Merchants Feed Consumer Dependence on Discounts
Al Ries, chairman of the marketing strategy firm chairman of Ries & Ries, views rampant discounting by retailers in terms of infectious disease.
He could just as easily have equated it to a bad habit or, going even further, an addiction. Merchants advertise discounts to consumers who act on those offers to make a purchase. Seeing that discounts drive foot traffic, retailers run more deals for consumers to chase after. Eventually, consumers only shop when discounts are dangled.
Writing this week on the Advertising Age website, Mr. Ries observed that you "seldom see a department-store advertisement based on anything except a sale." He points to Belk, Dillard’s, J.C. Penney, Kohl’s, Macy’s and Sears among the transgressors.
Kohl’s according to Mr. Ries, is the worst. He points to what he says is typical language for the chain in a recent mailing. "Start with these incredible sale prices of 20-60 percent off. Take an extra 15 percent off everything. Plus add a $5 bonus."
The quest to spend as little as possible on product purchases has also played into the
"extreme couponing" craze. Brands and retailers that have trained consumers to work for the best deal are now seeking to place limits on just how much shoppers can save.
An ABC News article reported on changes that retailers such as Publix, Rite Aid and Target have made to address the issue. Retailers are limiting the number of BOGO (buy one, get one) offers consumers can redeem, restricting the number of items that can be purchased to protect stock levels.
Shannon Pattern, a spokesperson for Publix, told ABC, "With extreme couponers, it’s a matter of using 50 coupons to purchase 50 items, which creates the problem of clearing out the shelves. We just need to make sure we limit the quantity so that we have enough products for everyone."
Discussion Questions
Discussion Questions: Do you also see discounting in terms of disease for brands, retailers and consumers? Is there any way for retailers to shake off the discounting bug and still get shoppers into stores?
Retailers are still forced to answer to Wall Street and have created this discount mentality so you feel like a chump if you come to a store on a Wednesday instead of the weekend. This of course makes traffic even softer and the need for more promotions higher. Add the euphoria over mobile couponing and it is a recipe for a shakeout of the middle, the heart of retail.
Discounts have become the drug of choice for retailers and consumers, and as long as the economy remains in the doldrums, both will keep shooting up. With the spread of coupon sites like Groupon and LivingSocial, there seems to be little chance of the extreme coupon revolution slowing.
Discounts have become the norm for retailers and consumers. In a sense, they are interdependent: consumers don’t want to pay retail, so retailers offer discounts to lure them into stores. It’s gotten to the point where if you pay full price for anything at Macy’s you should be ashamed.
Retailers are going to have to work with manufacturers to ensure adequate stock of items to be discounted, especially when BOBOs are involved. And they are going to have to get used to extreme couponers.
Discounting is not going to go away.
Discounting like what we see at Kohl’s and other retailers will need to change and change soon. Consumers need to start considering each purchase, not because it was on sale, but because they needed it. I believe this move will begin with retailers and manufacturers once they become responsible for the entire cost of a products life. The cost of a product not only includes the cost of raw materials, manufacturing, marketing and transportation, but also the cost to recycle or dispose of a product (including the marketing material to promote the product in store) properly, which can be substantial. When that cost gets added back into the overall cost of a product, manufacturers and retailers will need to keep prices and discounts realistic if they want to stay in business. Consumers will then be forced to be more conscious of what they buy. One study showed that the world consumes 1.2 times the resources provided by earth. That should be alarming enough. When China catches up to US consumption the world will use 2 times the resources provided by earth. That is unsustainable.
Heavy discounts at retail lead to unneeded purchases which in turn lead to a waste of natural resources and a cost of disposing (recycle or landfill). I realize this is a very different way to look at retail sale prices, but I believe it is necessary, and the move needs to happen sooner than later.
Consumers have had their brains addled by a prevailing contemporary fashion: discount pricing. Retailers have become like exaggerating politicians, promising heavy rewards (discounts) that really aren’t. It’s mostly just make believe.
Discounting in retailing isn’t really a disease. It’s an affliction that’s in tune with the times and equates to the “values” in many brand claims as well as the wizardry in much of today’s political process.
I watch many TV ads…and cringe each time I see the Meineke TV ad saying “Tell us what you want to pay (to get your brakes fixed) and we’ll tell you what we can do,” I freeze. I wonder if any one replies, “All I want is to pay is to have new brakes on my left front wheel only.” The retailer’s promise is that of an implied discount but the real purpose is to get you into the store where the sales pitch can take on a more expensive tone. That’s in tune with today’s times…for good or bad.
