Which Is Better Strategy: High-Price Big Discounts Or Uninflated Regular Prices?

Editor's Note:  Retail Intelligence Company, Upstream Commerce, welcomes pricing strategist, data analyst, and pricing processes expert, Scott R. Francis, as our newest guest contributor:    Objectives of any sales promotion include moving certain merchandise, getting buyers into the store who might not otherwise shop there (physically or electronically), and selling some regular-priced merchandise along with the promotional items. Since customers have several options no matter what they are buying, getting the customer's attention with the correct retail pricing strategies is critical. Large, unexpected discounts will get their attention, but when those discounts are expected rather than unexpected, will they achieve the objectives of the promotion?

If you've ever bought something online from a retailer or given a retailer your email address, then you'll occasionally (frequently?) receive email offers. I get them every day, but the tone of the emails can vary substantially: Some emails highlight new products, some offer free shipping, and some offer modest discounts, but a few retailers regularly offer huge discounts (of more than 50%). There is ample evidence in behavioral economics that customers like and will respond to discounts. However, retailers need to be careful they don’t end up with lower sales and lower margins by using a high-price, big discount strategy. I believe certain retailers have trained customers to realize their regular prices are meaningless, and in-fact highly inflated; and the customers rarely buy anything at full price from them.

What Does A Large Discount Signal To The Customer?

The reason a large discount will get attention is because it signals to the potential customer: You can get something valuable here for less than you would normally pay. In conjunction with that, the regular price is a signal about the quality of the product. So a relatively high price signals a relatively high quality, and the big discount says it is a bargain right now. Those factors can get potential customers to act. But when the regular price is very high for the retailer’s target market, and the discounted price is comparable to net prices at the retailer’s competitors, the attention will not last forever. Retailers who run huge promotions weekly will find, much like JC Penney, their customers become conditioned to those promotions and stop buying regular-priced merchandise.

The Problem With Price Addiction? It's Difficult To Shake The Habit. 

JCPenney had more problems than just their customers’ addiction to promotions; however they learned what all addicts learn – it is very difficult to quit. A couple other retailers who appear similarly addicted, but perhaps handling it better are Jos. A. Bank and Omaha Steaks. I see Jos. A. Bank ads on TV nearly every morning during my workout: “Buy 1 Get 3 Free”, or “60% Off!” and I see their ads all over the Internet. Similarly, I regularly see Omaha Steaks ads in newspapers and the Internet for “67% Off”. In the latter case, it is almost impossible to find something online that is not on-sale. Both companies are privately held and I am not privy to their results, but the frequency of the promotions would indicate a dependency.

Importance Of Good Analytics To See If Your Retail Pricing Strategies Are Working:  

It's imperative for retailers to have good analytics to tell them if their strategies are working and whether the customer's OR the retailer's dependency on discounts is worth it. Here are some of the important questions a retailer must ask when using big discounts:

1. How do our prices at 50% off compare to our main competitor's most common prices, which may also be 50% off?

2. Do our list prices accurately reflect the differences in quality between our products and our competitors? Are our list prices just the independent MSRP?

3. What is the distribution of our sales compared to the size of discount? Are the bulk of our sales at discounts larger than 50%?

4. What percent of orders have items with little to no discount? Are less than 10% of my sales at list price?

5. Are the spikes in volume all centered around discounts? i.e., does it mean customers are waiting for the promotion to buy?

6. How do our market share and growth rates compare to our competitors who do not use the high price, big discount strategy?

To Use Analytics As A Guide, Retailers Must:

* Test the results of stores with high-price, big-discounts versus stores with less inflated regular prices.

* Do the same test by product category.

 

Bottom Line For Your Strategic Pricing Bottom Line:

Be careful not to condition your customers to treat your discounted prices as the real "normal price” and only shop for sale items. If you are generating incremental margin from your promotion activities, great job! If not, perhaps you should consider weaning yourself off the dependency. Just don’t try it cold turkey. JCPenney showed us the problem with that. 

 

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Scott Francis, Guest Contributor

About Author

Scott Francis is the President of Strategic Pricing Solutions, a management-consulting firm helping clients with pricing strategies, data analytics, and pricing processes. Scott has more than 25 years of pricing experience both as a consultant and in roles leading the pricing function at large corporations. Scott's thinking is heavily influenced by the data-driven approach he learned studying finance and behavioral economics while earning an MBA at the University of Chicago. Prior to forming Strategic Pricing Solutions in 2005, Scott held a variety of corporate positions including CFO, SVP of Marketing and VP of Pricing. Follow Scott on Twitter@StratPricing and at http://www.Stratpricing.com
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