Employee Discount Fever
By George Anderson
General Motors’ “employee discount for everyone” campaign has worked well enough (sales up 41 percent in June) that Ford and Chrysler are starting similar programs of their own. This development, say retail industry observers, doesn’t mean that merchants in other product categories will begin marketing employee discount programs of their own.
Scott Krugman, a spokesperson for the National Retail Federation, told the Dallas Morning News that the discount offered by the carmakers will save customers thousands of dollars but the savings are much less significant on clothing purchases, for example.
Daphne Avila, a spokesperson for J.C. Penney, said the retailer doesn’t have plans for a GM-like program but that it runs a program that allows associates to share their discount with 10 relatives and friends at four times during the year.
According to Ms. Avila, the employee discount on clothing is usually 20 percent at Penney. “I know with our friends and family nights, those are pretty successful on those days that we have them,” she said.
In categories other than autos, Cheryl Bridges, associate director of the Center for Retailing Studies at Texas A&M University, says the sales stores run often offer greater savings than the employee discount.
“In most cases, the employee discount ranges from 10 to 20 percent. When stores run promotions, it’s up to 50 percent, so the promotions are often better than the employee discount,” she said.
Mr. Krugman worries that programs similar to those of the automakers could have an adverse effect on employee morale. “To take that perk and offer it to everyone, it could send the wrong message to employees,” he said.
Moderator’s Comment: Will (should) other retailers run “employee discount for everyone” programs of their own? What do you see as the potential pros
and cons of this strategy?
Daphne Avila and Cheryl Bridges may have given the best reasons for other retailers to try employee discount programs for regular shoppers.
- According to Ms. Avila, J.C. Penney has been successful with a similar but more controlled program for employees, their families and friends.
- Ms. Bridges said the discounts are less for consumers than normal sales. While this means shoppers are saving less, it also means retailers are making
more while customers can still feel positive about getting a good deal.
We are also less concerned about morale than Scott Krugman for a few reasons.
- When business is good, morale tends to be high throughout.
- Employees are usually given their discount even on sale prices. If shoppers are buying goods at the “regular employee discount,” then workers will still
be saving more.
As a caution, however, we would also point out that employee discount programs cannot go on forever because, eventually, the reduced price becomes what
the customer believes they should be paying regularly. Stores will need to have a what’s next strategy in place. –
George Anderson – Moderator
By far the two major profit sources for auto dealers are financing and used cars. Parts & service is next in line, and way down on the list is new car sales. GM’s employee discount, the cost of which is borne by the manufacturer, can only help GM dealers in the areas where they make the most money: financing, used cars, parts, and service.
If other retail models mirror that of automobile dealerships, they should strongly consider a temporary employee discount sale. But, I can’t think of any.
At the time of first offering, the thought of how the employees would react to their perk being given away to the general public crossed my mind. Given further consideration, it’s really the employees of the auto manufacturers that have the most at stake. I have changed my mind in the belief that if I was an employee at GM, it’s exactly what I would have wanted GM to offer at this time.
First, there is a myth about quality. The employees by support of this offering are making a statement that they want the consumer to have exactly what they offer. It’s a statement of belief in the product. Secondly, in some cases it’s not the lowest price available, so it can actually be a more profitable method of discounting. It’s also more profitable for the dealers if they have less of a stake in the offer as does GM by subsidy.
GM has a real gap to fill with the other manufacturers due to failure in leadership. The employees are putting up what they have to offer in this case as a plea to the consumer to give them a try again. The lack of exciting product, poor service and lackluster marketing is not their fault alone. The consumer has actually responded better to this promotion than that of 0% financing after 9/11. So, in fact, by the results at GM, it is working.
The problem, however, is now what’s left? Car companies have even gone to the extent of offering rebates along with 0% financing and have failed to stimulate sales. While this may be a temporary fix or stimulus, it’s not a replacement for meeting the consumers’ needs. What they may end up doing as a result is completely devaluing their product. In a recent stop to a Saab dealer, I was shocked to see a new vehicle on sale for $17K that originally stickered for $25K. This is the real problem in the first place.
