Should Companies Discount During COVID?
Why should companies care about discounting during COVID? I’ve been thinking a lot about this question. For the first time ever, I saw an 85% off discount in a store that was not closing. Discount sales clearly drive purchase behavior, but they also have negative trade offs. I want to share with you what I suspected and what I found out after researching this topic about discounting during COVID as well as my own experiences.
Go on Take the Money and Run
One direct to consumer shirt company I know used discounting as a regular strategy. They religiously pushed sales, all types of sales (e.g. Father’s day sale, warehouse sale, graduate sale, and so on). If you transacted with this brand, it quickly became clear that you would never buy anything at full price when you could just wait for the next sale.
And that is a bona-fide strategy. We all love to get a great deal. But when this online retailer cut the introductory price too low, they sacrificed value and started acquiring customers who performed differently than their classic high value customer. The newly acquired shoppers expected the first shirt they bought at a deep discount to be the same quality as a more expensive shirt, and they complained bitterly when it was not. These complaints reached other prospects and customers who started sharing stories that the company’s quality had changed. Had it? No, but the sense that you paid a reasonable price for good quality eroded across both the low value discount shoppers and the higher value long term shoppers as a result of increased social media reviews from the new low-cost discount shoppers.
So the question I’ve been thinking about is, should online retailers discount to drive up sales now and reap short-term revenues thereby offsetting crushing losses or should they hold their pricing and maintain the values of the brand, perhaps strive to create deeper customer relationships, even if revenue is down?
Customer-Centric Thinking
Classic customer-centric thinking about discounting is that it’s a mass marketing technique. Discounts are not meant to build close personal relationships. Think about it. A close relationship is built on shared values, quality, friendship, service and communication. In the same way you wouldn’t give your neighbor $5 for a cup of sugar. It would be insulting. Instead, you’d offer a cup of coffee or a few flowers from your yard. Discounts send the wrong message to valued customers that we want to buy your loyalty, our products are overpriced, we don’t really care about you, we only care about your money.
But, I believe in the digital age, we CAN use discounts appropriately with our customer base. Maybe have our cake and eat it too. But it’s complicated. So I made a 2x2 grid to break it down.
I started with Demand, meaning the overall consumer demand for your products during COVID and crossed it with Data Analytics maturity, meaning how easily can your company understand customer behavior and make a change.
Consumer Demand as the Y-AXIS
First, consumer demand is closely related to industry during covid. If you cannot sell at full capacity (think travel or restaurant industries) it’s a darker world than if you sell online and are seeing demand increase (think Amazon or groceries). So our first column (or y-axis) is low demand vs high demand.
Data Analytics Maturity as the X-AXIS
Second, data analytics maturity controls how simple or sophisticated your strategy can be. For simple analytics think (limited time sales or clearance rack by sku category). For sophisticated think baseball ticket prices which can take into account weather, team, location and timing of the sale. So our x-axis is low maturity vs high maturity.
Note that a company can a have one foot in several quadrants. For example, the warehouse supply chain could operate differently than the ecommerce arm.
Quadrant 1: Low Demand/ Low Maturity
Think of: Retail stores that depend on foot traffic. The Mall.
These are commonly the places where we see big sales signs and maybe even expect discounts. But we can do more than just raise price or lower it. We can be creative.
I need to credit Rafi Mohammed who wrote, The Art of Pricing as well as The 1% Windfall for this next statistic.
McKinsey did a study and they found that a 1% increase in price, if demand is held constant, would on average increase operating profits by 8.7%.
Now you might be thinking, why does that matter? I think it shows how much small changes in price can create big changes (positive or negative) on the bottom line. With supply chains still in disarray I would be very hesitant about adjusting price if, as a retailer, I wanted to be in business next year especially if - like Hertz, my business was already fully leveraged.
Instead of slashing prices, what could you do?
Rafi says, consider discounting with dignity. Consider that Price is coupled with our perception of value. When we offer good, better, best pricing it highlights the value of the better and best products. It also allows room for upgrades which may be frequent.
One example of this is jewelry stores who take advantage of this concept through the trade-up idea. Maybe today you can only afford a small diamond engagement ring for your loved one, but tomorrow you can trade in that diamond and buy the next size up! The retailer goes from too expensive/no sale to getting the sale and anchoring future sales, all while keeping the price and value aligned. Could your company benefit from a trade in/ trade up policy?
Quadrant 2: High Demand/ Low Maturity
Think of: Quick service restaurants.
In a time of COVID, the lack of lunch traffic from office workers as well as a reduction in catering hurts quick service restaurants in downtown areas BUT they are also seeing an uptick from suburban stores where people are downshifting that is, families or individuals who want to order out but don’t want to pay top dollar every time.
Many quick service restaurant chains have very dated technologies that keep their data maturity low. But here creativity can be about understanding what your customers true needs are. Pre-COVID I think about customer experience options such as Fred Meyer’s childcare-while-you-shop play areas. Or McDonald’s well-known play structures. These solutions do not require intensive data-crunching to know these experiences fulfill a customer need which increase sales.
Post-COVID, most restaurants have added delivery services and online ordering which was lacking before. But when it comes to discounting, loyalty programs associated with an app is where they really succeed. Even if they are not ready to act on the information, the data collected now from loyalty programs can be used to help understand customer preferences and where discounting makes the most sense which is to incentivize a higher frequency or recency of purchase.
