The same way consumers are counting their cents the one minute only to cough up more rands the next, so too are marketers when it comes to calculating the true cost of discounting promotions.
Consumers are feeling the pinch of the increasing interest rate, skyrocketing fuel hikes, Eishkom’s daily status updates and rising inflation. Marketers are acutely aware of learned price sensitivity from previous recessions, competition from dealer owned brands and the balancing act of reaching short-term sales targets and long-term brand building. Pricing strategies are taking centre stage in the battle of the minds of brands and sales marketers when it comes to building long-term brand loyalty and looking at potential trade-offs when discounting in favour of “buying the shopper in order to not lose the sale”.
The key insight is that after a period of time, shoppers become increasingly savvy to price discounts, both in the time frame they occur, as well as the value associated in the discount offered. This represents a challenge for brands who at key stages will need to take price increases or stay known for discounted prices which eventually erodes margins. These cultivated price strategies can shift behaviour far more powerfully in the long run for brands if they are not used as a source of competitive advantage.
“This expectation often prevents shoppers from purchasing items at the regular price from your business, and encourages them to look for competitor discounts”. https://www.volusion.com/blog/using-the-psychology-of-discounts-to-make-more-money/.
The reality is that when it comes to discounts, you need to consider if you’re trading sales volumes for profitability and potentially damaging the equity of your brand. Think of a house that’s been on the market for a really long time with further price reductions that can eventually create a price suspicion of value the further the price reduces.
This is separate from the high-low pricing of a seasonal product like Valentine’s Day chocolates or Christmas Décor.
“Perhaps the greatest danger in frequent discounting is to loyal users.
Discounts are offered in an effort to get new users or increase volume. Some new users are induced to trial. Loyal users, however, who would have bought the product at its normal price because they believe in the quality/price relationship, now purchase to the brand’s detriment, thanks to lower margins and their removal from the marketplace“. https://killianbranding.com/whitepaper/discounting/
The knock-on effect of continued discounting does a couple of things:
- You’re reaching the same customers who would have bought your brand anyway and are now purchasing at a discounted rate.
- You risk customers questioning why they should pay full price if they can simply wait for the next promotion.
- Loyal customers feel ripped-off for having paid a premium for a now intermittently reduced price.
- Consumers shift to bargain hunting for the best deals (brand becomes irrelevant).
- Commercial visibility of sites like www.pricecheck.co.za gives consumers comparative benchmarks to shop around.
Common examples driving discounting expectations:
- Black Friday:
Annually shoppers anxiously await the promise of bigger and better deals in Black Friday spending frenzies, saving for this November blitz of favourable deals and must-have items to be purchased. Over the last 2 years with the pandemic tightening shoppers’ spending, we have seen shoppers drive the expectation of discounts expected over the period and also responding quite negatively to retailers that aren’t offering 30% or more on larger ticket items. https://www.timeslive.co.za/news/south-africa/2021-11-26-why-inflate-the-prices-sa-slams-black-friday-scam/
- Seasonal discounting:
Seasonal promo bumper specials in certain categories have been both something shoppers look forward to and retailers plan as annualised revenue in the marketing calendars. While these are very important as a source of competitive advantage, they are often not re-looked with new ways to add value to shoppers beyond the discount year-on-year. The fragrance category drives many promotional specials as fragrance Spring offers, inclusive of GWP and beauty set packages. The opportunity, however, can be for brands to cross pollinate different category value combinations to reward and attract new shopper segments versus just deal prone ones. Seasonal discounting can however be a source of advantage if used for out of season deals and capitalising on new shopper audiences. https://www.talon.one/blog/seasonal-marketing-campaigns-9-best-ways-to-benefit-from-promotions
- Increase product awareness outside of seasons.
- Increase visibility for new shoppers.
- Convert one-time customers into more loyal customers.
- Boost margins in an otherwise quiet period.
What are the implications:
The more a brand discounts to “win the shopper at any cost” the more the category devalues – both in market share but also in the perception of value added benefits and using other levers as competitive sources of advantage. Brands are better off exploring how to integrate pricing tactics within shopper need states for value (better experiences, value reframing, new occasions and even personalisation of key offers). https://www.priceintelligently.com/blog/bid/170106/how-discounting-is-killing-your-pricing-strategy
The challenge for leader brands who are at the coal face of price war tactics and ensuring they win share at any cost, is that customers may eventually associate your brand into B and C grade status.
It becomes harder to build new value propositions from when price is the only thing you have become well known for. The brand sits quietly in the corner of the room while its guardians all argue convincingly that they know what’s best for it. https://killianbranding.com/whitepaper/discounting/
What could we be doing better/differently:
If pricing discounting is being used to drive trial / move product off shelf / entice lapsed buyers vs. recruit new shoppers into the segment? By seeing this as a chance to refine the role of pricing tactics within clear value propositions, a brands pricing strategy can be evolved into a more strategic space.
1) Trial as a tactic: If you are wanting to drive trial, rather than having consumers commit to a large format, offer a single serve format but with an adjusted price for the convenience factor.
2) Reframe new value drivers: Consider the trade-off of discounting your price by an attractive amount versus maintaining your current price, but having a value-add at the equivalent value of what you were prepared to discount by. The first immediate price discount has the potential to drive the price down across the category with competitors offering deeper discounts. A value-add on the other hand is harder to imitate, especially when it’s linked to your brand equity drivers.
3) Hiking pricing strategies : Take the challenges that Netflix subscriptions have recently faced with customers demanding lower cost subscription models given that other market offerings are more competitive. In this instance, raising and hiking prices can no longer serve a value model. Every time Netflix raises prices, it must reckon with this reality. At $20 per month, Netflix’s 4K plan is already more expensive than any other service—the closest alternative is HBO Max, at $15 per month—and even its HD plan is on the pricey side at $15.50 per month. Voting with your wallet is easy when the competition is just a few clicks away. https://www.techhive.com/article/633571/netflix-loses-subscribers-after-price-hikes.html
4) Role of online versus offline pricing variations: Often retailers will offer discounted prices online for an item (whilst the same item is sold at a higher price in-store), with the key motivation being higher costs of instore shopping versus online overheads, and passing the discount to the online shopper. The only risk to this strategy is to increase the “shopper showrooming effect” whereby shoppers only browse instore to see new offers and then head online to secure the discount.
The big brand picture of pricing tactics:
“Although it’s wise to contain costs, failing to support brands or examine core customers’ changing needs can jeopardize performance over the long-term. Companies that put customer needs under the microscope, take a scalpel rather than a cleaver to the marketing budget, and nimbly adjust strategies, tactics, and product offerings in response to shifting demand are more likely than others to flourish both during and after a recession.”
Can you build brand loyalty (equity?) while discounting?
Price discounting as a reactive strategy to attract sales beyond there being a meaningful justification (e.g. end of season, limited edition clearance, bulk discounts) will ultimately devalue your brand in the minds of consumers. The litmus test is to consider not only the cost of the discount at the time of promotion, but competitors reacting through matching or one-upping with deeper discounts.
Loyal customers who would have bought your product anyway are now paying less and you’ve lost margins you would have had, and there’s the knock-on effects of consumers stockpiling at the discounted price.
The short answer, discounts are useful tactics to drive trial, and sales in the off season, but consider the long-term cost if it’s becoming a go-to tactic to boost sales.