Pricing expert consultant Rafi Mohammed constantly amazes with his brilliant pricing ideas. This time he talks about margin-preserving strategies in a discount milieu. In recent Harvard Business Review (HBR) article, Mohammed wrote: "Retailers' Holiday Strategy Doesn't Have to Be 'Discount Everything.'" First, the statistics: Analysts determined that for Black Friday weekend this year, there was a more than 300% increase over last year in widespread discounting by retailers.
Dr. Mohammed points to the, by now, well-known "discount" problems from which retailers can't seem to get out of their own way:
* Customers have been conditioned to expect discounts.
* Retailers, feeling the heat between brick-and-mortar stores and online shopping, think that they have to slash prices to get the customers.
* If customers are allocating more for holiday purchases this year, retailers are cutting prices in the hope that people will spend more.
It's really about how to deal with price-sensitive customers, Mohammed writes. As always, he comes up with brilliant alternatives to the problem; this time four brilliant ways to compete on price, but still preserve margins:
- Provide a price guarantee. Psychologically, the buyer doesn't know when would be the best time to buy, and fears he/she may see a lower price later in the season. So a retailer can put their mind at ease by offering a price guarantee or match lower prices that may appear later in the season. Remember, it will be the customer's responsibility to do the homework to keep track and see if lower price on the particular item does appear down the road).
- Offer step discounts. For example, customer gets 10% off for purchases over $500; 15% if over $750; 20% if over $1,000, etc. This encourages customers to purchase more to reach a higher level of overall discounts -- AND may induce customers to buy additional products.
- Incentivize Big-Ticket-Item customers to buy now. Rafi says, Incentivize customers to make that purchase (e.g. of an appliance) NOW, for a lower price -- if they waive their right to return a product or seek a price adjustment. So, even if prices may be lower in the future, the customer doesn't have to worry about it, and benefits from the extra discount by buying today.
- Offer Flash Sales. "Only those who really care about price will constantly monitor their emails or a retailer's website, waiting for the right price," says Mohammed; they will instantly purchase in a brief time frame, i.e. a flash sale, because there is a sense of urgency to buy now as this exact product deal may not be offered in the future. Mohammed suggests focusing on specific popular products for flash sales and not discounting across the board (which spoils consumers into expecting discounts and special terms on everything.
Bottom line for your bottom line
"Instead of engaging in price-to-price combat, use a little finesse to boost sales, by better meeting customers' needs, incentivizing larger purchases, and more precisely targeting customers who require discounts to click (the) "buy" (button)," Mohammed concludes.
Rafi Mohammed is a pricing strategy consultant and author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow.