Tuesday, April 28, 2009

The slipperly slope of discounting.

Today's New York Times has a good article on the slippery slope of discounting. Price cuts of 50% have given way to scorched earth discounts of up to 70%-80%.

Retailers find themselves between a rock and a hard place. Offer steep discounts and risk losing pricing power longer term. (Detroit car companies never really recovered from decades of discounts and rebates.) Or don't discount and risk a steep drop in store traffic and sales.

An added challenge with discounts is that they are easily matched and simply lower revenues for all competitors. Sandwich chains are seeing this in their $5 lunch wars. Ditto for airlines.

Some brands have found better alternatives, or have at least augmented their discounting with demand-building strategies that also strengthen brand equity.

Best Buy is broadening its appeal to price conscious shoppers by featuring low prices on house brands such as Insignia. The retailer is also maintaining its emphasis on customer service and support (e.g., Geek Squad).

Hyundai was the first car company to realize that consumer anxiety was the main obstacle to sales, not purely affordability. Its Assurance program recognized the emotional component of value -- i.e., the need for consumers to feel smart and in control.

There is no doubt that discounting must play a role in spurring demand during a recession. But marketers would be wise to balance this pricing strategy with other offers -- e.g., loyalty bonus, warranty, added convenience -- that can help differentiate the promotion while also building a lasting positive brand image.

1 comment:

Jack Steinmann said...

The counter example of Apple is instructive. Their products carry a premium price. Apple refuses to discount their products (except ever-so-slightly on Black Friday). Analysts consistently criticize Apple's refusal to market cheaper products. And yet, Apple surprises those same analysts time and again with better-than-forecasted earnings. January saw Apple's best quarterly revenue and earnings ever - in the midst of the worst financial downturn of our lives. All of which suggests that, unsurprisingly, offering the best products and the best service (and, marketing them with the best advertising) can yield the greatest profit.