Harvard Business Review Blog Network
A retail battle is underway. Just walk to the nearest shopping center as early as Thanksgiving night, and you will find people shoving their way across overcrowded aisles for the best deals, and retailers fighting tooth and nail for each and every dollar in customers’ wallets.
Cynicism aside, there is no doubt that the six-week stretch between late November and early January is critical to the survival of many retail businesses. According to one study, for example, 30% of a merchant’s yearly revenue is generated during this period. Add to this the conviction that people will spend (if properly motivated) and you have the perfect recipe for a pricing disaster: all-out competition for the earliest, deepest, and most enduring discount.
But a poorly executed promotional campaign can ruin a brand and a business just as easily as it can boost sales. And the holiday season exaggerates this threat because discounting has always been the retailer’s weapon of choice.
To understand the problem with discounting, think of a price cut as a potent drug. The initial effect of a price cut on sales is clear, immediate, and intoxicatingly strong. But just as the company grows dependent on these concessions to meet its objectives, the market grows habituated and responds with less enthusiasm, fueling a downward spiral of deeper and more frequent price cuts.
Is there a healthier way to entice consumers? Most managers I know take a shortsighted view of what a discount is and what it can do for a business. There is a simple reason for this: managers don’t spend enough time thinking about the phenomenon. To them, discounting is a dull tactical issue with a mechanical solution that can and should be routinized.
Thus, it is not surprising that the output is a dumb promotion with no ambition other than making sure the sale takes place. To turn things around and improve the return on your marketing spend; consider what a smart promotion should look like.
Here are seven characteristics of a well-executed promotion:
It is a conversation starter. A price cut is much more than an incentive. It is the perfect vehicle to grab the consumer’s attention and start a discussion on anything but price: the merits of a new product feature or service, the reputation and values of your organization, etc.
It is selective. Companies are generally hesitant to turn customers away. In many instances, the discount is offered indiscriminately to anyone willing to purchase. By doing so, however, we miss a great opportunity to separate the customers we want from those we do not, which in turn strengthens our positioning and focus vis-à-vis the competition.
It is contingent. Don’t give money away too easily. Make consumers sweat for it by asking them to perform some ancillary behavior that reduces your costs (e.g., buy online, not in the store), increases your revenue (e.g., buy two units, not just one), or ideally does a bit of both.
It enhances the brand. The standard assumption is that discounts destroy a brand. But this is only the case if the consumer sees the price cut as an attempt at persuasion rather than a reward. Think of all the behaviors that capture the essence of your brand (and your ideal customer) and offer discounts to consumers willing to excel on those dimensions. Essentially, prove that you are willing to put your money (the discount) where you mouth (the brand) is.
It is exclusive. One problem with discounting is that an intervention is easily copied. To gain exclusivity, consider branding the promotion itself. To the extent that you can infuse a tangible benefit — in this case, saving money — with the intangible values of your customers, you have created differentiation also at the campaign level.
It is robust. Every promotion needs a baseline level of sales you can trust. Without it, there is no benchmark, no reference point to judge performance. What steps have you taken to ensure that your baseline is valid?
It is disciplined. The problem with drugs is that they cloud your judgment, making it impossible to exercise logic and reason. The same applies for promotions. One solution is to draw up an exit plan and commit to it before the first price reduction is made. Decide what you want to achieve with the campaign and stop when you have arrived. Decide what signs from the market would force an immediate withdraw and stick to them. The point is to establish a plan of attack while you are still responsible for your own actions.
There is nothing inherently wrong with discounting, if done right. Consumers will always be attracted to the idea of saving money. The problem is that many businesses are spending too little time thinking strategically about promotions — presuming that giving money away has to work. This is a pity, because a carefully crafted strategy can do so much for a business. For starters, it can keep retailers out of trouble this holiday season.