Peter Krišťák, 04.03.2016

Retailers: Stop silly discounts!

We’re leaders in European in selling goods on discount. Such approach to pricing brings about long-term destruction of the whole industry. Is there a way out?

During a conference about a return to the basics of correct marketing recently held in Prague, a representative of Unilever presented shocking facts. They imply that Czech Republic and Slovakia are absolute leaders in selling goods on discount. In case of Czech Republic, share of products sold on discount equals that of the goods sold at standard prices. We are not speaking only about the discount stores, late-night stores or various small stores but about respectable and large retail chains.

What is shocking about this fact is that “on discount share” is twice as large as in Germany, France, Spain or Italy and it has even been growing dramatically since 2008. In the above given countries it either does not grow or it has stabilized after the crisis. It is also interesting that the share of products sold on discount e.g. in Poland is by 42% lower than in Slovakia and that this share even decreased last year.

Excessive focus on price destroys markets

Discount is undoubtedly an effective marketing tool, which has a firm place in the equipment of a true marketer. Its excessive application, however, has a negative impact on the market. If retailers think that an artificial increase in the price will do the trick and that a dramatic discount granted simultaneously will bring them long-term success, they are wrong. They simply underestimate the complexity of their own business.

They forget that the market and its actors keep developing in time. Their competitors will see through this strategy and will start using it, too. This way a constantly larger group of players arises, which influences and - it is necessary to stress - spoils the customers. The point is that they get accustomed to regular discounts and start to search for them proactively or, what is more, they start to demand them from the retail dealer.

In order to grab a bigger market share, there will always be adventurers, who will discount even further. Either by their amount or by assortment coverage. Nevertheless, it is not possible to inflate the standard price ad infinitum artificially and so they lay hands on the real margin. And because the human nature with “a slapped ego” and worrying about its share, profit and bonuses irrationally dictates the competitors to respond immediately and even more aggressively, these retailers always bring about a price war in the end.

Finally, the actors of the price war will be left with not enough finances not only for investments in innovations but gradually also for usual operations. Consequently, this results both in the market full of players lacking inventiveness with average service and products, where even slight differences in price causes customer shifts, as well as in drastic cost cutting, which will be reflected in the quality of the service and, finally, of the product itself.

Three principles for every retail dealer

A simple and painless solution to finding a way out of this situation or trend does not exist. There are, however, three principles sticking to which will bring success:

Increase the value, not the discount!

He who believes that there is nothing more for a retail dealer to innovate today is wrong. The added value in the form of enhanced comfort, reduced risk of wrong purchase, interesting information, games and fun, or the feeling of exceptionality are hard for the competitors to counterbalance with a discount. Significant players on our market such as Alza, ZOOT, Feedo, or Rohlí, who have come to understand the strength of a positive customer experience, prove the feasibility of this concept in our markets as well.

Monetize the value effectively!

Creating the value, however, has a cost and the price will never cease to be important in the purchase. In order to be successful on the market it is necessary to employ an intelligent pricing strategy. The main goal is to create for oneself an image of affordability. Action offers “in the window” (or “loss-leaders”), which as “price anchors” persuade about the advantageousness of the whole range of products, are an effective tool in this effort. This effect will be stronger if all verbal and – which is even more important – nonverbal communication supports this image consistently and over a time. When the customers come, do not let them leave only with what they intended to buy. Sell more expensive alternatives and enlarge the shopping basket. Here a cleverly selected assortments and proactive sales must be employed. Even a sophisticated customer can hardly resist the psychology of “price trap” and the word “gratis” or “free”. Finally, implement an intelligent loyalty program so that you can segment the returning customers by the price sensitivity. If you design it properly, you will gain the part of their business they spend at your competitors as well. 

Use systems to manage prices in detail!

Managerial decision making in retail is extremely complex. Tens of thousands of product items, with various goods turnover speeds, seasonality, mutual influences (cross-effects), across different regions and locations with varied preferences, purchasing power and competition, sold in different channels and store formats – and, moreover, all this in a non-transparent system of sales rebates. Only in order for the retailers to understand, which discounts produce the real financial gain, they need to employ advanced mathematics and carry out at least hundreds of thousands of correctly made calculations. This is simply impossible without scientific approach and appropriate technology. Optimization of all price points on a regular basis in time, which also includes checking their correctness on price tags, is a much “tougher nut to crack”. Great news is that thanks to the innovations in the last 15 years this ability together with the necessary sales data has become available also for medium sized retail chains in our markets. All this without any need to buy extremely expensive software and hardware, to sign contracts for many years, or to employ expensive experts. It is enough to hire a professional service that will take care of complex mathematics and provide technology at a sensible price on a regular basis, thanks to which a real price optimization and revenue management in retail become reality.

Peter Krišťák

Author is partner and founder of Pricewise

He specialises in pricing and revenue management

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