Leaning Too Hard on One of Them Can Be Fatal
Retail businesses stand or fall based on their strengths and weaknesses with regard to five pillars (P5): PRICING, PRODUCT, PRESENTATION, PRODUCTIVITY and the talent, energy and dedication of PEOPLE. Leaning too hard on one, specifically promotional pricing, can threaten a retailer’s very existence.
P1 The Fatal Attraction of Promotional Pricing
Promotional pricing drives most retail business sales revenue. But when pricing behavior becomes rampant and reckless, it can erode gross margins, diminish productivity and ultimately destroy brand equity. Promotional pricing, an effective customer motivator when managed carefully, can easily become a fatal attraction when a business leans on it in an unsustainable way.
Unable to make sales plans? Watching inventory levels climb to unacceptable lev-els? No problem. Simply lower prices and your issues are solved. Well, not so fast.
By itself promotional pricing—the use of “save” stories to influence demand— is not new to retailing. It’s as old as the business itself. It can be a powerful, attractive, and successful way to build a retail business. But that’s assuming that the other four pillars (product, presentation, productivity and people) are operational and intact. Unfortunately for many retailers, several of these pillars are broken, or missing.
P2 It’s Always All
Retail businesses boom when they are fueled by an ongoing procession of new and exciting products, products that are presented in attractive and inviting ways. Shop at most of the retail standbys— Saks, Macy’s, Kohl’s, Target and Walmart —and your hunt for new and different products will disappoint. Same-old, same-old reigns supreme. Designer and celebrity lines, purportedly emblematic of differentiated lifestyles, all tend to blend together. Label slapping has become the order of the day, especially with private brand products.
In department stores—once the heart and soul of the retail industry, and now a struggling group of last men (and women) standing—careful assortment planning was once the basis of product selection. Good, better, best. Budget, moderate, better. Simple, mainstream and luxury. These categories were rungs on assortment plan ladders that drove the product selection of stores. Today, the assortments often hinge on brand labels alone. Or, they are based on vendor deals, which guarantee or protect gross margins, advertising allowances, sales associates’ commissions, etc.
Introduce something truly new and engaging—like a new Apple iPhone— and customers line up outside a store the night before launch. Relying on inventory that has little or no product appeal causes retailers to give in to the fatal attraction of unwarranted and unsustainable promotional pricing.
P3 The Internet Trumps Place
Presentation spans store and web design, customer service, and physical location or place. It’s an expression of the myriad ways customers intersect and interact with the stores that they patronize. The power of place, however, has now been forever altered by the presence of the internet. Although direct-to-consumer business, like catalogs, has been a feature of retailing since the 19th century, most retail commerce has, up until recently, been carried out in a brick-and-mortar store. Brick and mortar is likely to always make up a substantial percentage of retail sales, but its primacy is no more. Millions of square feet of retail space have now gone dark. Millions more are yet to follow. A retailer’s reliance on “location, location, location” as a badge of legitimacy is increasingly a thing of the past.
Let’s face it, the convenience of shopping at a nearby mall has been supplanted by the convenience of shopping on the internet from home or the office. Just as most downtown retail emporiums have disappeared, now many of their mall successors are faltering, as well. How do you coax customers into shopping at your stores? It’s simple. Put your entire stock on sale all the time. That is a vicious cycle. Unhappily, last month’s promotion needs to be made even more compelling to drive this month’s sales.
Customer Service. What Customer Service?
Customer service is also an expression of presentation. Customer service was once a key retail differentiator. Today, many retailers’ delivery of real customer service is a thing of the past. Store management is all too often focused on minimizing sales costs, not maximizing customer engagement. The store management gospel, once manifested by cadres of committed long-term service associates with genuine product knowledge, is badly diminished, if not gone. Can’t keep your customers loyal through great service? Then drive them back into your stores with lower prices. Of course, those downward prices have to be made sharper and sharper all the time to be noticed.
P4 Retailing Is Not a Not-for-Profit Business
Productivity, although not particularly simple to manage, is the most straight-forward of a retailer’s underlying pillars. Sales revenue minus wholesale product cost yields gross margin dollars. Gross margin dollars, less expense dollars, determines profit or loss. Promiscuous price promotion may drive top-line revenue, but to what end? Price deflation drives margins down and transaction costs up. Promotion does drive footsteps and it does liquidate inventories, but its effects on brand and price integrity are irreversible. Yes, incremental sales revenue does drive incremental gross margin dollars, until the day when that stops.
P5 People Make or Break a Retailer
The heart of most every enterprise is its human capital—its people. Retailing is no different. The retail industry, unfortunately, has a massive people problem. The training ground for both central merchants and store operators was once the department store’s executive training program. Not all were great, but all were devoted to building large numbers of capable future retail executives. Almost all of these developmental pro-grams have disappeared along with most of the organizations that supported them. That’s not to say that retailers today are devoid of smart, talented and ambitious people. But these people are not being schooled in the art and science of fashion and product development, assortment planning and customer service, or a host of other valuable apprenticeship skills. Today’s merchants are increasingly focused on the “deal” that management needs to support increasingly unsustain-able promotional prices. Employees are not being taught storytelling. They are not scouring the world for new and unusual products. Store operators are not enjoying the wonder of customer satisfaction and its reward—customer loyalty.
The Fatal Attraction of Promotional Pricing: Redux
Do all retailers exhibit this fatal attraction to promiscuous promotional pricing? The answer is no. Not all. Just most. Curiously, Amazon, that mother of all price disruptors, is no longer using price alone to drive its business. Amazon is eliminating comparative prices. Pay attention Macy’s! Although Amazon has put a toe in the water with its creation of Prime Days, the company has a long way to go before it matches the 52-weeks-a-year drumbeat of sale events trumpeted by Macy’s, Kohl’s and J.C. Penney. Amazon’s product selection, although still driven by the search engine, is massive in breadth and depth. The company has, however, begun to invest in fashion-driven private-label product development to match their own branded tech products, such as Kindle, Fire and Echo.
Their customer service regimen is second to none. Know anyone who is unhappy with Amazon’s customer service? I don’t. As for productivity, like it or not, the profit generator they’ve built, Amazon Web Services—a byproduct of their ongoing investment in technology—is unparalleled in its size and market share. Add to that the magic of Amazon Prime, which, like Costco’s member subscriptions, drives incremental revenue and customer loyalty, to boot. Finally, from a people perspective, their devotion to recruiting the best and brightest is unparalleled.
Some Unsolicited Advice
What should a retailer caught up in the fa-tal attraction of unsustainable promotional pricing do? Kick the habit, cold turkey, as J.C. Penney recently tried to do? