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Tips for Discounting

Oct 1, 2009

In addition to eroding profits, discounting can wreck a retailer's brand value. Most retail consultants wisely advise against it, and some refer to it as the dreadful "D" word, stressing that it is distracting, demeaning and, ultimately, depressing. Yet, companies do it all the time, and discounting is more prevalent today than ever. With the current recession, we are getting used to headlines bemoaning declining sales and shrinking profits, across nearly every sector of the economy.

In a recent article, the Harvard Business Review coined the term, "Post Recession Consumer," pointing to a, "new thriftiness and desire for simplicity," that will change business for a generation. And Yahoo has introduced a website called, Yahoo Deals, offering coupons, information about limited time promotions, and even a cheap gas finder. It has reported that searches for the term, "printable coupons," are up 50 percent this year. Greg Hintz, who heads Yahoo Shopping, has said, "Frugality is the new 'cool.'"

Many companies, even luxury merchants that once shunned discounts, are caught up in the frenzy to slash prices. Furthermore, marketers that bet on discounting in the past, and lost, have not been immune. McDonald's and Burger King fought public skirmishes with their franchisees over the price point of their cheap burgers. While their corporate offices wanted to drive traffic, franchisees complained about having to sell any product at a loss. When Macy's lowered its price on a popular line of men's slacks in an effort to generate sales, CEO, Terry Lundgren, said in an interview with the Wall Street Journal that the decision resulted in, "tremendous sell-through," but also required, "low price points and no margins."

Since we know that discounting destroys brand equity and erodes profitability, can discounting ever be an acceptable strategy for a business? Here are suggestions for a discount strategy that avoids the pitfalls. In short, they are rules for discounting wisely. There may be times and places where a discount can make sense to achieve a limited, well defined objective. It should be rarely used and carefully managed, but here are three rules of thumb to keep in mind when you consider slashing prices:

Discount briefly. Discounting can be addictive. When it's employed for a limited time to treat a specific condition, it can be helpful in the short run. But like a drug, it can take hold. Companies that get hooked on it do little more than drive their value proposition down, sometimes past the point of no return. This is one reason why department stores have been in decline over the past two decades, according to some retail experts. They have launched a succession of Red Tag sales as soon as their previous ones are over. They discounted so often that they trained customers not to shop if there wasn't a sale going on.

Discount credibly. Handled carefully, discounting can be used to achieve specific business objectives without compromising your brand's overall value perception. The key is to make the rationale behind the discount credible and obvious to consumers, so they don't perceive it as an act of desperation. Apple's student discount on laptops, for example, doesn't damage the brand because it's based on a rational reason, such as getting young computer users hooked on its products. Secondly, it's also based on a credible consumer need, and that is that students generally have little (if any) disposable income. The same company offers 10 percent off a new iPod when customers recycle their old one. This not only encourages owners to upgrade, but also makes Apple look like a responsible corporate citizen. Both of these tactics enable Apple to maintain (maybe even increase) brand equity, while making its products more accessible.

Discount creatively. Smart companies understand that price is just one element of the value equation. They find ways to, "discount without discounting," by focusing on other elements of the marketing mix. Luxury leather goods maker, Coach, adjusted its merchandise inventory so that half of its handbags are regularly priced between $200 and $300, in comparison with an historical average price of $325. This can, and probably will, have a negative impact on the long term equity of the Coach brand name, but it's less damaging than hanging a 30 percent off tag from the handle of every purse. In another example, GameStop pushed the sales of more used games, which have a naturally lower price point while times are tough. That keeps customers in the habit of coming to its stores to find what they want. When the economy comes back, so will the sales of new games, according to this strategy. Instead of hurting its future pricing power by discounting new merchandise, the company found a way to satisfy its customers in the short term.

In the customer's eyes, your product is either worth regular price or it's not. In tough times like these, that may be a more difficult case to make, but if you're not winning the value equation in their eyes, you should focus on finding a way to meet their needs without reflexively taking a percentage off the top. Retailers that choose to incorporate discounting into their strategy must make the discount appear sensible and smart, not irrational or a result of panic. People understand that prices are a market mechanism. Retailers that start over playing the discount card send a signal that they don't believe their product or service is worth the price. And if they don't believe it, why should a customer?

This article was edited from a story in Business Week.

Topic: Business Strategies

Related Articles: marketing  discounts 

Article ID: 1210

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