5 minute read
Discount dilemmas
Discount dilemmas How to manage price during an economic downturn
By Jason Eisner
My first response to this question is don’t. Reducing price reduces your cashflow, your profit and potentially enters you into a price war (which if left can lead to further price erosion).
However, this seemingly innocuous question is much more complex than it seems and disguise arguably one of the most complex questions in business. Before we begin to answer this question in detail, we need to first understand why price is important? Develop a marketing approach to pricing and then provide a framework for deciding if discounting is smart.
Why is price important? In marketing terms, price along with place, product, promotion and people is one of the five Ps of marketing. A pricing decision is the only one of the five Ps which directly effects your bottom line; they are quick to make and have an immediate effect. Price also plays a strong part of a buyer’s purchase decision and is often the difference between a buying and not. While there are many approaches to setting price, this article approaches the question from a marketing strategy/ branding point of view.
A marketing approach to pricing Pricing must be set in conjunction with your marketing strategy. In fact, just like any of the other Ps of marketing, your pricing strategy must be consistent with your marketing strategy. To illustrate the point let’s look at the Apple vs PC market. Now I am not going to go on “a free-for-all” let's bash the PC, we will leave that to Apple’s commercials, but it does provide a perfect example of pricing strategy from a marketing point of view. I was in the new Apple Superstore looking at new Macs. Apart from the sheer visual appeal of owning a Mac, what was noticeable was that Apple charged a premium of at least $1,000 to $1,500 more than a comparable PC with the same specs (I know it’s not the same - heresy!). What’s more, there were no discounts and no special offers - just the price plus the addition of extra $500 - $1,000 in software. Compare this to buying a PC where PC manufacturers apply discount after discount to gain market share. For instance, I recently was looking at three laptop PCs for a retail venture and the cost of those three, after store discounts and $100 cashback from the manufacturer, was about the same price as the one Mac. Whereas I don’t expect a discount from Apple, I expect/demand one from a PC. What this example demonstrates (no, not that you should buy a PC) is a company’s positioning plays a significant part in determining its overall pricing strategy and whether discounting is consistent with the strategy. Pricing framework So how do you determine whether you should discount. The place to start is to develop a marketing strategy by answering one of four strategic fundamentals: What you need to say, who you need to say it to, how you should say it, and what makes you different.
For the purposes of this article we will get you to determine your positioning by marking where you fit on the below matrix.
To best understand how this works, place your company in one of the four quadrants of the matrix. For instance, let’s use cars as an example. If you are a Prestige/Premium product, then you will be in the high price and high quality/service quadrant. Companies like Mercedes Benz, BMW and Audi would sit here, as well as Apple. If you are in the Budget/Commodity quadrant then you are typically lower price and probably positioned more as a discount/commodity product such as Kia and Suzuki (PCs would sit here). This leaves the other two quadrants - the high price low quality/service quadrant contains two types of companies, either monopolies such as utilities, and uncompetitive companies, ones where they were probably once premium companies but have since slipped. The last quadrant is the low price and high quality/service quadrant. This is quite often referred to as the Masstige market and represents companies that have a significant cost advantage to the market and are able to deliver high quality/service at a reduced priced; e.g. the Japanese cars such as Toyota and Mazda fit here. Should I discount? While the matrix is a generalisation it does provide guidance. If you are high price and high quality there is no need to discount. In fact, discounting takes you off your strategy and can only draw questions from your consumer. Similarly, if you are high price low service/ quality, then there is no benefit from discounting. The only time that you may wish to discount is if your company over the years has become uncompetitive and you want to off load product. While the matrix is a “ generalisation it does provide guidance. If you are high price and high quality there is no need to discount. In fact, discounting takes you off your strategy and can only draw questions from your consumer. ”
In the bottom two quadrants (three and four), discounting can be used. In the low price, low quality/service market discounting is almost (i.e. to get a greater share of the market, to follow a competitor). In quadrant four, the low price high service/ quality quadrant, you may want to discount — especially if you have a cost advantage over your competitors. But no matter what quadrant you are in, it has been empirically shown that having a brand allows you to consistently charge higher prices. Secondly, the above analysis assumes statusquo, it does not assume that you are a new entrant into a market - in this case you may, irrespective of you position on the matrix, decide to employ a “penetrating strategy” (deliberately discount to gain market share) or a “skimming strategy” (deliberately charge a high price to gain as much profit as possible before new entrants come into the market). The analysis calls into question certain behaviour by major brands. For instance, Mercedes Benz has been in the market offering
expected. In this case discount if required 'significant deals' on a stock, given its premium brand the above analysis would question the strategy irrespective of the downturn.
Jason Eisner is one of Australia’s leading marketing and brand experts
