Retailers must kick the discount habit
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It will be a brutal year on the British high street. Brands including La Senza, D2 Jeans and
Past Times have already filed for administration and others, including Thorntons, Game and French Connection, have announced profit warnings.
According to insolvency expert Company Watch, several major high street casualties are likely in 2012. By applying its ‘H Score’, it has produced a league table of retailers’ financial health and stability. At the top sits Zara with an impressive H Score of 91/100. And at the bottom lie Dixons, HMV and Clintons Cards with respective H scores of 5, 5 and, gulp, 1.
Review the brands mentioned above and you might spot a commonality. All except Zara are firms in severe financial difficulty. But there is a second theme that unites them: discounting. To wander into a Thorntons, French Connection or HMV is to enter a jungle of sales promotions - not just in January, but throughout the year.
While the popular press might trumpet the current plethora of sales promotions as being good for the consumer, it’s also worth remembering that price discounting is very bad for brands that over-use it.
Let’s start with the most obvious drawback: it’s literally money off the bottom line. Too many marketers focus on traffic and revenues at the expense of margin. And that could be a crucial error when there is a vital trade-off between attracting more consumers into the store with discounts versus cutting deep into gross margin with 30% or 50% off list prices.
Promotional activity makes sense but marketers should treat sales promotions like heroin
The second downside of discounting is commodification. The reason consumers are hopefully prepared to pay more for Thorntons is because it is more than chocolate. The brand associations of expertise, quality and tradition add value to the offer and that lowers price sensitivity, increases demand and further enforces brand loyalty and repeat purchase - the classic outputs of brand equity.
But just as you build brands by focusing on their associations, you break them when you reinforce the commodity at the expense of those associations. And that’s what discounting does. It draws attention to the price and the product and says to the consumer ‘forget all that guff about what we stand for, buy us because we are cheap. Buy us because we are a commodity’.
When I see Thorntons’ Mint Collection - a luxury selection of after-dinner mints - on sale for £4 rather than the recommended retail price of £12, it makes me question the brand. Suddenly it is not expertly made, high-quality fare - it is just cheap chocolate at a bargain price. Once the spell of the brand is broken, very few branded manufacturers can support their high cost operating model in the cut-throat environment of commodity competition.
Heavy discounting also makes a mockery of consumers who paid the RRP only a few days earlier. Full-price December customers are often overlooked in the pursuit of the fickle, bargain-minded January crowd. But brands should sometimes take a longer-term view. A price is a promise of value between a brand and a consumer. When we suddenly and inexplicably drop prices, we embarrass and disappoint those who had the faith to buy us at full price. The discount-driven frenzy will subside, and soon we will need our original consumer back. Let’s hope they will exhibit more consistency and reliability than we did with our recent pricing.
Even consumers eventually lose interest in discounts. Run a single sale and the market flocks to you. Run it again too soon and the impact dissipates. Keep running sales and the consumer starts to wait for them. When that happens, the crucial balance between pull and push is lost. There is a growing fear that the reason the 2012 January sales are not generating the expected figures is not just because times are tough but because the sales in November and December had already jumped the shark.
I am not suggesting brands should never discount. There are valid strategic reasons why promotional activity makes a lot of sense. But marketers should treat sales promotions like heroin. Heroin is a wonderful drug. A single, swift injection of morphine eased the pain and saved the lives of thousands of troops across the battlefields of the 20th century. But repeated use obviously leads to disaster.
Similarly, occasional and selective discounting can make strategic sense. But when marketers believe it is a tool that can be applied without any cost, they begin a vicious cycle in which discounting grows sales, but at the expense of brand equity and customer relationships. As a result, the brand needs to run another phase of discounting to offload unsold stock and attract lost traffic - and the brand is hurt again.
Maybe the likes of French Connection and Thorntons are running such deep and repetitive discounts because their businesses are in trouble. But it’s also worth reversing that causality and questioning whether it was such deep and repetitive discounting that got their businesses into trouble in the first place.
Readers' comments (9)
Anonymous | Wed, 11 Jan 2012 1:41 pm
Interesting article. This year was the first time I noticed sales start before Christmas. I think it needed to be tested, as you say, people just wait for January otherwise. Today's online culture is all about discount vouchers in exchange for your data. Online seems to be getting some value back for the businesses, but the high street seems to just be giving all their margin away and losing respect from customers.
"But when marketers believe it is a tool that can be applied without any cost, they begin a vicious cycle in which discounting grows sales, but at the expense of brand equity and customer relationships."
