According to a Yankelovich survey, deep discounting - even during a recession - can damage brands in the long run. When asked what they assume when a brand lowers its prices during difficult economic times, 70 percent of consumers responded, "The brand is normally overpriced." Sixty two percent said they assumed that "the product is old, about to expire or about to be updated, and the company is trying to get rid of it to make room for the new stuff."
In contrast, when consumers were asked what they assume when a brand does not lower its prices during difficult times, 64 percent said they assume that "the product is extremely popular," and 64 percent assume that "the product is already a good value."
"Lowering prices during a recession clearly raises suspicions among consumers," said J. Walker Smith, Ph.D., president of the Yankelovich MONITOR and executive vice chairman of The Futures Company, in a statement. "Drastic price cuts like those seen during the past holiday season create a double-barreled risk for brands. First, such price cuts generally fail to generate enough business to pay for themselves, although clearing inventory is of some value. Second, they create long-term difficulties in terms of consumer expectations."
Moreover, Yankelovich contends that those "deflationary expectations" cause consumers to postpone purchases because, when they see that a price is reduced, they anticipate that prices will come down even further. About half to 60 percent of the study respondents think that when companies lower prices, it means that prices will go down further if they wait long enough. And roughly 50 to 70 percent think that brands that do not lower prices will have to do so eventually.
"These expectations of deflation are difficult to break and can keep a category mired in unreasonably low prices for years," Mr. Smith.
The RDD (random digit dial) telephone survey was conducted in January 2009 among 1,002 adults ages 18+.
Discussion Questions: When is discounting healthy to clear excess goods and when is it detrimental to a brand's equity? If necessary, what's the best way to reduce inventories without damaging brand equity?