, we must offer value every day. In a sea of discounts (30% Off, 40% Off, make your own coupon), how do we offer a perceived value that helps our customers choose us? Aren’t the shoppers tired of fake discounts yet? How do we establish real value in the eyes of the customer? Marking something up 2-1/2 times to advertise a 50% off deal seems like a strategy that would doom an independent to an abyss of marketing hell.
When I see a Staples coupon for $10 off a $50 purchase, and then see the exclusions (e.g. computers) I wonder who is asleep at the switch. Why wouldn’t Staples want a consumer to buy a $500 computer at $10 off? Also promotions that exclude clearance items–isn’t that what they most want to get rid of?
This is why I see much more to the story of Walmart’s seemingly simple messaging of a return to EDLP. They have recently added new dimensions to this original promise including price sustainability (no high-low games which “rebuilds trust” with customers but it will also make any promotions more impactful and hedge against price transparency, I think), EDLC (peeling the onion and getting granular with original cost–a message to suppliers as raw materials and commodity prices increase and as the fundamental hedge against couponing), and price matching (to clean up any anomalies). To me, the new layers beneath Walmart’s public price messages reflect an understanding and proactive response to multiple price-based realities. I’m not sure that anyone else is looking at it as comprehensively.
Paula is right that this is a question that differs by category. In services, electronics and apparel, we see greater use of % discount as the signal. In traditional grocery and mass merch, we see more of a price point or cents off focus.
I don’t believe Groupon will change things in the latter channels. The reason is that shoppers for the most part don’t know when they’re getting a good deal. Two studies support this:
1. Only about 50% of shoppers could spot a good deal for a particular brand after being shown a price for it (Vanheule and Dreze as quoted by Byron Sharp in “How Brands Grow”)
2. Consumers were unaware that 50% of the promoted items they bought were on sale. Of those who bought, about half would have bought the product anyway. (Terbeek, as quoted by Herb Sorensen in “Inside the Mind of the Shopper”)
Rather than Groupon, market-by-market alternatives require retailers to be competitive on items that serve as reference prices. But the above suggests that other cues like display, circulars, and digital messages are more important. As Bob notes, promotions with FMCG and retail are more about reminders than depth of discount.
I have said this many times before, but consumers want deals, and if a coupon gets them in to the store, so be it. My concern is that the offers of 10% off seem to be thought as not enough, BUT, in my business it would be an incredible offer, as my bottom line is very small. 10% off a restaurant is nothing special, so the deal depends on the business. If Walmart ran a 50% off all purchases coupon, the customers would destroy the place, but 50% off at a jewelry store wouldn’t break the doors down. Customers will always recognize a great deal, and the businesses that offer them; better be ready to have the product to back it up.
For the most part, my local Groupon offers are for local operators, and are largely for services (salons, restaurants, dance studios, fitness) so I can’t see it truly affecting national retailers. GAP needed to remind everyone they were still out there, and the publicity and surge in traffic may well have been worth it, but I can’t see anyone affording to make it a regular promotional vehicle. I recently saw an offer for a $30 Old Navy gift card at $15…but then I remembered that it’s rare I even spend $30 there.
As many smart people have said here, it’s about understanding the value you bring to the consumer, and pricing/promoting accordingly.
Many years ago, our VP Store Operations drilled into our heads that “any fool can give product away; what we need to do is create within the customer a desire to buy.” A 10% discount, a 50% discount is irrelevant unless you use that trip to convert a shopper into a loyal customer. We are so focused on events and short term processes that we are missing the blocking and tackling that goes with retailing. Service, selection and that intangible “feel” that exists in a store that makes you feel at home and want to come back. We get the customer through the door and then lose them.
The comments in line here are testimony to the experience of the RetailWire BrainTrust. Very thoughtful and additive to our understanding of how retailers will position discounts in the future. Thanks for your participation.
These vehicles give marketers another tool in the arsenal, so they no more dilute the effectiveness of promotions than ads, coupons, etc. Where these tactics could be honed is to review their effectiveness and utilize some of the optimization tools on the market to make sure that discount/offer is optimized to entice the consumer to take action. Most of the promotions I have seen via Groupon and LivingSocial seem haphazard as far as the discount/value to the target customer. The effective use of analytics and predictive forecasting could save the retailer some margin and make these promotions even more effective.
I saw three different commercials, nearly back-to-back-to-back, on TV this weekend, that I’d seen before, but that in the repetition of the message struck a chord. Each was a direct marketer, and each had the same message; “Why shop at retail?” in a tone that suggests that only fools or suckers would do such a thing. But the message is profound: “How could you possibly trust that you’re getting the best price from a retailer?”
So what have retailers wrought? First, that value can only be denominated in price, and second, that price is a zero-sum game. If the retailer wins, and the consumer buys high, the consumer loses. If the consumer wins, and buys low, the retailer loses. We have created an adversarial situation between retailers and their customers. We’ve traveled so far down the slippery slope of discounting that retailers are now often looked on as thieves, or worse.
Some might suggest that it’s always been this way, but the very best retailers have never operated on this philosophy. They carefully cultivate customers over the long haul, creating value that goes far beyond just price.
In such an environment, Groupon is merely the logical extension of the insanity. Bob Phibbs is right, Groupon extends the insanity to local, independent retailers. And to those retailers I echo Bob’s warning, that sites like Groupon are like a drug. It looks like easy money, and the first high is great, but it will become addicting, and the addiction will kill you.
There have been MANY studies over the years that show that at least the vast majority of “promotions” are economic disasters. In fact, equating promotion with cutting the price would only occur in a world devoid of real sales ability. Hey, how about we PAY the customer to buy?
Sam Walton didn’t initiate the world’s largest corporation by doing promotions better than anyone else. Au contraire! He did it by eliminating the worthless cost of promotions, driving for the rational lowest price that would still deliver a profit, every day, all the time. P&G tried to do the same thing with discontinuing coupons a few years back, but threw in the towel when “consumerists” rebelled. I can understand P&G making that rational business decision (both to discontinue, and then to not.) But when people inside the business talk in glowing terms of paying customers to buy, you can only conclude that they have ALL DRUNK THE KOOLAID!
Marge Laney, Bob Phibbs and other skeptics here are right on!
I don’t believe that to be the case.
Discounts are simply a promotional vehicle and different type of discounts serve to fit different promotional needs. Think of it as online vs broadcast advertising; while online advertising will product very desirable results within certain demographics, it will not replace broadcast’s impact and broader reach.
The solutions discussed are by no means a “one size fits all” approach. Different categories of products and segments of retailers must respond differently to capture true loyalty. Simple discounts, whether deep or not, do not alone create loyalty. There has now become a consumer culture of demanding deep discounts that can often drive negative margins for the retailers, just to get shoppers in the store or online. However, that approach is clearly not sustainable in the long term. Shopper benefits need to include additional perks that do not depend upon price reductions. Services before, during and after the sale continue to drive true loyalty. Brand building, whether via social media, traditional advertising, or whatever, is the chief reason for driving loyalty.
Shoppers continue to value discounts over EDLP in most situations because there is a relative comparison of the “regular” price versus the discounted price. Coupons of all types also continue to have their attraction with shoppers due to the seeming value of having an instrument that brings down the price. These more tangible methods of price reduction sell product, however do not necessarily drive loyalty. It is too easy to match pricing and have the shoppers jump ship to another brand or store.