As far as other forms of retail goes, I don’t think as many others are at the point of desperation as GM, Ford and Chrysler. If they are, they would first have to have an effective enough employee program worthwhile offering as a promotion. Many retailers simply offer 10-20% on a regular basis for clothing and other products and it usually applies only to non-sale merchandise. As with the reality of GM’s offer, some other promotions are a greater savings than the employee discount. Consumers can be fooled for a while, but in the end they are pretty smart.
General Motors in particular is suffering from more than just lack of ability to promote sales. They will have to offer vehicles that consumers actually want to buy and an experience worthy of the consumer’s loyalty for real change in their situation to occur. I see no evidence in their offering that indicates that they have advanced to that level of thinking. In fact, they have now even begun to screw up their best consumer offering – Saturn.
This only works on high dollar items and uneducated consumers. But I’m not falling for such foolishness. The car companies and their dealers are still making a reasonable profit. Personally, I always research all the invoice costs, rebates, hold-back allowance, and dealer incentives to determine exactly what the dealer needs to break even. Then I sucker them into thinking I’m going to finance the car so they sell it at break-even or less, but then pay cash at closing. If you are paying the employee price, you are paying too much.
Auto retailing is a lot different than most other kinds of retailing because of high dollar ticket involved. It’s easy to con customers into paying extra for phony items such as extended warranties, rust-proofing, clear coat, Scotch Guard, pin stripes, dealer prep, and finance charges. Even if they break even, it’s the salesman’s job to separate as much money from the customer’s wallet as he can. Employee discount or not, they are hoping that uneducated consumers with believe that they are really getting some kind of discount that is actually available to everyone all day long. Dealers would be tickled pink if customers never haggled, never researched, and blindly paid the employee price.
Most other retailers would have a tough time figuring out how to make up the employee discount on low priced items. So I don’t see this being widespread. If you do see it, watch out. I’m sure there is a catch.
The success of GM’s promotion lies in the broad public awareness of auto employee discount plans such as Ford’s “Plan A” pricing and the “exclusivity” of those discounts (up ’til now). Ford and Chrysler tried to put a dent in the fabled “employee discount” buzz by exposing the fact that their current discounts added up to as good or better a deal than GM’s. But clearly consumers were having none of it. They believe in the employee discount for auto workers and that’s that.
Two major questions outstanding are: 1) do consumers hold the same “myth” of employee discounts for other industries? and 2) what happens now that GM has lifted its skirts and Ford and Chrysler are jumping in? Will the cachet last?
I believe, but I could be wrong, that the JCP promotion was an additional discount over any current prices. Inside information might show that the demand elasticity for those promotions wasn’t significantly better than for others.
The employee discount program works very well in situations where the actual price the consumer pays is not clear nor is future information easily assembled. Added discounts, such as the JCP program, are proven effective, particularly when there is some aura of selectivity in who is allowed to participate in the promotion.
I can easily envisage retailers offering employee discounts as an alternative to promotions. However, outside of relatively low-promotional profile players, I don’t see this as being a huge change in the way pricing is done. Nordstrom, as an example, which rarely promotes, finds employee discount promotions highly effective. Federated, where everything is on sale all the time to one degree or another, will probably succeed with this as an added discount, not as an alternative discount.
GM management has to be desperate due to their reputation for product mediocrity. So they resorted to a new kind of price promotion. Price promotions are easy and quick to implement. It is harder to fix the product. That takes vision and lead-time. No retailer with a highly-valued product assortment would need to resort to desperate price promotions. Of course, if the retailer has BOTH a product as well as a price advantage, they become almost unstoppable.
And constant price promotion (even if the themes are changed) leads to customer cynicism. The auto industry has minimal price credibility. Very few people would feel good about value if they bought a car at sticker price. How many core Macy’s shoppers feel good about buying something not on sale?