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Why 2010 Is the Year to Rethink Discounts, Pricing Strategy

Steps You Can Take to Slowly Return to Higher Profitability

By Published on . 8

Chris Dickey
Chris Dickey
General business strategy dictates that there are two ways a business responds to a dramatic downturn in consumer spending. They cut costs and/or discount heavily to drive traffic and lure beaten consumers out of their malaise. Both approaches are easy levers to pull because they have a salient short-term impact. The rub lies in not knowing what the long-term impact of these short-term decisions will be. While the long-term implications of cost-cutting is an article in itself, today many retailers find that their most immediate issue is working their way back out of discount-driven brand-price erosion.

Most companies did a fair amount of discounting damage in 2008 and 2009 to merely survive. While this strategy addressed an immediate, sometimes dire, business situation, brands also taught the consumer to wait for a discount. Many brands have set new low-bar expectations for the consumer on what a good price, good deal and good offer is. And while 2010 will certainly not be the year we "get back to normal," it is the year that many brands have to rethink their discount and pricing strategy to slowly return to higher profitability.

The following are strategies to test your way back to profitability by finding opportunities to increase value and profits.

Step 1: Assess the damage.

The process begins by taking a deep dive into a "consumer migration inventory." It requires historical sales data and some consumer-level response and transactional data. You can begin by inventorying your consumers on a typical RFM basis (recency, frequency and monetary value). Then take a cohort of consumers from each RFM segment in 2009 and compare with some period when profits were healthier and discounting less pervasive (such as 2007). What's changed? Here are some likely outcomes.

Your best consumers have changed their buying patterns in frequency and/or average ticket, eroding short-term and likely long-term lifetime value. You have lost some of your best consumers to lower-value competitors, and you've grown your base of deal seekers. In the past, this base might have been a small subset of 1X consumers; today it's much larger, with lower average ticket and lower repeat frequency. Or, your mid-tier consumers have eroded, either by frequency or by average ticket.

Certainly this is not all due purely to a discounting strategy on steroids, but some of it surely is. Take a hard look at your strategy in the past 18 to 24 months. How pervasive has it been? How many consumer segments has it targeted, or was it targeted at all? Were you discounting at the same rate to best consumers, who may have bought without a deal, as you have to to deal-seekers, who may never buy again? If the offers were in un-targeted mass media, the answer is likely yes.

Step 2: Determine where the opportunity is to retrain, reactivate or acquire.

There are five typical segments of consumers ripe for testing your way out of discounting.

  1. Loyal consumers who have been with the brand long-term and have proven behaviors pre-discount (they find a significant value in your brand and have paid premium in the past).
  2. New consumers who look like they could become a best consumer and did not buy specifically on a deal.
  3. Mid-level consumers who did not fully succumb to discounts.
  4. Lapsed "best" consumers who at one time valued the brand at a premium and who can be reactivated.
  5. Prospects who look like best consumers, with whom we can start with a tabula rasa approach in a better economic environment.
Step 3: Develop a comprehensive testing plan to determine how best to increase profit margin and long-term value by segment.

Begin to test retraining these consumers by evolving the offer strategy to determine where the optimal point of response versus margin comes into play. It's critical to define an "offer" as something of relevant value to these segments or sub-segments, value that is not a pure discount. For example: first to know, first to buy, special bonuses, content, experiences or add-ons.

The best media for these tests are targeted communications. It's important to note, though, that one issue to avoid is testing at times when other media are carrying heavy discounts. To counterbalance this problem, remove a specific test market from a pure promotional campaign to truly understand the results.

Beyond the offer, brands also have to pay close attention to migration over time. Changing customer behavior takes some time and patience to achieve; be patient.

Step 4: Learn, evaluate and optimize.

Make sure that every strategy you put into place is measurable in some manner. For example, use control groups or A/B splits when testing a direct-mail, e-mail or online campaign. Test different offer strategies against control groups and against each other, and track behavioral changes before, during and after campaigns. Then trust your test and apply what you've learned. In other words, don't be afraid to roll out a winner in the next campaign. But when you do, you should also test other new offers. Optimization is reached when the test offer's performance homes in on the winner but none can overtake it.

Next year is going to be an undiscovered country for businesses trying to get "back to normal." Even if the new normal is a highly price-sensitive consumer base, there will always be segments of consumers who are willing to pay a premium. But to get that premium, brands will need to rethink their offer strategy from one purely of discount to one of a price/value balance, with the emphasis on relevant value that will, in turn, justify a premium. It's not a new challenge, but overcoming it after significant erosion will be a key lever to increased profitability. The good news is, it's a strategy that can be tested, targeted and optimized -- starting today.

ABOUT THE AUTHOR
Chris Dickey is senior VP-director of customer relationship management at Barkley. He oversees agency analytics and relationship marketing for Build-A-Bear Workshop, Sonic Drive-In and Westlake Ace Hardware, among others.
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