Discounting While Preserving the Brand

Anyone who’s been shopping lately has seen it: the store wide sales, discounts, coupons and massive price reductions taken at the cash register. While back-to-school shopping last weekend, we saw it up close and personal. As a shopper, it makes me a little crazy not to know what the actual price is of the items in my hand and a little excited when it rings up as less than I calculated. As a strategic marketer, it makes me crazy to see across-the-board discounting on the rack and at the register.

In recent articles in Business Week, Retail Customer Experience, and elsewhere, the experts are weighing in on when, where and how to discount. There’s great retail advice out there. Kate Newlin’s recent article for Retail Customer Experience offers advice about the antidote to price-based competition. How do we kick our own addiction to price promotion? She asserts “We have to return our focus to the shopping (not buying) process, enhancing, entrancing, and engaging the customer and the salesperson in the dance.”

Kate advises clients on how to avoid discounting and how to contain the damage if/when they do by:

1. Hiring front line people with a passion for the merchandise
2. Branding the experience, differentiating on elements of style and design
3. Changing the tone, acknowledging that the customer knows the economy is in free-fall and expects a deal

In an August 14 article in Business Week, Steve McKee shares 3 rules for discounting wisely. They should discount briefly: make the rationale behind the discount credible (and obvious) to consumers, so they don't perceive it as an act of desperation. They should also discount credibly: for a limited time to treat a specific condition. And last, McKee contends they should discount creatively: by focusing on other elements of the marketing mix. I agree with McKee that in your customers' eyes, your product is either worth regular price or it's not.

I have one more tip. Retailers have the data to know which merchandise drives the sale of additional items, but still take across-the-board discounts. When they have to discount, smart retailers promote the items they know will lead to increased units per transaction at full or close to full price. This allows them to continue positioning themselves as the leader in their core driver categories and reinforces the brand for better days ahead.

Do you know which items or subcategories drive basket size? How well does your promotional strategy line up?

Going Beyond Value

Late last year, I wrote about value becoming tablestakes. The upshot was that consumers were about to be bombarded with promotions screaming value, putting retailers in most categories at a disadvantage relative to Walmart.

Some value retailers have been caught flat-footed, like Sears, whose Q4 2008 profits were down 55% from their 2007 levels and whose comps dropped 8% for the year. As Fortune reported late last month, “analysts are predicting profits will fall even further in 2009, and one even suggests Sears may disappear altogether.”

Meanwhile, Family Dollar has been busy adjusting its assortment and promotions strategy to better fit the times. CEO Howard Levine told attendees at a February Deutsche Bank Small and Mid Cap Conference that the 6,600-plus unit neighborhood discount chain is “working to increase relevancy to the customer by reinforcing more promotionally priced offerings and expanding the assortment of key consumables, such as food.”

What exactly have they been doing? The company added sales generating SKUs of food, health and beauty aids, and laundry and cleaners – all items that people buy regularly and frequently, so they come into the store more often. In addition, the company directly confronted the downturn in the home category by launching a Home Remodel event featuring inexpensive home décor ideas. And it took a page from Merchandise Optimization 101, promoting average ticket-increasing merchandise in in-store circulars and end-aisle displays. In another smart merchandising move, the company is using seasonal buys to freshen the selection.

The strategy appears to be working. According to a Dow Jones Newswire from March 5, Family Dollar’s second quarter comps store sales were up over 6%, and the company raised its earnings guidance ten cents to $0.61 a share. And the stock is up 60% vs. year ago levels.

From all appearances, Family Dollar seems to be getting back to retailing basics in ways that consumers, as well as shareholders, clearly approve of.