Why do people say “discount” like it’s a bad word? This is nonsense. If you’re in a price elastic market and occasionally sell your wares to non-millionaire playboys, pricing is often the difference between window shopping and revenue. We don’t always have to confuse “marketing” with “premium positioning,” although this happens more often than it should. We’re heading into a new year with a very strong headwind, and pricing is going to play a big role. So let’s throw caution to the wind and utter the unutterable: let’s sing the praises of slashing your prices.
The simple truth of the matter is that competing on price is only bad if you can’t do it.
Much like a fat man goaded into a foot race, you don’t compete on price because of a dare. You compete on price on purpose. You’re in shape and they’re not. You’re lean, very mean, and ready to throw down with anyone – and sometimes everyone at once – in your category because you’ve been planning for this moment for the last ten years. You understand where you can reduce costs and how they affect your factories, your transfer pricing and your trade price. You’ve positioned your brand to easily reach down into the ‘low and to the left’ segment of the market where lesser brands fear to tread.
Most importantly, you compete on price because you know for an absolute fact that when you drop your prices, your channels and customers flock to you and away from your competitors. Where your competitors guess at consequences, you know what will happen. Where your channels are unsure, you’ve got facts to share and a plan to unfold. Where pundits proclaim your desperation and predict your demise, you know better. Because pundits don’t run companies – especially ones like yours.
How do you compete in this game?
· Your cost structure lets you beat the other guys. They just don’t look at costs the way you do. They don’t devote headcount and engineering time to cost reduction. They don’t spend the time getting marketing people on the factory floor talking to the people who put your products together. It’s very, very interesting when you do this. Marketing people see things and ask questions. Together, marketing and manufacturing can make things that work for the customer and cost less. Try it if you haven’t done it.
· You control your inventory. You don’t tie up money on things that aren’t moving. Forecasting, checking the historical forecasts against actual results, developing models that do a better job predicting sell-through and planning than what you can reluctantly drag out of your sales guy, all matter a lot. Stay lean on inventory.
· You know that price elasticity in your category means lower prices become faster turns. Some categories react quickly to changes in price. Once upon a time, the VHS blank cassette industry experienced a 1,800% increase in sell through when retail price decreased 10%. What’s yours? Can you drive greater volume with lower pricing? Can you do it on a sustainable basis? Can you do what they can’t?
· You’ve engineered your marketing so that “keeping up with the Joneses” is driving them out of business. Once upon a time, a long, long time ago, I ran consumer overlay promotions in mass merchants and consumer electronics superstores using phone cards (it’s been awhile) and my competitors followed along. I printed them on sticker stock paper, applied by a labeling machine, and paid my vendor on actual minutes used, managing my exposure on usage through a third party promotional insurance carrier. My competitor paid for face value, using plastic credit card stock, which had to be hand-inserted. I paid $0.24 each for a 10 minute card. They paid $2.50. Where we made solid gross margins on each promotional SKU, they took a bath. They couldn’t compete and couldn’t get off the ride because the channel partners wanted the turns and believed in the promotion. Do this with your advertising, PR, packaging, merchandising, customer service, sales, IT infrastructure and a few other things and you’ll be on the right road.
· Your branding isn’t so narrowly defined that it doesn’t allow you to move on price. When you’re a luxury brand and you’re a pure-play “Way High and To the Extreme Right” it’s pretty hard to go down market. If Mercedes Benz can deliver the C280 and Sony can do entry level, so can you. Maybe.
· You can down-rev your product and still deliver a winner.
Deciding you want to be able to compete on price isn’t something you whip up in the board room when things are going to hell in a hand basket. It’s something you do from the ground up. It isn’t for everyone or every brand. But if your category is price elastic and your channels (and consumers) have options, someone in your business is going to do this. It might be good to know who that will end up being, or if this is a role you and your brand should be embracing.
Is (gasp!) “discounting” still so nasty? Hell, no. It sounds pretty fun to drive your competitors out of business, doesn’t it? Come on, admit it. This actually sounds like fun.
Competing on price and being a discounter is not a temporary strategy. I don’t think you can drop prices in 2009, and then if the recession ends next year, raise prices. If you’re going the discount path it should be a long-term strategy.
Jay: violent agreement all around that price isn’t a casual undertaking. It’s a core competency in many cases, as I’ve outlined in this piece. However, there’s nothing that says you can’t raise your prices either. The best case study I have on this is my 7 years (that’s 49 “dog years,” for the mathematically challenged) in the VHS tape industry: prices went from $22 per unit in the mid-’90’s to $0.79 each by ’97, and then buoyed up to $1.50 or so by the early ’00’s. The price increases came when the competitors had largely exited the business – allowing the survivors to reclaim some margin.
Buyers don’t like to hear that your prices are going up, but that’s a question of sales discipline, not to mention salesmanship. I’ve done it, I’m sure you’ve done it, and it doens’t have to be an unhappy discussion. It just has to be done well. So you can raise prices next year – or not. The real point is, it’s up to you – not your channel.
Thanks as always!