Charnell Lucich

Can Your Brand Afford To Discount?

Posted on: December 29, 2008

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I got an e-mail this morning from MarketingProfs that really caught my attention and I wanted to share it because everywhere I turn, I’m seeing discounts. While I understand why, I have the very same questions that are included in the article below.

During a time when customers are asking themselves, “Do I need to spend this much on that?” Companies, across the board, are turning to discounting attract customer traffic. While it seems discounting has become a pre-requisite to drive sales this Christmas season, I can’t help but wonder long term scars will be created on companies and brands?

  • Will consumers be willing to pay full price again after the slump?
  • Will our products and services be devalued in the longterm?
  • Will brands make this ‘temporarily necessary’ tactic part of their marketing toolbox?

Starbucks has broken one of their cardinal rules: “We will not discount our whole bean coffee. Right now, everything at Starbucks is 20% off, including whole bean coffee.

(Tangent: Yes technically you can get Starbucks whole bean coffee at a lower price at warehouse discounters and at some of the grocery locations (mostly because Starbucks can’t control pricing at these locations). But until now have always stuck to the “won’t discount whole bean” rule).

Starbucks, like so many other retailers has decided they need to play the discount game to compete.

There is no doubt today’s retail strategy relies heavily discounting. In fact, The Boston Globe reported this morning, “Even Luxury Shops Must Coax: Turn to discounts as clientele holds back. Jenn Abelson’s article uses information from the data service SpendingPulse, to report that:

“Luxury spending, which includes high-end apparel, leather goods, restaurants, and jewelry, plunged 24.4 percent compared with the previous year.”

The article later adds, “Neiman Marcus Inc. reported sales plummeted 11.8 percent in stores open at least a year, and Tiffany & Co.’s North American shops saw sales drop 14 percent at stores open a year… The unprecedented discounting this holiday season is just the beginning of what upscale retailers are willing to do to try to bring back customers. For example, Saks also offered no payments or interest on purchases for a year for shoppers spending $2,000 on their Saks Fifth Avenue credit card.”

There is an everybody’s-doing-it “Get Out Of Jail Free” card brands are using as justification, since… nearly every retailer *is* discounting. However, as someone’s mom used to say, “Just because everyone is jumping off the Brooklyn Bridge does that mean you should do it?”

The root of the problem is in the lack of creativity by companies. Or at least a lack of being able to think creatively – quickly. Companies are having to do something QUICK and FAST to drive sales, so they turn to the ‘low hanging fruit’ of marketing tactics – discounting.

While added traffic may feel good to worried retailers, but discounting brings problems.

  • Perceived Value – Will customers willingly pay full price again when the crisis is over? Once premium product now become perceived as commodities. Customers begin to perceive the actual worth of the $50 item, marked down to $40 as worth $40.
  • Discounting Erodes – Increase traffic feels good, but may not be driving incremental sales. While discounts may drive traffic. They erode margins. We’re making the slippery holiday ice we’re skating on thinner.
  • Self Control – Now that the glass has been broken on the “forbidden discount tactic”, will we marketers forget we ever employed it? Or will we simply put it at the bottom of our marketing toolbox for potential future use?

I believe disciplined, strong-willed brands will put the discounting tactic in the freezer and thaw it in another ‘extreme emergency.’ Less disciplined, less-creative thinking brands will come to rely on discounting in the future as “fair game.”

What are your thoughts?

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2 Responses to "Can Your Brand Afford To Discount?"

This reminded me of the old adage, “Is there ever a day when mattresses *aren’t* on sale?” Amazingly enough, the game console sector has been able to keep their prices fixed. Apple is another brand that only seems to bring out the discounts when they are trying to get rid of soon-to-be-outdated versions of their products. Yet, Apple keeps selling iPhones and iPods and iWhatevers, and people keep buying PS3’s and Wii’s. Everyone hopes for the discounts to come, but they end up paying full price anyway. On the other hand, the discount game has made it almost impossible to sell anything at retail or MSRP. In the end, it’s just a short term way to get a little cash flow, and like you mentioned, lessens the perceived value of the merchandise. The retailers need to find ways to raise the perceived value of their products if they wish to charge any more. The game consoles keep the perceived value high by being unique. Nothing other than a Wii plays Wii games. Maybe the other manufacturers will actually have to make products of higher quality if they want to raise the perception of value. By discounting so regularly, they are telling the public that their products are inferior and not really worth what they want to charge, so they’ll make a deal and give it to you for less. If they can advertise quality (like the Maytag ads) and get the public to believe the ads, they can get away with charging full price. It might be nice to have ‘durable goods’ that aren’t designed to fall apart 1 year after the factory warranty runs out. Well that’s my $0.02. B^)

Whenever businesses try to *chase* the sale by discounting and cutting prices, they are spelling their own doom. When times are financially *tight* as they are now, folks *may* flock to WalMart or CostCo… but those who are in the know may prefer to spend a bit more to get QUALITY and VALUE and DURABILITY and GOOD SERVICE rather than cheapness, flimseyness, and poor service. A marketing blog out there said that competing on price is a loser’s game. Some fool out there will ALWAYS offer a product or service for cheaper than reasonably possible (they may quickly go bankrupt, but not before severely damaging others in their same niche).

In a similar fashion, the airlines are doing this same thing. Most American airlines are trying to compete on price. They are cutting prices left and right–while at the same time, sneaking new costs in (such as charging extra for baggage, earphones, in-flight meals, in-flight snacks, and other things and providing shoddy service and treating customers like cattle).

I’d rather pay extra (instead of going for the cheapest flights) and get a flight on an airline noted for great service, quality care, and inflight amenities. So, rather than flying on the cheapest flight from the U.S. to the Orient, we flew from SFO to Hong Kong and the Philippines on Cathay Pacific… and were pleased with the service, quality of the inflight meals, and the way they treated us passengers. The price was only a few hundred dollars more than the cheapest flights, but the extra cost was worth it. Thai International, China Airlines, Philippine Airlines, Japan Airlines, Lufthansa, or Scandinavian Airlines would also have been good choices. (Not by price, but by good service!)

In the meantime, some of the “discount airlines” are complaining about their financial woes and are declaring bankruptcy. Sheesh. Too late now. They’ve pissed off enough of their customers that they won’t get the customers they need to bail them out even if they DO make massive improvements.

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