Discounting Kills… especially in a recession
This is the best opportunity most of us will ever see to leap-frog past stronger competitors. But it is being squandered on discounting.
How much benefit has discounting had for all the marketers using it to save themselves from the current slow economy? Not much. Sales are down, profits are REALLY down, and the future of those who discounted has been significantly harmed.
Retail sales are down 2.7% according to a recent Wall Street Journal article. That’s not really all that bad in the bigger scheme of things. But net profits are down over 20% in many cases. Discounting may have slowed the total dollar volume decline, but at a terrible cost. And not just short-term, but also long-term, as well.
But this is no big surprise. It’s what happens whenever discounting is the strategy over value-based demand creation.
Our long-term research into the use of discounting and coupons repeatedly showed that neither has any positive net effect (even in good times), except as a tie-breaker between two or more products that end-users cannot clearly differentiate. It never seems to lead to long-term loyalty growth, even among the most price-conscious end-users. It never seems to lead to an increase in profitability. In fact, it only increases totalprofit, if sales geometrically increase to make up for the lower margins.
What discounting always does, however, is undermine the value end-users put on your product or service. The long-term result of the almost hysterical discounting we are seeing right now will be to undermine the ability of most marketers to get a fair price for their products in the near future. This is already starting to happen.
Auto dealers are finding customers expecting 20%-25% discounts off of sticker prices. The heavy discounting being offered by a few manufacturers and dealers has many people believing that they have been cheated by all car dealers for years, and they won’t accept anything but a “steal” right now. Grocery consumers are doing similar things. They are allowing their pantries to be depleted as they wait for prices to go even lower. Corporate buyers are feeling the same kind of price empowerment. They are expecting their suppliers to provide them with products and services at no profitability, simply because someone might actually do that.
And the problem is not that customers don’t have money to spend. After all 93% of employable Americans are still employed. (And that’s not that much different from the normal 96% employment rate we have experienced for the past two decades.) Most employees also have not even experienced a reduction in income. The problem is that marketers have grown to believe that they have to maintain total dollar volume without regard to either short-term profitability or long-term ramifications. So, instead of recognizing that periodic slowdowns happen and the real trick is to not harm yourself during them, they use discounting to artificially maintain gross dollar volume. The result is that they harm their current and future price leverage.
Just how easy will it be to raise prices again back to “normal” profitability when things get better? It will really depend upon how you respond right now.
So, what’s the answer to survive the downturn and not harm yourself long-term? The Alpha model points the way. The answer is not in reducing price to match a lower perceived value. Rather it is in increasing perceived value to the price point you wish to achieve. Increasing perceived value is most easily achieved through fulfilling ego-satisfaction needs.
My wife just ran into this a few days ago. It is a simple example, but it shows how easily Alpha thinking works even in tough economic times.
My wife hates to spend more than necessary for anything. She is the person most marketers fear, because she says she wants to lowest price on everything. In this case, she needed some paint for a remodeling project. She planned to just run over to the large local warehouse home improvement center to get what she thought would be the lowest price, even though she really hates going there. She would rather have gone to a specialty paint store she used once before, but she feared that she would pay more for essentially the same thing.
At the last minute she decided to pull into the specialty paint store. The person there helped her so thoroughly, even to the point of offering to carry the paint out to her car for her, that she didn’t stop talking about it for 20 minutes after arriving back home. Then she called a friend to tell her.
This was much more than good “customer service.” Tis retailer helped her feel smart, knowledgeable, appreciated, empowered, in control, more capable of doing the job, and thoroughly cared for. The large home center would have made her only feel “smart” for buying what she believed would have been the lowest priced product.
The only problem for this retailer is that he is not letting more people know about the great experience customers will have when they shop there. Word of mouth is a slow marketing mechanism, especially when times are already tough. The best part is that he now has a much more loyal customer, simply because he did not lower prices. If he does this with every customer, he will not have to work nearly as hard coming out of this recession to raise prices, as the home center will.
This specialty retailer did not lower its price to what it feared might be the lower expectations of a customer in tough economic times. Rather, it helped raise expectations so high that the home center will have to lower its prices even more in order to attract my wife.
The rule of thumb has always been that every dollar discounted requires at least three additional dollars in sales to just break even short-term. Long-term, the loss is closer to hundreds or thousands of dollars for every dollar discounted.
This economic downturn is a unique opportunity that most of us will never experience again to leap-frog past much stronger competitors. The largest and most fearsome competitors in almost every category are pulling back, pulling in, and hiding out until things get better. That leaves lots of room for smart Alpha thinkers to make significant gains.
The secret is in understanding the basics of the Alpha model: Satisfy ego-satisfaction over function (or price). Ego-satisfaction will overcome inferior product performance (as long as it still meets the minimum expectations of performance), higher price, lack of availability, or just about any other factor you have learned is critical to marketing success.
People will pay almost anything to fulfill their ego-satisfaction needs. You just need to be the one discovering what those needs are, and how customers want you to fulfill them. Once you have that, you have the key to owning your category and becoming the sustainable Alpha that everyone else follows.
Stop assuming that people only want the lowest price. Start assuming that they want to feel appreciated, cared for, smart, knowledgeable, empowered, in control, more capable, and generally ego-satisfied and that they will pay more to get that. Also assume that they will remain more loyal through good times and bad times, because that is almost always the case. Customers really want to be loyal. Most marketers just don’t make it easy for them to do so.
Also assume that you need to let potential customers know what you are doing to satisfy their ego needs. Assuming that others will do the sales job for you is always a mistake. Word of mouth is grossly over-rated, because it almost always under-delivers.
The result of following the Alpha model will be that you will come out of this downturn more appreciated, more cared for, appearing more knowledgeable, more powerful, more dominant, and a whole lot happier than your competitors who believed discounting would save them.