Beware of the discounting minefield

The truths about branding book review

On Sale. Clearance sale. Holiday sale. 25% off. 50% off. it never ends. Roy Williams in Wizard of Ads describes constant promotion as the cocaine of Advertising. That’s a good analogy because discounts make us feel good in the short run (as marketing teams see sales gains) but risk killing the brand in the long run (by cheapening the brand’s image and shrinking profit margins). As consumers become acclimatised to this activity, it takes larger “doses” to keep generating interest and sales gains.

The problem with discounting is that you can never go low enough. There will always be a competitor willing to be cheaper than you. And that simple point is the crux of the discounting dilemma. Although an organisation may agonise over a few per centage point shifts in a discount – should the sale be at 20 per cent or 25 per cent off – there are other competitors who will be willing to discount deeper to stimulate revenue and market share.

Discounting is a minefield, and one which you will most certainly lose. Even if you’re brave enough to offer the lowest prices and ultimately win the weekly volume award, you have eroded your brand in the process, losing a more precious element along the way: your brand’s equality.

US supermarket Kmart attempted to revitalise itself. Enthusiastic CEO Charles Conaway brought in a slew of fancy executives from places like Wal-Mart, Coca-Cola and Sears. The strategy for saving the brand? Compete head-on with Wal-Mart through extensive discounting. Really, that was it. Price reductions combined with extensive consumer promotions communicated through a steady stream of direct mail. Ultimately, this strategy led to bankruptcy, the departure of Mr Conaway, and finally a merger with one of Kmart’s competitors.
Competing on price is the weakest of positions. First, marketing should provide consumers with a reason, other than price, to do business with you.

Target understands this. Although discounting in the domain of discounters, Target has created itself as a hip discounter in the US through creative merchandise selections and interesting advertising.

Second, Wal-Mart’s success with its low-price focus is due in large part to brutality efficient operations – an efficiency that Kmart was unable to match.

Third, competing directly with a dominant market leader is rarely the path to success.
Brands are built not through imitation but though differentiation.

What logic could lead anyone to believe that Kmart could out-Wal-Mart-Wal-Mart?

The battery wars are interesting to watch from a pricing perspective. Duracell has a slight US market share lead over Energizer. Rayovac is a distant third in market share. Rayovac is always the cheapest at point of sale of the national brands.

Duracell is typically the market leader and the price leader at point of sale, striving to keep a 5-cent to 10-cent price advantage over Energizer. But, don’t be confused – in the battery world, a price advantage for Duracell is being a few cents above Energizer.
Why? Because Duracell understands that the price leader is often seen as a market leader, the quality and performance leader.

All are brand attributes that relate back to a 5-cent to 10-cent price differential over their competitor, Energizer.

You can just see the Energizer sales associate proudly telling the head of marketing that he had secured a 5-cent discount versus Duracell. The sales team cheers because of the short-term volume potential. The marketing executive groans because once again, Duracell is positioned as a leader simply by premium pricing at point of sale.

Too many times, marketers convince themselves that the discount is just this one time. A temporary price reduction (TPR) is taken at a grocery store. A coupon of significant value across the country. A special buy one get one free (BOGOF) programme is provided for mass merchandiser.
The next thing you know, the consumer has become trained to wait for discounts.

Your brand is known for being sold below its recommended retail price and a little brand erosion has begun.

Discounting is a minefield because you never quite know when a discounting move will blow up on you. At what point has the consumer become used to a promotional price that they refuse to purchase your product when it is not on sale?

At what point is your competitor so desperate that it will drop prices significantly to capture your volume? If you do not have strong brand equity, if it has been declining because of price discounts, can your brand sustain such a pricing blow?

There is no denying that it is a fine line to walk – the balance between short-term gains from discounts and the damage to long-term brand building. But, be careful about over-promotion and extensive discounting. Walking into that minefield led Kmart to bankruptcy court.

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This chapter is part of Truth about brands review thus copyrighted to its authors.