## November 03, 2019

### Price Deflation

The transactional brand has no qualms with discounting.

A few years ago, a Private Equity firm asked me to speak with the Chief Marketing Officer at a business they were looking to acquire. During the call, the CMO said something that just stopped me in my tracks. Here's the paraphrased quote from the CMO:
• "I don't care what we're selling. I can craft an offer, any offer, that will cause any customer to buy anything. Period."
That's the definition of a Transactional CMO!

I'll bet I've analyzed a dozen brands in 2019 that introduced new items at prices more expensive than the brand average. In other words, if the average item sold for \$25, the brand introduced new items that cost \$29.

This causes a unique dynamic among existing customers. Your existing customer sees a \$29 item and says "that's too expensive". Instead, the customer buys the \$25 item. Your merchandising / inventory / product team then measures results, and notices that customers "don't like" new \$29 items. Now there's an inventory problem. What's the best way of getting out of an inventory problem? Discounting items.

Here's where the marketing team gets involved. They apply 25% off your entire order (how generous), meaning that \$25 items are now \$18.75 and \$29 items are now \$21.75. The customer finds both price points appealing, and buys something.

Of course, gross margins are normally around 60% ... so let's say that the customer places an AOV of \$75. Cost of Goods = \$30.
• Gross Margin at Full Price = \$75 - \$30 = \$45.00.
• Gross Margin at 25% Off = \$56.25 - \$30 = \$26.25.
So now you have to generate 71% more business just to equalize gross margin dollars. Good luck!!

A lot of the price deflation I'm seeing in 2019 starts with a merchant trying to generate gross margin dollars by introducing new items that are more expensive. This creates a customer response problem, which becomes an inventory problem, which becomes a marketing discounting problem, which becomes a gross margin problem which is addressed by introducing more new items at more expensive price points which ... yeesh!