To Discount or Not to Discount?

Should I discount during this current economic downturn?
During an economic downturn many firms panic and discount price in order to halt reducing demand and/or stimulate sales. The purists would argue that all this does is destroy brand value.

So when is it right to discount and not to discount?

This seemingly innocuous question is much more complex than it first seems and leads to arguably one of the most complex questions in business. To answer the question in detail we need to first understand why price is so important?

Why is Price important?
Along with Place, Product, Promotion and People, Price is one of the essential 5 P’s of marketing.

A pricing decision is the only one of the 5P’s which directly and immediately impacts your bottom line. Price also plays a key role in the buyer purchase decision and is often the difference (especially in tougher times) between buying and not buying.

While there are many approaches to setting price this article reviews the question from a marketing strategy/ branding point of view.

The marketing approach to pricing
We believe, like any of the other marketing P’s, pricing must be set in conjunction and be consistent with your marketing strategy. To illustrate the point, let’s examine the computer market and Apple vs the PC.

Now I am not about to go on “a free-for-all” lets bash the PC (we will leave that to Apple’s commercials - if you have not seen them, watch some of them below), but it does provide a perfect example of pricing strategy from a marketing point of view.

Last week I visited the new Apple Superstore on George St, Sydney, looking at a new Mac (by the way the store was jam packed with people). Apart from the sheer visual appeal of a Mac, what was highly evident was that Apple charge a premium of at least $1,000 to $1,500 more than a comparable PC with the same specs (I know its not the same - heresy!) . What’s more there were no discounts and no special offers - just the price plus the addition of an extra $500 - $1000 in software.

Compare this to buying a PC where PC manufacturers apply discount after discount. For instance I was also recently looking at 3 laptop PC’s for a retail venture and the cost of those 3 (after store discount 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 have been conditioned to expect/demand one from a PC. Which may account for some of the reasons why Apple reported a record first quarter net profit for 2009 - during the current economic crisis (with plans to open another 25 stores according to Macworld) while HP recorded a -5% drop in profit.

What this example demonstrates is a company’s positioning plays a significant role 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? We advocate a ‘think before doing’ philosophy, so the place to logically start your consideration (whether to discount or not) is to look to your marketing strategy and examine further 4 of your strategic marketing 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 simplicity we suggest you reflect your positioning by placing your product or service where you think it fits in the below matrix.

The two axes of this matrix are Price (relative to your competition) and how Differentiated you are (relative to your competition). Differentiation in reality can be seen as a proxy for the strength of your brand. Typically the stronger your brand the higher price you can charge relative to your competition.

If you are in Quadrant 1 your products/services are high priced with low differentiation –monopolies and companies that have lost their differentiation comfortably fit in here (e.g. Sydney Water, Energy Australia or Rover).

Quadrant 2 is low price and low differentiation commodity products – PC’s would naturally sit here, no-name brands and petrol companies.

Quadrant 3 is high price and highly differentiated – for instance luxury products such as Tiffany would site here, as would Apple products).

Finally, Quadrant 4 is the low price and highly differentiated quadrant – the ‘Blue Ocean’ companies and products that have a significant cost advantage to the market and are able to deliver highly differentiated products at a reduced prices (e.g. Ikea would fit here).

To Discount or Not to Discount?
Most often, the question is not “Should or Shouldn’t I” but rather “Must or mustn’t I”, The matrix provides a general guide as to whether, based on your positioning, a price discount is consistent or inconsistent with that positioning, or necessary depending on your competitors’ pricing strategy.

There are, however, exceptions to all rules. Discounting may be part of your normal sales strategy and not being done as a response to the current market, and therefore not necessarily dependant on your positioning. Examples of this are clearing of old stock, sales cycles of your distribution channels such as department stores requiring discounting at key times during the year, or new entrants into a market employing a “penetration strategy” and deliberately discounting to gain market share.

Lets compare Quadrant 1 & 2 with 3 & 4. Quadrants 1 & 2 have low differentiation and hence are easily interchangeable in your consumer/clients mind. Therefore if you are positioned in this area a price discount is not only consistent but is also an effective tool in driving additional sales (eg PC sales).

In addition your consumer/clients may well expect or demand a price reduction in “down times,” And you will most likely need to maintain your price position compared to your competitors.

Quadrants 3 & 4, on the other hand, represent high levels of differentiation within your clients/consumers mind, in which case reducing your price to increase sales or stimulate demand, may be unnecessary and inconsistent with your brand’s positioning.

Finally a word of warning on discounting
You should exhaust all other options before resorting to price reductions. Discounting per se is a little like becoming a drug addict – it might provide you with the kick, the stimulus you are looking for in the short term but beware…once hooked it’s a mighty hard habit to kick and you may find like many before you – that you’ll need a lot more than a methodone treatment to wean yourself off the habit.

Apple through its strength of a sound positioning (and ‘cool’ products) differentiates its brand and products to the level that the purchase-price decision within their target customer’s mind is far less important than their desire to just ‘have it’.

The ultimate position to be in is in Quadrant 4. Here you have a differentiated product and a cost structure that allows you to completely change the way business is conducted.

Reducing your price at this point would simply cause confusion in your consumers/buyers minds. As a successful businessman said to me just today, “sometimes you have to be prepared to say ‘no’ to business, if they are demanding a price decrease, it is more important to keep the integrity of the brand.”

In Conclusion
In reality, price may not be something you may not have complete control over. If you are in an undifferentiated market, you will be forced to follow your competitors otherwise you will be perceived as expensive for your offering.

The companies that rise above their competition in these turbulent times are those that successfully differentiate themselves from their competitors. These companies don’t have to, and often shouldn’t resort to discounting. Differentiation is not only about product innovation, but also about branding. Is Mac really better than PC? That is an argument that will have no conclusion. But is Mac’s brand better than PC’s? With that, there is little doubt.