I don't believe it is the Marketers who are behind the decision making for heavy and regular discount, I think its push from the heavy weights and shareholders who don't really understand marketing.
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Anonymous | Wed, 11 Jan 2012 9:21 pm
Price (high OR low) still seen as a surrogate for quality?
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amanda | Thu, 12 Jan 2012 1:08 pm
As consumers' spending is squeezed they will dictate where prices go. They will just wait for bargains rather than go for quality. Why pay more? as the phrase goes....
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Anonymous | Thu, 12 Jan 2012 2:39 pm
We've been saying this for a while - the current price discount dynamic is not sustainable, nor is it good for consumers in the long term, and more manufacturers and retailers begin to feel the inevitable impacts of price promotions that are too deep, and too frequent.
HOWEVER - this does underline the importance of brand relevant promotions that ADD VALUE....
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Jackie | Thu, 12 Jan 2012 3:35 pm
Very interesting - a point we have been trying to get across for some time, but in the chase for sales in a recession, the longer term message gets lost - along with brand equity. Smaller retailers will close down, and the high street will be a poorer place when only the big players, who can afford to take the short term loss, will be left. And then they can charge what they like - just look at the power industry suppliers!
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Neil Hopkins | Thu, 12 Jan 2012 4:07 pm
There's a simple way of looking at this...
Price competition = a race to the bottom.
Value competition = a race to the top.
Too many companies are competing on price (who is cheapest) and too few on added value, or just plain value.
I believe consumers are looking for value as much as they're looking for savings...
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avi | Wed, 18 Jan 2012 8:45 am
why did Thornton's ever go into retail - wasnt that their problem in the first place? I don't go to a Cadbury or Mars shop...
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chris doyle | Thu, 2 Feb 2012 10:56 pm
Great article. discounting is a dizzy downwards spiral. Some of the big names that were reporting increased sales over the Christmas period are now reporting losses! As for Thorntons Avi, I think you have missed the point there. Cadbury and Mars are global brands with a sell cheap to the masses policy. Thornton's have always marketed themselves asa premium brand. They dilute this status when they start to sell cheaply.
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Josh Parks | Thu, 16 Feb 2012 6:29 pm
Another great article - I'm a former student of Mark's and a pricing professional. I second the notion that deep discounts break down brand value by breaking the suspension of disbelief regarding the COSTS of production. We do B2B type of seals with very sophisticated customers - deep discounting in our industry breaks intellectual framework of the brand by the type of commoditization that Mark mentions. Even though the product margin is STILL high, we are calling attention to the fact that we can make the good/service for less than we charge. Thus the goodwill that we built up to enable our previous high priced sales are shown to be hollow and unnecessary in “today's” sale - I worry about this as we face the current economic climate and the associated near-term versus long-term pricing/value decisions. There's no reason to call attention to your low cost production - create new brands to access these cost sensitive customers, don't deface your current premium brands...now this is nearly impossible in Pharmaceuticals but not as hard in apparel.
You’ve got to question the ubiquity of brands such as Ralph Lauren – for how long can they use RL and the associated Polo brand to reach such vast swaths of the population? I personally I have interest in wearing anything from Polo so long as the thug on the subway is wearing a 4 inch Poloman. Now you might argue (after Mark’s schooling and hard work on my part) that I’m now an ‘RL’ customer, but the associations for me are there and I’ll spend my incremental dollars elsewhere. Reminds me of the case study on Tommy Hilfiger that Professor Ritson presented during prospective student week about 10 years ago…but I digress.
By definition, or at least almost so, elite brands HAVE to discount to reach the masses. This sales pick up and the associated growth that comes with is like the heroin that Mark mentions in the article. While the Street loves the RL story, I’m afraid the Brand will soon go the way of Tommy H and soon be on the long slow climb back up to the top…
The intellectual aspects of this, on brand, on product lifecycle, on corporate profits, are WHY I’m a pricing expert at this point in my career – everything comes together in one perfect moment of preference. If you get it right, and by this I’m talking about the entire marketing mix, the price can be another aspect of the product or service, shrugged off along with the technical details or contracting language. If you get it wrong – and as mentioned this is often part of putting PRICE before VALUE – the entire purchase unravels based on one variable.
A final note – price is the single largest point of disconnect between your customers and your organization – bar none. Oftentimes Price is a disconnect WITHIN your organization too – with some in your organization falling in love with your products and not listening to your customers’ opinions thereof. So be sure to get honest, open, outside perspectives on your value proposition before engaging in pricing.
Wonderful article. Quality!
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