Time Right to Dial Back Discounts
Chris Dickey, senior VP-director of customer relationship
management at Barkley, an agency that works with Build-A-Bear Workshop,
Sonic Drive-In and others, makes a case that brands need to rethink pricing
strategies and begin the process of cutting down on discounts in order
to return to more profitable sales.
According to the piece on the Ad Age website,
consumers have been conditioned to wait for discounts before buying and
will need to be reoriented to buying at times and prices more advantageous
to marketers. He recommends a four-step approach:
- Assess the damage – Mr. Dickey
recommends “a deep dive into a ‘consumer migration inventory.’” Likely
findings, he suggests, will include discovering over the past couple of
years that marketers have lost some of their “best consumers to lower-value
competitors” and acquired a larger group of “deal seekers.” - Determine opportunities to retrain, reactivate or acquire –
Consumers come in five primary groups including: loyal (not motivated by
sales); new (but did not buy on discount); mid-level (sometimes buy on
deal); lapsed (were loyal but have moved elsewhere); and prospects (likely
to buy based on value as economy improves). - Test to determine how to increase margins and build long-term
value – Determine where the “optimal point of
response versus margin comes into play.” Mr. Dickey believes targeted
communications over time will help marketers find the answers they seek. - Evaluate and optimize – Test against controls and
determine what works. Mr. Dickey writes, “Brands will need to rethink their
offer strategy from one purely of discount to one of a price/value balance,
with the emphasis on relevant value that will, in turn, justify a premium.
It’s not a new challenge, but overcoming it after significant erosion will
be a key lever to increased profitability. The good news is, it’s a strategy
that can be tested, targeted and optimized.”
Discussion Questions: Do you
see brands and merchants being able to get consumers back to a reasonable
"price/value balance" anytime soon? What are your steps for weaning consumers
off of the mentality of waiting for a better deal?
Any brand that is in full-time discount mode is in trouble. The marketplace is telling brands what their products are worth. And if a brand has to discount all the time to generate sales, it is telling consumers that it is not worth full retail price.
Discounting is easy to do, but there must be a strategy behind it, so the overall value and perception of the brand is not diminished. Many brands are wisely using discounts to navigate through the recession. To others, discounting has become a strategy.
As the economy improves, consumers will continue to seek value. It’s not a matter of weaning consumers off the mentality of waiting for a better deal. It’s a matter of educating consumers about the value of a brand.
Chris Dickey presents a well thought out procedure for developing a pricing strategy. It incorporates the shopper’s perspective and a marketer’s flexibility.
In that regard my expectation is that there will be considerable experimentation around pricing. However, consumers will define the price/value relationship and managers must understand how to convey their brands and products to deliver against that dynamic.
“Retrain” consumers? I don’t think so.
“Refrain” marketers? I hope so.
Whether shoppers are offered a deep discount or great value for the price, they are becoming savvy enough to understand and determine what is best for them. Mr. Dickey’s approach minimizes any incorrect assumptions so that the marketer doesn’t fall into the trap of trying to misguide shoppers only to discover the marketer has just fooled himself.
Here’s my detailed Nancy Reaganesque way to Dial Back Discounts: Just say “no.” CMOs have been devoid of creativity for years. Will this be easy? No. Will most embrace it? No. Will they have the fortitude to stay with it? I hope so for their sake.
You know, I’ve made the same exact case. RSR has a pricing survey open that is built on that entire premise, that retailers need to start moving away from (weaning consumers off of) steep price discounts. I even gave a speech on that topic earlier this week at Retalix’s user conference. In addition to what is recommended here, I thought it is important to include hurdles–sure, you can have 25% off, but only if you spend a minimum quantity with me.
However, when I came home from that conference, my mailbox was stuffed full of exactly the worst kind of offers–“here’s $25! Come spend! No limitations!” And my favorite–“here’s 15% off for you, and here’s three more coupons so that you can give them to your friends!” There is no path to “regular” pricing in these offers.
With the irrationality of the holidays fully upon us already, I don’t see rational pricing or discounts coming any time soon. I’m thinking, try back next year.
This could be a prescription for the retailer’s demise! Refusing to discount or going that direction right now with the economy as it is could be tragic. Instead, possibly going the route of added value is better. Instead of 25 percent off, throw in a new brush with the hairdryer or a new screwdriver with the drill or a scarf with the hat, etc.
In these times it is critical that the retailer and the ad agencies assisting them think out of the box and get very creative to maximize the value and maximize the profits.
It is always an uphill battle to “retrain” the customer. You already showed them that you can give discounts…and now you want to stop doing that?! Good luck. This is the new economic environment for the foreseeable future. The emphasis should be on services/benefits of shopping with you rather than focusing on the traditional item/price strategy.
Why should a customer shop with you? Lowest prices? Give it up. That is neither compelling, nor differentiating and can too easily be copied, obviously. But services combined with the sale is a driving reason to shop your store.
I’m with Bob Phibbs. The best answer will be to find some true differentiation, and few people seem to be really making a sincere effort there, perhaps because it’s risky. But so is playing a pure price game.
The answer is no, the CPG companies are not going to reduce their prices any time soon. The argument is great consultant-speak. It seems logical, but does not take into consideration the real world. Before the Nixon price freeze, CPG companies raised their prices to the max, but promoted back the increase. This allowed them to go for years without having to push through a price increase.
Last year’s price increases were commodity-cost driven. CPG companies know we are heading for a period of high inflation. You cannot have deficit spending and negative balance of trade forever without getting inflation. Unless a significant portion of a product’s cost is commodity price dependent, there will be no roll back. Over the next few years, the deal spending level will be reduced.
