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?
Hi Paul, you make some terrific points about discounting. I am of the opinion that it’s survival that’s driving discounting. If you have the margins, these are probably the times to take a bit lower margin to ensure survival. If you don’t have the margins, it’s going to hurt (i.e. auto makers).
Regardless, it’s going to be a bumpy ride for everyone.
I think Lewis Green once aptly mentioned that companies could add more value to the equation (i.e. adding 20% more product, throwing in a week of free consulting etc) instead of discounting. That’s probably a better option.
Hi Paul – thank you for this reinforcement. Really fantastic points. My brand, Sugarluxe, is tiny in comparison to the places mentioned above…but I’ve always watched what the BIG brands do as a guide to growth.
As an artist, I learn so much from other companies because I didn’t have a business background. But as I’ve been watching lately, the whole discount thing feels a bit desperate.
Maybe the tables have turned for a moment. Now the Big Brands can watch to see what smart artists do to keep from starving during tough times.
I feel surprisingly optimistic about the opportunities this recession can provide creative thinkers.
Thank you for helping me with my hunch.
I agree with Paul B regarding survival discounts. One big problem with offering discounts is that it communicates that “really” the product/service is only worth that much and that the companies were overcharging previously. Then again, in tough times, if someone wants me to buy something unnecessary, they’re going to have to offer a substantial discount to secure my purchase.
Most people in marketing know that you set your price high so that you can always have a discount on it. It is all psychological for someone looking at your brand. Your brand and product can both relate with the psychological thinking of people.
You answered your question perfectly with your summary statement.
“I believe disciplined, strong-willed brands will put the discounting tactic in the freezer and thaw it in another ‘extreme emergency.’”
Thanks I enjoyed the post.
No matter how it’s spinned, when a business discounts it is saying “my value is not as good as my price.” And while there may be 10, 15, even a 25% drop in business, that means there is still 90, 80, 75% of business that’s still the same. Is a business willing to change it’s brand for the majority while trying to cling to the minority?
I think discounting is a huge mistake no matter what the circumstances are. It trains the customer to wait for a sale to buy. I also think it’s laziness on the part of the business. It means they haven’t solidified their value proposition or they’re targeting the wrong market.
I agree with all the comment on discounting. But coming from a company that discounts and works with large retailers, I’ve found it’s the industry norm. Trying to reverse that standard of – DISCOUNT now, I’ve started coming up with creative ideas and campaigns to better promote our jewelry and maintain sales with discounting so heavily. One of which is a higher end jewelry line sold exclusively online and not available anywhere but on an independent website. We developed it and test marketed the collections and the feedback is promising. We are moving forward with the line.
Somehow, I think there’s a perceived difference between consumer product goods and professional services when discussing discounting. There’s a pre-existing expectation that some retail products will go on sale. Timing is everything, so when consumers need a specific product, it may or may not be on sale. If time isn’t an issue, certainly they can wait it out.
Professional services are something else. Clients are paying for someone’s expertise and time. Whether someone is a dentist, an accountant or marketing consultant, the client is paying for the years of experience and/or training the service provider brings to the table. Discounting in this arena becomes trickier, as perceived value is reduced along with the discounted fee. I like Lewis Green’s suggestion to offer something additional as a bonus instead of discounting the fee.
I think that discounting is riskier for Starbucks than it is for other retailers.
Buying coffee at Starbucks is not altogether rational. But people do it anyway to give themselves a treat or whatever their personal motivation.
Giving them a discount may wake ‘em up to realize that they perhaps should be skipping this expense altogether.
The exception to this discount conversation is if what makes your brand “the best” is having the lowest prices. So, if DISCOUNTING *is* your brand… of course, this doesn’t apply.
I think Jay said it best:
Discounting declares: “My value is not as good as my price.”
Thanks for a great article! This is a most interesting dilemma. My 17 room inn near Yosemite had the best year ever – until 1 November, when it literally went over the cliff! Our philosophy has always been to ‘add value’, but this has fallen on deaf ears. We’re now trying the discounting for the first time ever…it’s not even working at this point! Our numbers are below post 9/11!
However…we’re the eternal optimists…this too shall pass!
The post and the ensuing comments are all on point. The level of discounting to get traffic and sales back in is also of importance, and for those brands that have not been successful in correlating value to price will have to discount deeper.
hi Paul
Its really an interesting post from you.I agree that the customer will not pay more for the same product, once the Economic crisis is normal.
At the same time its imperative for brands to develop new product lines that can serve during the crisis alone and also the existing products will remain unchanged in terms of cost and value..
Cheers
Suresh babu
Brand manager
I think I wont like to buy the same stuff at greater prices post recession.
Laurie.
In a down economy, marketers think a lot about price. They think that since times are tough, people care about price and nothing but price.
Of course, people actually care more about value. They care about value more than they used to because they can’t afford to overpay, they don’t want to make a mistake with their money.
An easy mathematical equation
Value = benefit/price.
That means that one way to make value go up is to lower price, right?
The thing is, there’s another way to make the value go up. Increase what you give. Increase quality and quantity. Increase the benefit and the value will go up.