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?

Is Price the only ‘P’ that Matters Now?

As consumers and retailers settle into the new frugality, IRI reported last week on the emergence of a new generation of Americans – the Downturn Generation. As shoppers, this generation is adopting practices similar to Depression-era shoppers, implemented both to weather the recession and to keep a close eye on spending long after the recession ends. This marks a dramatic change in how consumers shop and what they buy.

When people lose their jobs, they value their time differently. In today’s economy, convenience-based value propositions are losing their appeal as people are repricing their free time. In fact, IRI found that “65% of shoppers reported that price is becoming more important than convenience in their purchases."

But how do they know when a price is a good deal. In conversations with homeowners in December, it was clear that they are well-aware of the current price of items they buy regularly. Under those circumstances, consumers are generally able to evaluate an offer, and know when they are being overcharged. This may be changing.

A recent NY Times article about today’s consumer mindset the title of which says it all: “Never Mind What It Costs. Can I Get 70% Off?” The point of the story is that consumers are numb to 50% off offers, giving rise to a vicious cycle of discounting to motivate a purchase. Trouble is, this type of downward price spiral does not build loyalty. In fact, it’s the opposite of loyalty – it rewards customers for being fickle. And it requires retailers to reorient their value chain to make up for what they lose on the top line by selling more. While many have famously claimed “we’ll make it up on volume,” few have actually succeeded.

Enter Starbucks into the fray. The brand that brought us the idea - if not the reality - of the Italian café experience, has been criticized for the high price of its lattes and is under siege from McDonald’s and Dunkin’ Donuts, among others. Last weekend, the retailer began a campaign to combat extreme price pressure and the media blitz behind McDonald’s McCafe launch. The campaign warns readers to “Beware of a cheaper cup of coffee. It comes with a price.” According to Starbucks CMO Terry Davenport and reported in an article in the May 1 issue of AdAge, “The ads lay out facts that separate Starbucks from the competition, such as its practice of buying fair-trade beans and providing health care for employees who work more than 20 hours a week.”

Are people today more sensitive to the need for worker benefits like health insurance? Do mass market consumers value the fact that Starbucks provides coverage to part time workers? Do they make the connection between the price they pay and the company’s ability to afford coverage? Two years ago, the answers would have been “no.” Starbucks is making us connect the dots between our values and our willingness to pay. It may give us a chance to see whether this recession has changed these perceptions. Kudos to Starbucks for trying.

Flip Flops at the Grocery Store

Wnbc.com reported today on a company that wants to “be able to tell its customers the stories behind the products, of how they came to be and how sustainable they are.” Another story about Whole Foods? Nope - try Wal-Mart!

Whole Foods is busy trying to overcome its “Whole Paycheck” image. People used to use the nickname after shopping at Whole Foods, as if it were a badge of their own economic status. Now that whole paychecks are going to pay for the mortgage and gas, and with food prices sky high, people are shopping at Whole Foods less often and spending less when they do shop there. Whole Foods’ response? Introduce more lower-priced, store-branded merchandise and do more in-store promotions.

Meanwhile, Wal-Mart is moving to a more aspirational messaging platform. For years, Wal-Mart has focused on fuel savings, less waste, more efficient packaging and reduced electricity, all in pursuit of cost savings. Turns out that all that resource efficiency is also very green. The article points out that the company is now striving to extend its success with resource efficiency to the products on its shelves. The good folks in Bentonville know that the cost savings across the value chain from greater resource efficiency are substantial. In today’s tough economic environment, the master of EDLP is embracing green-ness as goodness.

However, finding the great deals is what people brag about now. Whole Foods may intentionally or unwittingly be reintroducing Hi-Low pricing and convincing consumers that there are still bargains to be had. What's old is new again, in green cred and in retail strategy!