"Price Addiction: Why retailers are hooked on discounting," is an interesting recent article in Retail Customer Experience by competitive pricing consultant, Dale Furtwengler. In his comments about "Addiction to LOW pricing by RETAILERS," Furtwengler posits that retailers have gotten so used to fighting for the lowest prices, they've forgotten about all the other values to be offered, and, in the process of pricing low, they've trained the customers to be price conscious and expect low prices.
Furtwengler thinks retailers got hooked on discounting because of Walmart's success with a low-price strategy and everyone's desire to duplicate it; also that retailers fooled themselves into thinking they were giving what the customer wants, with the result that everybody stopped trying to differentiate themselves on anything other than price. Just about every pricing strategist you talk to today, agrees: Unless you have a secret formula to underprice and outlast your industry's low-price leader, you're setting yourself up for failure. So let's take a look at the ways retailers can self-destruct with low pricing:
- You have to constantly beat up your vendors to get the best price. For this low-price strategy to work, costs of the items you sell have to be cheaper than your competitors' -- And cheaper vendors likely mean more product defects.
- Competitors can lower their prices, too. If competitors are game, they'll also drop their prices until you (and/or they) are no longer in business.
- Greater Transparency. The transparency of the Internet lets consumers check your pricing against hundreds or thousands of online retailers, so they know who's got the lowest prices, and who's got the quality.
- Insufficient profit margin for discounting. If you strive to have the lowest prices at all times, you may not have sufficient profit margin to offer further low prices for promotions or discounts.
- Discounting repeatedly is not a long-term solution. One of the key elements of a sale is surprise. However, surprise fades when you reduce prices over and over again.
- Mistakenly thinking that by having the lowest price, you will sell more. Maybe, but we've already talked and written about selling more at a lower price, or less at a higher price, and you find a spot in the middle where you'll sell less, at a higher price, and make more.
- Your credibility gets questionable. If you've conditioned customers to expect EDLP, offering price discounts can seem contradictory, and cause customers to question if you really do have the lowest prices.
- Your consistency gets questionable. Are you everyday low priced, or are you everyday low priced plus sales?
- Perception of quality gets lower. A lower price infers that the quality of the brand is actually low or that it isn't worth paying the premium price.
- Customer service suffers. If EDLP makes your profit margin low and forces you to operate on a low budget, you can't afford to hire the support staff to maintain a high level of fulfillment and customer service.
So there you have it:
With low prices, you lose money, customers, sales, credibility and consistency -- there's no way you can win. The solution is to lead change. Be the leader of the pack. Use pricing intelligence and price intelligently. Find out and use your ability to differentiate yourself. I believe that pricing will level out to parity in the coming months as merchants and customers alike, become wise again about pricing and value -- and things will settle down. If you apply strategic pricing policies and use the right tools and information to know where you're positioned in terms of pricing, assortment, and competition, you can sell for value, defend your market share, keep the customer comfortable and happy, and reap greater profits.
Many points above were made thanks to:
- The Disadvantages of an Everyday Low Pricing Strategy, Small Business Chronicle.
- The Low Price Disadvantage, Leading Entrepreneurship by Daniel James Scott.
- Cheap Doesn't Feel Good. Brandland.
You'll also find a lot of consistency in our Upstream Commerce blog posts; some examples below, in case they're not listed at the bottom of this post:
And many more at Upstream Commerce.
Thanks. Let me have your reactions to this post, and to your own pricing status. Gilon