By Tim Young
The retail marketer’s dilemma is very similar to the prisoner’s dilemma, well known in game theory, except instead of only two participants there are numerous participants. The dilemma centers around discounting. There would be more profit to go around if discounting was held in check, but not knowing if your competition will make a move on price forces you to make a difficult decision. If you hold price constant and your competition lowers theirs, you may lose business. If everyone lowers their prices the same, you would most likely get the same business you would have without a price adjustment, and you would all make less profit.
So what to do? Does price matter as much as we think it does?
Many studies have been done on why consumers buy, what they buy, and why they shop where they shop. You may be shocked to find out that price is usually not the main reason. But as retailers continue to emphasize low prices, offer deeper discounts and use promotions more frequently, price becomes a greater focus and therefore a bigger part of the buying decision.
Is there a way out or is it a race to the bottom? Yes and no. There is a way out (sort of), and it doesn’t have to be a race to the bottom where few will win.
Discounts need to be well thought out and be part of an overall marketing strategy, not the entire strategy. Far too often promotional offers are used to drive a spike in sales at a point in time. While that can happen, it could just be that you convinced your customers who were going to buy from you anyway to buy now (at a discount), and not that you pulled sales from your competition. And even if you did pull sales from you competition, how are you going to retain those new customers? Another steep discount? Isn’t that what attracted them to you in the first place? Price might not be your number 1 value proposition, but it was likely perceived that way during the promotion.
To take it one step further, if you are successful at creating a spike without a dip in sales afterward, you just created a nice sales bump you have to comp next year. Play that out year after year…good luck.
What about a different approach to discounting that might deliver a more sustainable outcome?
Using discounts as a ‘thank you’ or ‘reward’ for customers who frequently choose you as their destination is a strategy that will create a healthier business model, retain your customers longer term, get you out of the death spiral of discounts and make it more difficult for your competition to match your prices.
How do you do all of that?
With personalized discounts that are not broadcast to the masses. The only person that sees the offer is the person that receives it. Over the course of the year, they save a similar amount of money that they would have if you continued with the mass offers, but since they are varied and less predictable, you are encouraging consistent shopping in order to continue to receive the ‘rewards.’ Your competition can’t price match what they can’t see, so your best customers can’t be lured away with discounts.
You may be thinking “Okay, I see how that defends against the competition, but how do I make more profit if the customer saves just as much?”
Answer: By not wasting money on customers who were only going to shop your store for the heavily discounted item and never buy anything else. It isn’t worth the investment to try and lure the discount shoppers in if you have to continue to heavily discount in order to keep them.
Instead, identify your best customers; send them a personalized thank you reward that entitles them to save really big on a choice of items. Focus on securing their loyalty, and turning them into advocates. Do this and you’ll avoid the marketer’s dilemma.