Escape the Discount Downward Spiral, Part 2: Competitive Differentiation

Brady Walker

It’s no news to retailers that over-discounting is a problem. Just two adverse effects that lead to plummeting bottom lines include setting customers up to expect to only buy on discount and (thereby) reducing the perceived value of your brand.

In the following three-part blog series, we’ll investigate three challenges on the road to maintaining healthy levels of discounts and promos

 

  1. Reducing excess inventory 
  2. Competitive differentiation
  3. Healthy, full-price growth

Each of these represents a unique challenge, but each can be overcome by aligning your marketing, merchandising, and finance teams on a trajectory charted by data-driven customer insights.

And if you either don’t want to wait or you want all this information in one place, you can check out our new book, In Discounts We Distrust.
 

Problem 2: Competitive Differentiation

In addition to markdowns driven by excess inventory, retailers use promotions as a way to keep pace with other brands in their space. Most retailers don’t want to engage in rampant discounting (in a vacuum, they wouldn’t) but pressures from their competitive set often leave them feeling that they have no choice but to “discount match.”

If all your direct competitors are offering 40% off purchases in Category X, prevailing wisdom suggests that failing to match that discount and instead offering only 30% off purchases in Category X would reduce your “share of wallet,” especially during highly competitive periods like the holidays.

However, this line of thought assumes every consumer is equally discount-sensitive, which isn’t true at all.

Instead of taking this assumption at face value, take the time to sort your customers into groups based on what motivates them to engage with the brand.

Who in your customer base is a discount-seeker who only engages with the brand in marked-down categories or during promotional periods?

Who is a discount-opportunist, someone who take advantage of promotions, but will also occasionally make full-price purchases?

And who is a full-price shopper for whom the appeal of the brand is something other than price?

 

Short-Term Solution: Sort Customers by Pricing Preference

Now, “winning” discount-seekers is very much a matter of matching competitors’ levels of promotionality. If a customer’s foremost priority is getting the best deal, they’re going to gravitate toward whichever brand offers the deepest discounts.

That said, winning discount-opportunists and, especially, full-price shoppers involves much more than competitively slashing prices.

Consider this example: several years ago, the executive team at casual footwear retailer Crocs demanded that the company reduce its reliance on discounts and promotions. Initially, this dictum was met with a great deal of resistance, as many stakeholders assumed that since the brand operates in a low-price space where its competitors engage heavily in promotions, its core customer base must be highly discount-sensitive.

The brand’s customer data told a different story.

Once the stakeholders examined how various customers engage with the brand and which customers make purchases at different levels of promotionality, they discovered that a large segment of their customer base is fairly discount-insensitive. These customers are motivated by novelty and innovation and have a strong enough relationship with the Crocs brand that they will make purchases with or without a discount.

Armed with this key customer insight, Crocs was able to adjust the way it communicated with a substantial portion of its audience. Rather than leading with a promotional offer, the brand crafted messaging that emphasized its unique value proposition—messaging that really resonated with Crocs’ full-price shoppers.

As a result, Crocs was able to retain these customers’ loyalty while simultaneously rolling back its promotions, all while its competitors continued to offer steep discounts to customers who, it turns out, were more than willing to pay full price.

 

Long-term Solution: Specialize to the Point of Uniqueness

While segmenting a customer base according to discount sensitivities is well within any retailer’s capabilities, Crocs’ key discovery—namely, that a segment of its customer base was moved more by the novelty of its product than by its price point—hints at the ideal long-term solution to competitive Promo FOMO.

In our experience, the retailers that are least prone to falling into the downward spiral of discount matching are those that, for all intents and purposes, simply don’t have a competitive set.

These retailers have endeavored to cater to an underserved segment of consumers, and have come to understand the segment so well—what makes them tick, what their day-to-day needs are, what they’re looking for in a brand—that their ostensible competitors don’t stand much of a chance. Through extensive analyses of customer data, these retailers have fine-tuned their offerings to such a degree that their customers view them as a truly unique value proposition.

For instance, women’s fashion retailer MM.LaFleur has developed a “Bento Box” offering that provides customers with a curated clothing delivery that is personalized to their singular taste. The Bento Boxes are not a clothing subscription service, per se—there is already ample competition in that space—but a chance for women to painlessly upgrade their wardrobe through a one-off consultation with an MM.LaFleur stylist. MM.LaFleur has built its business around a clearly defined core audience—time-strapped professionals who appreciate a stylist’s personal touch—and as a result, has never had to discount its product.

The takeaway here is as straightforward as it is challenging: to permanently shed the pressure of having to discount match, find a segment of consumers who are being underserved by other players in the market and cater to them in a meaningful way. When a retailer lets specific consumer preferences shape the product it sells and the way it communicates, it will be able to build long-term brand loyalty—no discounts necessary.

For the full scoop on destroying the discounting downward spiral, get our book on it, In Discounts We Distrust

 

 

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