It is simple: try not to upset the customer.
Can you spell “Abercrombie & Fitch”? There’s a company that decided to hold the line on pricing. And watched its comps go down by double digits every quarter.
I believe rational pricing is good…but retail’s not such a rational business. And, supermarkets and fashion are two different worlds.
The timing is wrong. Maybe next year…maybe never.
It is time to fundamentally rethink how to present value, product, and service benefit. This will be greatly strengthened by developing benefit-based copy on in-store messages. This will focus on shoppers whose product (and service) interest goes beyond price.
As always, the key words are value and perception. I like the suggestion of adding value as a way of gradually reducing discounts. Value that can be either tangible as with Susan’s hairbrush and screwdriver or intangible as with the suggestion of improved service and finding a way to make the entire shopping experience more enjoyable and tempting. It can be done. Simply removing discounts is so much harder that it verges on the suicidal.
When determining pricing strategy, most manufacturers miss a fundamental principle most shoppers have and that is, if it’s a really good product, people will pay a reasonable price for it. The problem is there are few of those products out there, not that any companies would know. “Put as many products out there as you can at a discounted price and we’ll sell more” is not working. You won’t be able to retrain shoppers as you would Pavlov’s dogs anytime soon when people have accepted they need to “settle” in the current economic conditions.
The essential question here, unanswered by the original columnist or the comments, is: What is the difference, really, between pure discounting and a “price/value balance?”
As long as the jobs situation remains weak (the consensus seems to be that it will be for years) and factory utilization remains low (which it will), the consumer has all the power.
Yes, you can bundle some things in different ways to connote “value,” and some luxury brands and retailers have introduced new products to appeal to the now cost-conscious affluent buyer, but in the end, they all mean the same thing: lower prices. A rose is a rose by any other name.
While things are and will get somewhat better economically, there will be changes to consumer behavior that will last well beyond the recession. I wrote a piece for RetailWire a year ago on this very topic called “Welcome to the real value chain.”
And I am not sure who will be brave enough to lead the charge into a new higher priced strategy. It would take a cartel system for it to work.
I love margin. It’s a huge barometer for me when I’m visiting clients or doing an evaluation. Margin intake is indicative of so many things in a retail operation. You can really feel the pulse of your business through the margin number.
That said, I agree in principle with Mr. Dickey. But the reality is that traffic is down and normal supply and demand rules still apply. No one is going to buy a plasma TV at MSRP. People will still look to buy Crest when it’s on sale or the low margin multi-pack they sell at Costco. In theory, yeah, I would love to tell my clients to raise prices. Is that a good customer-service gesture? Walmart is constantly harping on low prices and lowering prices and low low low prices and price rollbacks…how in the heck can I compete if I have to raise prices?
Now I’m all for price and merchandise optimization. You can sell stuff at low prices but have a shield your for margin with associative products. That’s the whole point of having low prices. Or did something fundamental change in basic retailing concepts?
Great idea. Wrong place. Wrong time. Wrong planet.
This is the time to tread cautiously. Retailers have held their loyal customers with a value proposition that worked for them through difficult times. Most used discounting and promotion with some selectivity, but also used Private Label in just about every channel, providing store differentiation and more product choice for shoppers. Develop a long-term strategy that will build the brand and loyalty–the game has changed, and a new focus is needed.
Customers wait for bargains because retailers have trained them to. Kohl’s is going to offer the Candyland game on Black Friday for $1.99, and there will be lots of cheap plasma TVs under the tree on Christmas. With doorbuster deals seemingly everywhere, shoppers have no incentive to do anything other than wait around while retailers duke it out among themselves….
I realize that there are large numbers of shoppers today who have become especially sensitive to price. However, in general, retailers and brands and shoppers ALL think price is far more important in the purchase process than it actually is. The reality is that the majority of shoppers have only vague ideas about what things are costing them, and care even less!
I’m not going to try to prove all this here, just to make some assertions and point out some facts seriously at variance with the thinking that permeates nearly everyone thinking about retail.
First, the shopper: Financially stressed shoppers, the clear minority, are certainly more likely to follow pricing closely. The growth of coupon redemption proves this. ALL shoppers maintain a self-image of being careful, rational shoppers, with price a very high consideration–and they’ll be happy to mislead anyone about this, who cares to take the time to ask. There are a few rabid shoppers who really do monitor every penny, and spend lots of time to possibly save substantial money. This tiny minority is at the forefront of defining the pricing issue for the whole market.
Second, the retailer: Although retailers obviously can use hard won efficiencies to lower prices, the more common course is to use the brands’ money, through wholesale price concessions, promotional money, etc. Retailers are on the front line with the rabidly price-sensitive shoppers, and are also responding to the competitive “herd.” This weakens both the passion for holding the line on prices, as well as the necessity.
Third, the brand: Anything sold has some apparent intrinsic value, and probably has some added value (packaging, etc.) and MAY have some CREATIVE value–the brand. The real key to profits is this third value, the brand. Unfortunately, sometimes brand marketers become so involved in responding to the noise from the minority rabid shoppers and the massive pressure from the retailers, that they forget that the proper role of the brand is to create value, primarily image–buttressed by performance. That is, it is the responsibility of the brand to explain to the shopper why this branded item is worth more than the alternative.
The number one role of price is NOT to communicate COST to the shopper, but rather to tell the shopper what the item is WORTH. If you really don’t believe your brand is worth more, you really shouldn’t be in brand marketing. If you don’t know how to communicate that your brand is worth more, GET THE HELL OUT OF THE BUSINESS!!!
And that’s all I have to say about that. 😉