December 13, 2009

Dear Catalog CEOs: Financial Weapons of Mass Destruction

Dear Catalog CEOs:

Last week, I was asked the following question by an experienced catalog advocate:

"Have you looked at this L.L. Bean catalog cover? Are they selling product or promotions?"

The same thought came to mind when viewing the other half of the promotional arms race from Lands' End. Last week, I received the following e-mail marketing messages (wording isn't exact, promotions are).
  • Message #1 = Final day of 25% off of everything plus free shipping.
  • Message #2 = 25% off everything plus free shipping extended one day.
  • Messages #3-4 = Up to 50% off all outerwear plus free shipping, two days only.
  • Message #5: 25% off everything plus free shipping.

Interesting!

L.L. Bean and Lands' End, of course, are not catalog brands, and they certainly are not alone in their pursuit of market share via compelling discounts and promotions, are they?

They do, however, represent the fabled multi-channel brand, combining stores and e-commerce and catalog advertising and e-mail marketing and search marketing and affiliate marketing and portal advertising and social media and mobile marketing and television advertising and radio advertising and billboard advertising and newspaper advertising and magazine advertising and telemarketing and co-branded credit marketing and postcard marketing and package insert marketing and discounts and promotions into something that the pundits believe is nothing short of customer nirvana.

If all of that stuff worked as the pundits suggest it should work, would any multichannel brand have to give you free shipping and 50% off outerwear in order to encourage a purchase during the busiest shopping period of the entire year, a period of time when the customer is most likely to buy outerwear?

You, of course, are a Catalog CEO. You are not required to discount to such apocalyptic levels, because you don't have to "be competitive" with retail stores in the same way that L.L. Bean and Lands' End theoretically have to.

Discounts and promotions are our version of "financial weapons of mass destruction". They are taxes placed upon brands for being unremarkable.

You are probably already executing reporting of this nature, but in case you aren't, please ask your Business Intelligence team to run the following report for you:

Step 1: Categorize customers into one of four buckets.

  1. Historical customer who only purchases merchandise at full-price, and never uses discounts/promos.
  2. Historical customer who buys using a mix of full-price, sale, discounts, and promos.
  3. Historical customer who only buys using a mix of sale items, discounts, and promotions, never purchasing full-price merchandise.
  4. First time buyers.

Step 2: Sum demand spent within each of the four groups --- full-price items with no promotions, sale-priced items with no promotions, full-price items using discounts/promos, sale-items using discounts/promos.

Step 3: Run this report, for the month of December, for each of the past three years.

What do you observe? Are you converting all of your full-price customers to sale items? Are you converting all of your customers to ones who only buy when there is a discount or promotion? Do discount/promo/sale customers ever purchase full-price merchandise without the aid of a discount or promotion?

We all know that the best way to manage a brand is to acquire customers who willingly pay full-price, without any need for external stimulation. The minute we pollute the customer file with customers who thrive on the need for external stimulation (% off, discounts, promotions), we place the long-term, full-priced health of our business at risk ... we insert a game (% off, discounts, promotions) in-between the customer and merchandise. Eventually, the purchase of merchandise becomes "conditional" on "playing the game" ... never a good thing.

As always, I am available to help you create sale/promo reporting that illustrates if your business is being skewed toward an unsustainable mix of promotional buyers. Contact me at your convenience for assistance.

Thanks,
Kevin

7 comments:

  1. Kevin what, in your opinion, drives people to push these deep discounts?

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  2. Probably three things:

    (1) Inventory Levels. When you are overstocked, you are going to discount. Inventory is like unrefrigerated meat, it loses value by the second. You must move it, typically at any cost.

    (2) Sales Objectives. Businesses love to hit a top-line sales number, and frequently give away margin dollars to achieve a sales number.

    (3) Fear. When one competitor discounts, other competitors feel like they need to play the game, in order to stay competitive. Now, competitive is a unique word, because you can be competitive and not offer promotions. But there is a mania that happens among executives when a few competitors offer big discounts and promos. The executive does not always want to "wait out" promos, for fear of being accountable for a 10% or 15% sales decrease because the competition gave away the store. Business leaders want to be able to come to work tomorrow, just like the rest of us. So leaders will discount to be able to say that they responded to competitive pressures.

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  3. I'll add a third to the list- The Gap. I used to buy there at full price, but over the last few years, they've trained me to wait for not only a 30%-50% off mailer, but a sale on top of that.

    It's absurd that we can use a 40% off card on sale items that are also 40% off, all the while, not raising their prices anywhere near 40% of previous levels.

    We typically pay 25 to 30 cents on the dollar and I no longer value the items the same, my perceived value has kind of landed between 30% and 50% of the price on the label and if it's not on sale now, give it a month and it will be.

    Most don't really understand the numbers on discounting and the massive sales surge needed to maintain profits, it just doesn't happen.

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  4. Thanks for the comment, Greg!

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  5. Anonymous2:55 PM

    Hi Kevin
    Brands are a creation of the 20th century and in times of economic distress all products tend to become commodities, sold at or close to their costs. Companies like the Gap manufacture their own products and do away with the middleman, who usually is a very creative designer who puts that value-added percentage in the price; Thus when a Gap product sells for 50% off you are really getting what it is truly worth, a commodity without any creative input -a mass product, similar to the mass Mao outfits worn by the chinese communists in the 50's. The people who design for the Gap are nameless, colorless, creativeless (new word), eccentricless, and altogether boring anonymous automatons. Besides that, I heard that they are nice people.

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  6. Thank you for the comment, Anonymous.

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  7. As an internet retailer, I relate very well to the story...I am always saying that 'this is the last promo' am launching and then 4-6 weeks later when I see that sales are low again I end up launching a new promo for 2-3 days...It is quite adictive...any suggestions as to what I should do to break this pattern? Thanks! RICARDO

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