October 31, 2016

Pricing Integrity

Have you witnessed the blood bath going on out there in regard to pricing?

20% of Americans now subscribe to Amazon Prime. In other words, these customers ... representing more than 20,000,000 households ... let that one sink in ... are willing to pre-pay for shipping and handling a year in advance, with no guarantee they will even get maximum utility out of their investment.

I'll say it again ... these customers pre-pay for shipping without getting any products shipped to them.

Now let's visit Chico's.

That's what a catastrophe looks like. It's late October, one of the busier shopping periods of the year, and the home page is BEGGING the customer to buy something ... 50% off one item if you buy one item - get discounts to sign up for email ... just a complete meltdown, don't you think?

Chico's isn't alone, of course. A review of any catalog website illustrates the desperation that has crept into non-Amazon commerce.

I have analyzed full price and sale price / promotional behavior for the past ten years, more than 100 times. 50% off is toxic. TOXIC. The future of a "brand" is poisoned by today's promotional strategy.
  • Customers who are acquired via discounts/promotions are much less likely to pay full price in the future than are customers acquired via full price.
  • Customers who convert from full price purchases to discount/promotion purchases are much less likely to pay full price in the future.
This is bad, folks. I'm sure you have analyzed the issue as well ... right ... RIGHT? And no, I don't mean you analyzed an A/B test with 20% off vs. 40% off. You actively simulate long-term customer value, and you know the results inside-and-out, right?

It's bad because when merchandising tactics are fixed next year, you'll have the right merchandise and the WRONG customer. Your customer base will expect discounts/promotions again, and won't buy unless you dazzle the customer ... and the deeper the promotion this year, the more the customer will expect deep discounts next year.

It takes 3-5 years to move a customer from a promotional rhythm to a full-price cadence. Most Executives don't have the patience to pull that off and deal with tepid top-line sales in the short-term.

How can you avoid this problem?

Remember, discounts/promotions are largely a function of inventory position. If your business fails to meet budgeted sales levels by 20%, you are going to deal with an inventory situation not unlike nuclear winter. You have to purge the system of the rotting tomatoes sitting on the shelves.

Historically it was important to make sure that the customer was happy. You didn't want a customer to visit the widget page and realize that widgets weren't available. So inventory levels were tied to budgeted sales forecasts, hoping that sales would hit the budget and all customers would be happy.

Here's the problem. Let's say you are in a full-price environment, and you hit budgeted sales. Say you forecast to sell 10,000 widgets at $49.99 each, with a cost of goods of $19.99 each.
  • Total Sales = $499,900.
  • Total Margin = $300,000.
Now, let's say that business is not hitting budgeted levels ... business is off by 10%. Your Management Team decides to blow through inventory by offering 20% off. The dynamics change.
  • Total Sales = $399,920.
  • Total Margin = $200,020.
Had your Inventory Team "under-bought" by 10%, you wouldn't have had to discount. The story changes (again), if you had under-bought inventory.
  • Total Sales = $449,910.
  • Total Margin = $270,000.
In other words, you'd sell through your inventory, you wouldn't have a need to discount to move inventory, and you take home $270,000 margin.

I know, I know ... if sales hit budgeted levels, then you lose out on $30,000 of margin.

But if business is 10% below forecast, you gain $70,000 of margin.

There are three benefits to this strategy.
  1. You avoid training customers to expect discounts and promotions, protecting the future of your business.
  2. You protect gross margin dollars.
  3. You create urgency. If the customer does not buy today, the item may not be available next week. As a result, the customer is motivated to buy RIGHT NOW. You want to train your customer to buy RIGHT NOW, don't you?
There is one drawback to this strategy.
  1. If business is on plan or above plan, your inventory team has to hustle like there is no tomorrow or sales will not be maximized.
Because of the one drawback, almost nobody employs this strategy.

In modern cataloging, where co-op response is awful (yes, it is awful, face up to it) and sales seldom exceed expectations by more than 10%, the three benefits greatly outweigh the one drawback.

Urgency is the biggest benefit.

The fast fashion folks figured this out. By having virtually nothing in stock, fast fashion folks demand that you buy something RIGHT NOW or it won't be there tomorrow. Urgency results in store traffic, high conversion rates, and constant "engagement".

Meanwhile catalogers follow a vendor-centric playbook demanding full integration across channels and endless inventory depth ... a woeful strategy that results in non-stop overstocked positions that demand 40% off plus free shipping ... a strategy that fully devalues the catalog brand.

The path to pricing integrity isn't "competing with Amazon". That battle has been lost. The battle is with other catalog brands. Create urgency by not requiring an inventory position that aligns with your sales plan. You won't have to discount, and you will create urgency. In modern cataloging, urgency is a key demand driver. Take advantage!

You are no longer competing against Amazon. They won a decade ago. Catalogers lost. The battle now is to take market share from weak catalogers. You don't want to be a weak cataloger, do you? Good! Then it's time to change.

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