Monthly Archives: April 2011

Beat the Price Cutting Trap

Rarely do price promotions lead to increased sales; more often than not, they simply attract deal seekers or encourage consumers to stockpile items that are on sale – Harvard Business Review

In the current economic situation more and more focus is being placed on prices. Obviously people are taking more notice of what things cost and grocery shopping in particular is being fragmented. Where before people were happy to do all their grocery shopping in one location they are now being more discriminating and spreading their basket across multiple shops. The discounters such as Aldi and Lidl are seeing increased market share as a result.

The temptation on hearing this is to immediately assume that you have to cut prices in order to compete. But the message is actually more subtle and, for non-grocery retailers at least, is more hopeful. I have seen customer survey results in recent times and my analysis of them showed that yes price is important but even within the grocery market it is not everything. If price was the only factor people placed a priority on then there would be no splitting of the shopping – it would all transfer to the cheapest shop. But in fact what is happening is that people are moving the dried products such as canned goods to discounters but they are still placing a premium on the fresh products such as meat and vegetables and are willing to pay more for them.

What does this mean for the general retailer?

I have given this some thought and believe it means that rather than simply cutting prices a business can maintain its margins if it is clever and pro-active. Cutting prices alone is a dead-end path, one which puts it up against larger organisations which, through their sheer scale have greater bargaining power and efficiencies. This conclusion was reinforced for me in a recent article in the Harvard Business Review.

The article focused on the dangers inherent in attracting customers through price cuttings. It specifically mentioned web sites which encourage businesses to offer deals to their visitors but it’s message was more general than that and results from decades of research showing that  price promotions are “suitable only for specific purposes under specific conditions.” It’s main points are;
  • Reducing prices lowers the perceived value of the product or service and makes price the only reference point. No longer will the quality of the product, the personal service or the ambience of the location be the factors that consumers take into account.
  • Price promotions attract people for whom price is the only factor. These people have already been desensitized to the other benefits you can provide and, as soon as you raise your prices again they will move on to the next place with a discount.
  • Price promotions that are available only to people who received a voucher book or purchased a discount card create resentment amongst your regular customers. These people are your bread and butter but they see others getting a better deal than they do and they don’t tend to like it. 

The result is that a business who tries to offer a special promotion (either by themselves or as part of promotional scheme such as a discount website or a voucher book) and expects this alone to improve his business will be disappointed – or worse. There may be an initial surge of customers but, as the article notes these rarely lead to increased long term sales. In fact “a steep price promotion can make consumers permanently price sensitive… and can distract customers from a products benefits, leading to permanent damage” that results in lower long-term revenue.

Of course none of this means you can raise your prices and expect to thrive either. You have to remain competitive, you just don’t have to be the lowest price available. And you don’t have to avoid sales and price promotions completely.  If you use them sparingly and have a plan to convert the resulting 1-time customers into more profitable ongoing customers they can work. As the article says “what merchants need is a full tool kit of marketing programs.”

A Reward Card can be one of the most important tools in that kit. 

Llets look at how a Reward Card (or a Gift Card) can help you avoid the price game and also get you the maximum benefit from those rare promotions you do decide to run.
  • Most obviously the Reward Card allows you to replace the price fixation with one of your choosing. It is always better to give product rather than a discount because its cost to you is lower. So if you can get your customers to expect a bottle of wine after 5 meals or a free tire balance after 3 services then it helps your bottom line.
  • Because you are not providing a discount to every customer you automatically save money. Some of this can go towards greater rewards for the loyal customers, making the loyalty program itself more attractive.
  • The fact that a person has to do business with you to earn the rewards is seen as fairer by your regular customers and creates a positive attitude towards you.
  • When you do run  price a promotion your Reward Cards can help you get the maximum value from customers. Be sure to ask every customer if they have a card or would like one. This is standard practice anyway for any successful Reward Program but it is critical during a price promotion. Most effective is to load the card with points and give it to the customer even before putting the purchase through. This will result in almost 100% acceptance of the card and now you have the opportunity to try and convert this bargain-seeking 1-time visitor into an ongoing customer.
  • allows you to make private notes on each card that can be searched. Use this facility to record the promotion that brought the person in and the purchase they made. This will allow you to filter each promotion and assess which have been the most effective in bringing in customers and which have led to ongoing business.

Promotions such as sales or voucher books do have a place in business as a tool to bring customers into the shop. But they must be used sparingly and as part of a plan. Signing up to every voucher distributor has the same effect as permanently lowering your prices – lower profits. But if you know when and why you are going to run a promotion it can bring the customers in. Part of that planning is to have a Reward Program ready to convert those new customers into regular ones.

A Reward Card is not a replacement for all your other promotional opportunities, nor is it a magical device that will make your business a success. It is a tool that requires you to use it.  If you do so it can help reduce the need for other tools such as vouchers and price promotions that might be easier to operate but cost your business more in the long run.