Would a loyalty app make sense for your business now? Would it help you collect customer information your current systems are missing? And could that in turn help you become more strategic about your discounts? You bet! I also want to mention bulk purchasing in this quadrant. When sales are down, some companies encourage the purchase of multiple items at once. Think of most household consumables like cleaning products, paper products, food staples. I’ve also recently noticed my Amazon searches are pushing a lot more in bulk items even when I only need one. One can be hard to find, so we give up and rationalize that we will use it eventually. An excellent strategy of discounting without losing the alignment to value via bulk sales. A similar twist is product bundling where more products are added to the core purchase. Think, would you like fries with that hamburger? This doesn’t have to be post-sale, it can be like a happy meal and sold as a set.
Quadrant 3: Low Demand/ High Maturity
Think of: Casinos/ Hotels/ Airlines
Years ago one of the casinos in S. Lake Tahoe asked this question about loyalty. Through our loyalty program, are we basically paying people to come who would otherwise buy from us? The casino was running a vast loyalty program which compensated guest’s room and drinks and chips to gamble. The belief was that without these perks (which were essentially discounts), highly valued guests would not return. So they ran a test WITH A CONTROL.
Why do we need to put a control behind every test? Because if we do not then we cannot tell the effect of the test! So they started with a small audience and tested their theory. Were they overcompensating, yes but not totally. They found certain features like a free room were more highly valued. They simply had to realign value in the program but then they went further and found they could differentiate the program by the customer lifetime value. In other words, customers who loved the brand and came frequently would respond to different incentives (like special dinners or event tickets) more than customers who did not come frequently (and responded to hotel rooms and free drinks).
Now in the COVID era, we see hotels and airlines pushing the value forward. Consumers know the rates are historically low so these travel offers tap into pent up demand by allowing travel far into the future. The no worries cancellation policy is also part of this. Book now and if you cannot travel, you can push it out or cancel with no extra fees. Now that this is a sunk cost, as a consumer, you might even upgrade in the future.
What could you do to remove the mass treatment of a loyalty program? Are you passing out endless points without the right incentives to cash them in? Of course, customer lifetime value is a sharp strategy to help you target the right segments, even when demand is low.
Quadrant 4: High Demand/ High Maturity
This quadrant has changed a lot. Think of: PRE-COVID Disney world, Carnival cruises, certain ball parks. POST-COVID think of food delivery services like Grub Hub and Uber Eats, and I’ll put Dominoes here too. There are also quite a few companies that are being pushed into high maturity such as Peloton which I’m going to use as an example.
Last fall I broke down and bought a Peloton bike. It rains a lot in Oregon so I got the bike and tried out multiple programs. In the heart of COVID less than 6 months later, I sold it. Why? Despite all the electronics and the metrics on the screen, the company hadn’t figured out me. I did not want to train as a competitive cyclist. I wanted to keep in shape but not kill myself doing it. There was no setting for this. The machine could not tune its recommendations to me.
This is because - to operate at the highest level of maturity - a company needs to improve the data coming in. They never asked me the right questions or had me augment their data other than basic class ratings and instructor ratings. No qualitative information was collected from me the entire time until after I left. Compare that to StitchFix, a company that surveys you constantly while also augmenting the descriptive details about all their clothing so it can make good matches and improve them. Customers who are willing to augment your data provide a huge competitive advantage.
Companies in this space use discounting as one of the many arrows in their quiver but you will most often find it attached to acquisition. It sounds like this, Join now and we’ll give you $100 which I like to interpret as Our cost to acquire you is way higher than $100 so if you will become our customer for this offer, we both win!
These companies push the relationship with you to be part of our tribe. They want you to reflect your values in their brand. I wanted my athletic values to be reflected in Peloton. Disney wants you to feel special as their guest. And that is a mark of high maturity.
Dominoes was already high maturity when COVID began. Since March 2020 Dominos stock price has increased 17%. Part of their maturity was delivery to any location even your neighborhood park and extensive tracking of the order from the moment it was placed to the oven to the car to your door. Discounts were gamified to a free pizza after every 6 orders which increased the frequency of orders. We started with quick service restaurants in quadrant 2. Dominos is an example of one that crossed over to quadrant 4 through the skilled use of data as a result of a successful digital transformation.
In this quadrant, the strategic, skilled use of data allows you to run very narrow tests and make granular improvements that impact your bottom line as well as innovate. The trick is to keep doing this so it becomes very difficult for competitors and imitators to keep up.
If you have mastered your data, what areas of innovation do you sense but haven’t tested? Ask around the call center and the programmers. These employees already know what you need.
The Answer
Keep pricing steady, get creative with discounting aligned to value, and think about it from your customer’s point of view. Customers do not think about your costs plus margin. They think if I did not buy this here and now, then would I go somewhere else and how much time would that take? Is the value worth it?
Let’s say I want to try a better discounting strategy, what should I do first?
Consider your company’s readiness to execute and the broader consumer demand for your products now.
Match your company (or division) to a quadrant on the 2x2 grid to determine what kind of discounting strategy is right for you now. Are you high or low in demand? High or low in your digital customer data maturity?
Need help? You can always get in touch I love this stuff because I believe when companies are sensitive to the right customers, it makes happier customers and more resilient companies over time.
I’m Allison Hartsoe, the CEO of Ambition Data. My team and I use digital data to create healthier, stronger businesses as measured by the strength of their returning customers. We talk about this as Customer Equity and customer lifetime value or CLV is the tool we use to measure it. You can think of us as tech-enabled services because through our personal approach, we tune the data to reflect your business. Now this approach is not right for every business, but for fast-growing Direct to consumer businesses I think it’s a natural fit. You can find out more by downloading our free Customer-centric CMO guide.