Price slashing can be a recipe for disaster
This guest post was written by Simon Barnett. Graham has kindly allowed me to write a few words on the subject of discount retailing. I have experience in this area and regularly contribute to a website about online discount codes.
Reading Graham’s post about his visit to Barnard Castle, I was struck by his observations of the discounting approach that’s been taken by the Edinburgh Woollen Mill chain of stores. Like many retailers, it seems that here is an example of a business that believes that the best way to succeed is by trading at the “bargain bucket” end of the retailing spectrum.
It’s clear that many retailers take such an approach because they believe that serious discounting will lead to a significant increase in sales and profitability. But such thinking may not necessarily ring true. Competing on the basis of price in this way has some inherent dangers.
Damaging the brand
In my local high street there are a number of stores that seem to have cropped up in the last few months. They are selling “everything for a pound”, or are already having a “clearance sale”. They probably won’t be there by Christmas. But they’ll be replaced by other stores with similar product ranges.
As consumers, what do we think of these shops? We may well think that there’s the chance that we can pick up a bargain. But we also know that they are unlikely to sell high quality goods. We probably wouldn’t choose to buy a High Definition television set, for example, in one of these stores. That’s because we tend to think of cheap goods as being of a low quality.
This encapsulates the problem that faces many retailers, both on the high street and when trading online.
If they discount too heavily then consumers will naturally start to question what is being offered. Are the products going to be safe? Will they last? Why were they so much more expensive to begin with?
Once consumers start to question the quality of products on offer, it’s a slippery slope for the retailer. Before long, customers will start to drift towards alternative stores when it comes to making quality purchases.
In short, the brand will have suffered.
But this damage to the brand is not the only danger. The problem with discounting too heavily is that it starts eating into margins. This means that the move is likely to be heavily reliant on a significant uplift in sales.
That uplift in sales may not be as dramatic as expected. Alternatively, it could occur but cause its own problems. A retailer would need to consider, for example, whether they would be able to handle a doubling of sales. Do they have the warehouse capacity, the staff numbers and the necessary stock levels?
If not, the increased costs could actually wipe out any gains that have been achieved through the improving sales. Or worse still, the slashed prices could actually cost the retailer more than is earned.
A failure to maintain the low prices, or to provide the required level of service, could lead to yet more problems. Disgruntled customers are often keen to discuss issues with friends, family members and, increasingly, using internet forums.
Understanding online retailing
The internet has allowed many new entrants to appear in numerous markets. It could be argued that it’s never been easier to open a store. It’s certainly never been easier to reach a wide audience.
This has led to many inexperienced business owners looking to the internet as some sort of cash cow. The reality, however, is often frighteningly different to their expectations.
Attempting to compete with other internet retailers by constantly lowering prices is a hazardous approach. Many larger retailers will have negotiated better deals with suppliers, ensuring that they have larger margins to work with. Sometimes a smaller store simply can’t compete on price. At least, they can’t if they wish to remain profitable.
The key to success is surely understanding that selling online isn’t always about pricing strategies. Consumers are actually willing to pay more if they believe that they are receiving high quality products and a good level of service. As mentioned above, negative stories soon spread online, but positive ones do too.
If a retailer can build up a good reputation online then they can actually charge a premium for what they have to offer. Does this mean ignoring pricing? No, but it does mean taking a realistic approach.
Provide great service levels
John Lewis, the UK department store chain, are famously “never knowingly undersold”. They promise to price-match with competitors. By doing so, they ensure that they are seen as offering a good deal. But they don’t desperately discount products. In fact, they won’t price-match with online retailers.
That’s because they know that some internet retailers are simply offering unrealistic prices. But it’s also because John Lewis don’t need to compete on those terms.
They’ve built up a strong reputation. Their staff are generally knowledgeable and customer-focused. These are the things that consumers will pay extra for.
Building a great business should be all about the customer. We all want to feel like we’ve got a bargain deal. But that’s not just about the price – it’s about the entire shopping experience. That’s something that some retailers are still learning.