Can retailers shake off the discounting bug and still get shoppers into stores? Whole Foods has but few retailers want–or need–to risk it. So the game continues to get played.
At one time I ardently agreed with Al Ries on this point. But like the human body or our broader ecosystem, once a virus lives there long enough we build up natural immunities. In this case, the immunities are retailers that set regular retails high enough to absorb the discounting (with manufacturers help of course)–and consumers who know it. They balance each other out in the end.
It is a horrible waste of energy–just as viruses and antibodies constantly fighting each other sap strength our bodies could otherwise use to become stronger or fight off aging. So in that sense, discounting continues to weigh us down as an industry and prevent us from developing new strength–but it’s not going to kill us either.
Retailers have a choice. They don’t have to create a price image for themselves with discounts and promotions, but they just might make their immune systems vulnerable to another disease–bankruptitis. It happens to be more lethal, and usually fatal, compared to discountitis. It’s important to remember that the jobless rate rose to 9.2 percent last month, 14.1 million people are out of work, only 18,000 jobs were created in June by the economy, and many people have not received raises for several years. Retail price is still a dominant issue, and those merchants that address the mass market and need a broad customer base are well advised to make sure they have a good price image. The key is managing discounts, promotions, and couponing. In one of the reference articles relative to extreme couponers, retailers are justified in protecting stocks so that the benefit of the coupons are spread to a wider audience. To turn the use of coupons, however, into an ordeal for the shopper will only drive that shopper elsewhere–which is exactly what the article indicates. Retailers need to build their brand through a variety of initiatives, many non-price, but they cannot, except at their peril, avoid using discount, BOGOs, other promotions, and coupons to drive home a price-value proposition.
Discounting has always been part of retailing. The difference today is the depth and number of discounts that have become part of the norm since the economy turned south. Add the impact of the various coupon companies and now deep discounting is a fixture on the retail scene.
However, in order to be able to buy up large quantities of a sale item the customer has to have enough extra funds to be able to invest in that item. This by itself is a somewhat limiting factor and pantry loading is more a supermarket issue than a general retail one.
As many have already pointed out, discounting is not going to go away anytime soon. Retailers will have to find a way to adjust margins to compensate for the margin erosion that comes with this new way of life.
97% of all our problems come from self-inflicted wounds. Actually it’s 100% but 97% sounds more like real data. Of all our self-inflictions, this ‘Destruction by Discount’ strategy just may be one of the most foolish.
It’s the world we live in. Consumers want great value for their money. Discounts and coupons provide that value in stores. Groupon and Living Social fulfill a need many didn’t know they had. But once shoppers recognize the “savings” out there for the taking, they want them.
To suggest that marketers and retailers develop strategies to re-direct consumers away from discounting is misguided. Instead marketing strategies have to be based on understanding the consumer and the competitive landscape. If a company (Bose might be a good example) can position itself as “worth the price” and that price is higher than much of the competition, that company can reap the rewards. However, for most consumer goods that claim is difficult if not impossible to justify.
With more and more deep discounters, especially in apparel, where a woman can purchase a top for $3 and still look fashionable, it is hard to argue with the consumer on their choices.
It is a disease? Sure. Hard to stop now that it is expected. The problem is that no one wants to be the store that stops discounting, only to hope others follow their lead. Also, there are serious governmental concerns if retailers collaborate to attempt to “fix” pricing.
Retailers that focus upon other traits of their brand while still offering competitive, yet incrementally-higher pricing can win consumers.
One answer to this question is Walmart, under Sam Walton. The single principle that drove Walmart to become the world’s largest corporation was the renunciation of Hi-Lo pricing in favor of EDLP–Every Day Low Pricing. Hi-Lo encourages casino type thinking on the part of shoppers (many hate it) and encourages the tiny cohort of “predatory” shoppers, those who can buy $200 of merchandise for $20. I discussed this in some detail in “No, the Customer is NOT Always Right!” The bottom line is that paying customers to buy is lazy, non-selling retailing. That doesn’t mean that using a few massive specials isn’t a good idea. See “Stew Leonard: My Story.” But there is nothing “special” about massive numbers of regular “specials.”
