The Customer Doesn't Know Best; You Do

Resist the Pressure to Discount and Move Product at the Expense of Profit

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Anne-Marie Fink
Anne-Marie Fink

In our tough economy, marketers everywhere are seeking strategies to survive. Here's one widely held tenet smart marketers should ignore: listening to customers. Too much listening is likely to cause more harm than good at a time when no one can afford missteps. More-effective strategies are out there to help you win with consumers.

Counterintuitive? Certainly. But it's what I've observed as a professional investor for J.P. Morgan Asset and Wealth Management. With billions of dollars resting on my and my fellow investors' assessments of companies, we have intensively studied what works and what doesn't, observing repeatedly the pitfalls of being a customer fanatic.

Customers always want lower prices, but marketers should rarely listen. And our tough times don't warrant exceptions.

Saks Fifth Avenue fell into the discount trap during the recent holiday season. Faced with an uninterested customer, Saks made a decision to offer its end-of-season sale earlier in the year and with steeper markdowns, as great as 70%. The management team sought to clear an inventory overhang from orders placed in early 2008, before the full impact of the recession was apparent. Its slashed prices did clear out inventory, with a 14.6% comparable-store decline by the end of the fiscal year in January 2009.

Yet the cost overwhelmed that benefit. Revenue fell 15% in the fourth quarter, and same-store sales are continuing to flag, with a 26% decline in February, much worse than other luxury retailers (for example, Neiman Marcus same-store sales fell 21% in the same month). Though volume was high, profitability was nonexistent.

The Detroit automakers have pushed a similar high-volume, no-profit strategy since 2001, and it's landed them on the threshold of bankruptcy court. With profits down dramatically, rumors of bankruptcy are starting to swirl around Saks as well.

Changing perception of value
Compounding the problem, Saks' price cutting has damaged its business in the longer term. To move product, the retailer filled its floors with racks of clothes, creating a discount, guerrilla-shopping environment that contradicted its high-touch image. The steep markdowns changed customers' perception of the value its wares offer. Responding to consumers' desire for lower prices may well be the end of Saks.

Firms that have remained disciplined on price have fared better, even in the face of declining sales. Despite the tough environment, the athletic-footwear and -apparel retailer Foot Locker found that its high-end sneakers sold better than other categories. Despite what customers were saying, many were willing to spend more than $100 in the U.S. and more than $150 in Europe on its shoes. Because the retailer was less promotional in the fourth quarter, it was able to garner these high-margin sales, and even with an 11% drop in fourth-quarter sales, it generated higher ongoing profitability. Coach, the accessories retailer, also saw that its premium-priced bags (over $300) performed better than its aspirational products in the $200 to $300 price range.

I'm not being naive about pricing. Volumes may suffer if you maintain prices and your customer doesn't perceive your product as offering value for the price you charge; the bar for value is higher in today's environment. However, marketers often underestimate the value their clients perceive and cut prices too quickly. Indeed, because value is an intangible, it's often your pricing action that conveys to customers what your product is worth. Coach's high-end bags still attracted customers because their premium prices brought a perception of premium value. If higher prices do result in reduced sales, marketers are better served to accept lower volume and resize their operations accordingly, as trying to "make it up on volume" never works.

Following customers' lead too closely is dangerous, because you know your operations better than they do. In pricing, you know the margins you need to maintain the service, branding and other intangibles your customers take for granted. Pushing through a larger volume of sales with additional racks of clothes on the floor changed the careful displays and luxurious space of the Saks sales floor.

ABOUT THE AUTHOR
Anne-Marie Fink is a VP at J.P. Morgan Asset and Wealth Management, where she has served as a portfolio manager and equity analyst. This article is based on findings from her recently published book, "The MoneyMakers: How Extraordinary Managers Win in a World Turned Upside Down" (Crown, 2009).

Understanding the trade-offs
At the other end of the spectrum, Costco has succeeded despite giving customers minimal displays and austere ambience because bare-bones environments keep its expenses low and allow it to sell profitably at low prices. It understood the trade-offs between customer requests for low prices and ambience, and decided where it could ignore its customers. The same holds true at the higher end. Apple's iPod offers many customer-unfriendly features, such as an inability to accept other MP3 files. Apple understood the trade-off between making its music player easy to use with seamless software and being a more open system.

Moreover, customers often don't know what they want. Fast-food restaurants have for years tried to respond to customers' requests for more-healthful food. McDonald's introduced veggie burgers, and KFC offered grilled chicken, both of which flopped. Customers just don't order these healthy alternatives. It turns out that when customers go to fast-food restaurants, they're not looking for healthy food. The most successful new sandwich launches in the past few years have been bigger burgers. Management at Burger King turned the company around by introducing larger and less healthy food, including the Triple Whopper.

In lieu of listening to customers, the savviest marketers adopt two key strategies. First, they follow customers' actions rather than their words. When people part with their money, they give you a truer sense of what they want than when you ask them. Burger King knew its customers wanted larger versions of traditional burgers, because that's what they ordered. The restaurant also had a veggie burger, but it didn't get a lot of traction. To follow customers' actions, you need to follow your sales figures closely and to offer customers opportunities to let their actions tell you what they want. Getting new products quickly to market, in beta or limited-time offers, gives you the valuable feedback you need. Maintaining a suite of "good, better, best" offerings allows you to cater to different pricing needs without diminishing the value of your best products through lower prices.

Shorter lead times
Following customers' actions also requires shortening order-to-delivery cycles. You need to be able to respond quickly to feedback. Saks adopted such aggressive discounting partly because it faced a large inventory overhang (I would still argue that the retailer could have found less-damaging ways to solve that problem). With short lead times, however, you don't need to face that challenge. If you cannot shorten lead times, it's better to err on the side of under-ordering. Running out of a product reduces sales, but it also creates a valuable aura and scarcity value around your offering. Nintendo's Wii has benefited enormously from undersupply.

In addition, run your own race. Offer your product with a fair margin and with the trade-offs you are most comfortable with. If your offering has value, customers will respond. If it doesn't, then you need to determine how to enhance the value or shrink your business accordingly.

Selling without profit, on hope for a recovery someday, is akin to running in place. You're working hard but not getting anywhere. As the Detroit automakers discovered, you will eventually have to address the fundamental problem. In the long run, you'll do better focusing on your offering's value and your edge in providing it than on fanatically listening to your customers.

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