The Race to the Bottom

How Long and Deep Before Price Decimates Value

The dark side of price promoting is that it has become a race to the bottom. And it’s really driven by the fact that if one’s product, brand or retail experience is not different and unique enough that it can’t be matched by hundreds of other competitors in our over-stuffed marketplace, price promoting becomes the weapon of choice. Furthermore, price promoting is not just represented by sale signs, price tags, coupons, ads, algorithmic “robo-pricing,” and/or the myriad of other deals for products and services. It is also accomplished through “diffusion” brands such as Simply Vera by Vera Wang made exclusively for Kohl’s and many other designer examples; or through the proliferation of outlet stores such as Nordstroms Rack, Saks Off 5th, and many others (all of which are growing faster than full-line stores).

How long and how deep will this “race” go on before the aggregate effect on consumers’ perception of the true value of the brands, designers or retailers becomes as confused as the “tricky” pricing strategies? And even worse, it will ultimately align value with the lowest possible price placed on it. In other words, it behooves brands and retailers to “beware of what they ask for” by diminishing the value proposition to “….buy me, I’m cheap.”

The paradox of course, is that while the retail consensus is that consumers are “hooked” on the “drug of sales,” the longer and more persistently brands and retailers “push” the drug, the more the process becomes an implicit admission that their brand or store is worth less.

When to Hold ‘Em and When to Fold ‘Em

So, who’s bluffing whom, and who’s going to call whose bluff? It could be argued that retailers are bluffing consumers by raising the “bet” that more and larger deals (discounting) will win more of their wallets. Inherent in the bet is that consumers’ perception of the true value of the offering being discounted will not be diminished. In other words, the thrill of discovering and purchasing a designer brand, for example, at 25 percent “off,” will not erode their perception that they’re getting 100 percent of the true value of the designer’s brand for the “sale” price. The same bluff assumes that consumers will uphold their counterintuitive belief that they’re getting full value even at 50 or perhaps 75 percent “off.”

So far, even though it’s hard to quantify, this race to the bottom does not seem to have had major impact on retail or wholesale profitability. I think they’ve all become so skilled in pricing trickery that they know when to “fold ‘em” so to speak, to stop the game before it erodes the bottom line.

On the other hand, as this race intensifies, and as ingredient products and labor costs increase on the manufacturing side, how long and deep can the discounting continue until the brand, designer or retailer must get out of the race to protect margin, or must find additional areas to cut costs, and/or must begin to sacrifice product integrity/quality? The last alternative, which has been lightly referred to by some as “product engineering,” risks decimating the true value of the offering in the eyes of the consumer. And, this of course is when the race to the bottom hits the “bottom,” and no amount of further discounting will win the consumer’s purchase.

How Not to Join the “Race”

Please don’t yawn, but Apple hasn’t joined the race, nor has Lululemon or Trader Joe’s. And, they are just three examples, among others, that have a strategy in place of how not to join the (discounting) race. Without going into great detail, they are not only providing different and, in most cases, unique products; but on top of the product value, they also provide meaningful and compelling experiences. For starters, Apple’s engaging and educational genius bar; Lululemon’s various sports and yoga events and classes; and, Trader Joe’s funky shopping experience, (associates dressed in Hawaiian shirts), and innovative, hard to find, trendy foods all carrying the proprietary Trader Joe’s brand label.

These retailers and others like them were fortunate to have started with the two key components of unique products and great experiences, thus they have not had to join the discounting race. The combination of these two great and synergy-creating value drivers is compelling enough to not only make their brick and mortar stores “go-to” destinations, but also to attract consumers into the stores away from the Internet.

Unfortunately, for other mainstream retailers who did not have the experiential component “baked in” so to speak, and whose products were/are not necessarily that differentiated, they were forced to join the race just to survive. And, those that have attempted to get out of the race by trying to wean consumers off of the “sale drugs” have largely failed.

And, of course, as so broadly covered by yours truly, another huge mainstream retailer – JC Penney – is trying to get out of the race by attempting to wean consumers off the discount drug and on to their fair and square pricing. And, I believe that largely because the experiential and unique brand components of Ron Johnson’s grand vision were not “baked-in” and visible to consumers from the get-go (but, planned to evolve over the next couple years), the resulting consumer confusion and/or push-back to the pricing strategy alone is now a huge challenge.

While Johnson admits they did a poor job of communicating and educating the consumer on fair and square pricing, and I would agree, he now has a choice of ramping up the education or perhaps side-lining it until his total value package of a new and exciting shopping experience, unique brands, great service, new brand positioning and marketing all become visible and compelling enough so that the pricing strategy is not only acceptable, but desirable.

As I’ve said before, vision and long-term strategy is one thing, implementation another.  And, because Johnson’s re-visioning of JCP, indeed of all department store models, is so fundamentally disruptive and game-changing (to say nothing of its grand, high-volume presentation to the entire world), its implementation is not only bound to be full of unexpected trip wires, but each one of them will be minutely and painfully scrutinized by the press, the financial world, and competitors.

So, as each misstep in implementation occurs, along with the expected short term drop in traffic and sales, the key question at the end of the day is: how many trip wires and how much time and how much revenue loss will the Board and shareholders allow before they push back against Johnson and his visionary objective?

He’s betting the consumer is ready for his revolutionary concept and will buy into all of it once they see it and understand it.  The naysayers are betting the consumer likes and expects the department store model just the way it is, thank you, including the tsunami of coupons, discounts, deals, and on and on. And, they point to the precipitous decline in business at JCP to support their claim.

There is another analogy to think about. When the heroin addict can no longer get a rush from another injection – when they become inured to the drug, it’s the beginning of the inevitable “crash,” hopefully followed by recovery and a new life without drugs.

So, should JCP stick with its “cold turkey” approach, albeit with intensified consumer education? Or, should they pull back until the entire holistic vision is in place: exclusive brands; exciting fun shopping experience with a “town square” full of events; and, an elevated level of service?

In my opinion, they should “tough it out,” stick with their commitment to getting out of the “race,” with loud, clear and continuing consumer education about how they arrived at fair and square value and that they will no longer feed discounting addiction, which will ultimately decimate both the real value as well as consumers’ perceived value of the product or service.

However, I would get those other visionary components up and running as quickly as possible.

Robin Lewis About Robin Lewis

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.