To discount or not to discount.
That’s the question many of my clients have been asking lately, with the U.S. economy limping along at less than 1.5 percent growth and ever-growing global uncertainty, whether it be terrorism, China’s slowdown or the UK’s decision to leave the European Union.
I understand their Hamlet-esque angst. On the one hand, they’re anxious to drive sales in these uncooperative market conditions. On the other hand, they’re equally anxious to avoid long-term damage to their brand’s image.
A plethora of conflicting conclusions from business school researchers only adds to the confusion. Some studies say consumers who buy on promotions are acting only on a price trigger and not expressing a personal preference for the brand. These studies conclude that frequent dealing trains consumers to wait for discounts and ultimately reduces the price that people are willing to pay.
Au contraire, say other studies that point out that today’s consumer is more tech-savvy, online-oriented and value conscious than ever before. These studies conclude that deals actually help a brand by increasing awareness and trial.
Both views sound reasonable and are supported by rigorous academic research.
So when clients come to me for advice, I say, “Proceed, with caution.”
My bias is to drive sales. I can’t stand leaving inventory unsold or missing quarterly sales targets. And over time, I’ve learned that it is possible to use price promotions to stimulate demand without trampling the brand.
First, segment your customers into at least two groups and apply different promotional strategies to each. Group one are those who know and prefer your brand. Group two are prospects who aren’t yet customers.
Group one is your bread and butter. Your goal with them is to protect brand prestige and financial margin. For this group, I recommend a non-monetary, value-added promotion such as a free gift or extra product. This kind of promotion has three benefits: It stimulates sales in the short term, it doesn’t reduce the products’ reference price in consumers’ minds, and it actually enhances brand perceptions.
But while value-added promotions work well for brand loyalists, they’re not nearly as effective at attracting new customers.
To get new customers, the most effective tool is a compelling price offer that closes the value gap between your product and the customer’s next logical alternative. Think Ritz-Carlton for just a little more than the price of a Hyatt.
To protect against brand denigration, price promotions should have one or more of the following characteristics:
They should be directed away from your regular customers and toward a wider base of potential first-time customers.
They should be offered on a “lite” version of your product, one that doesn’t offer all the bells and whistles that brand loyalists seek.
They should be offered only on products that are most commonly purchased by first-time customers. Items that are typically purchased by brand loyalists should not be discounted.
They should be offered for a limited time only. And, when the offer expires, it should go away. No immediate “back by popular demand” extensions.
They should be offered via select channels such as outlet stores, or online flash-sale sites such as Gilt and Rue La La, or to specific demographic groups such as students, or seniors, or first-time customers.
Finally, don’t let the promotion be the only message your customers are hearing. Keep advertising. Keep extolling your brand’s many virtues, even while some of its products are on sale.
With these approaches, I’ve found that it’s entirely possible to stimulate short-term sales without subjecting a brand to the “slings and arrows of outrageous fortune.”
Adam Snitzer is a revenue strategy expert and president of Peak Revenue Performance, a consulting firm that specializes in designing and executing innovative pricing strategies. He can be reached at firstname.lastname@example.org, or via the company’s website at PeakRevenuePerformance.com.