This is nothing new, except that consumers are more savvy today and harder to fool. It’s difficult when everyone is racing to be ‘the low price leader’, but in this economy it’s at least understandable. I see no cataclysmic change coming, and no emergency, although I certainly would have seen all this as an unprecedented emergency when I was just starting out and hadn’t yet seen this same nonsense going on for 40 years. It always shakes out. Those who plan and have some creativity and daring generally come out ahead. Those who don’t, don’t.
Pricing and promotion strategies vary by retailer. Off price/discount price works for some, and fails miserably in the long run, for others.
Consumers do not buy exclusively when things are on ‘sale’. There is a rich treasure trove of data that backs that up.
However, certain retailers who run pricing and promotion programs in an effective manner, along with their merchandising mix, are not harming their business, as Mr. Ries contends. In many cases, they are enhancing it.
Kohl’s has 150+ “promotional” events a year. They keep growing–stores, sales, profits. TJX is waxing the competition–does that make them poor performers? Of course not. The “Blonde Bombshell” (my gorgeous bride of 37 years) showed me 3 summer dresses that she picked up at TJ Maxx at $29.89 each–the manufacturers tags were in the lining, and the previous retail mark had the dresses for $129.95. Or, how about JoS. A. Bank–they are performing well above other men’s stores across the country.
Price is part of the marketing mix–we’ve looked at it that way since the early ’60s. Decide how much of a role it plays into the strategy, and then work it to your advantage. Kohl’s, TJX, and JoS. A. Bank are all taking cash to the bank and pockets of shareholders.
Long ago, retailers learned that when an item is marked down, the unit sales of that item increases. However the message is communicated, this bit of Shopper Marketing insight remains relevant. Merchants and their finance partners have learned how to manage price to ensure financial targets are met.
Therefore it is NOT important for retailers to break the discounting cycle, unless consumer behavior proves there is a more motivating message than SALE.
Wow, we’ve had this discussion a ton of times before, right? Like the old radio play clock–play “Stairway” every day at 5:15 PM–it seems like there’s a “discussion clock” on this topic.
To me, the topic really seems to be the actual retail prices of stuff. If most of it sells at a discount, then that’s the new actual retail price. It reminds me of Nixon’s price freeze in the 80s when manufacturers froze their wholesale prices artificially high and then dealt backwards to the real price. It was the birth of wholesale allowances. Today it seems that retailers are doing the same thing: Set the MSRP artificially high and then deal backwards with discounts. If they’re NOT doing that, they should begin because that’s the way things are going in this economy.
Retailers are very good at training consumers what to expect. When retailers train consumers’ expectations, why should we be surprised when they respond to their training?
Discounting is not going away.
Discounting is not a sustainable retail business model.
These two statements may seem like a fundamental contradiction, but they are not. I don’t think of discounting as a disease, although I have no trouble with framing it that way. Discounting is a terminal disease.
I like to think of discounting as a slippery slope. Once you step out onto that slope there’s just about no way to step back. It’s all downhill from there.
And yet, in an economic sense, discounting is nothing more than good old fashioned price competition. The competition drives down the market price of goods, forcing the uncompetitive out of business or into the hands of the more competitive. Just when we think that all this competition will lead to a single uber retailer, other concepts spring up with lower cost structures (ecommerce, for example), and prices are pushed lower still. This is why some have suggested that the effective life span of all but the most hardy of retail banners is only several decades at best.
This pattern is particularly true of high demand, highly identifiable commodities or near commodities, which is the business of just about every major national retailer. From toothpaste to TVs to tank tops, race you to the bottom!
Those that can escape this seeming black hole are those who offer highly differentiated products, products that are discretionary, and whose value to the customer goes far beyond the price paid. Even then, prices need to be sharp, but retailers are better able to sustain pricing integrity without having to resort to rampant discounting, and thus are better able to sustain margins.
There’s not a lot of volume in these categories, so this is the business of smaller, independent retailers. That doesn’t make it easier, because they are trading in more discretionary goods, but at least it’s possible to construct a sustainable business model. Unless they succumb to discounting.
Yes–discounting is a disease. The smartest brands stay away from it except as a way to move surplus goods at the end of their life cycle.
The fact that it is rampant shows that retailing has become fooled by the dominance of supermarkets and discount superstores over the last 40 years. This aligns closely with efficiency and ease of modern-day transport (private cars and super-efficient freight) which has made access to bulk goods at low prices the norm.
The cycle is slowly turning back towards smaller stores, local produce and personal service–but it is too early to predict how big this effect will be.
I see a future where discount OR full service is a more clearly defined choice, and bricks and mortar retailing will be mainly the latter.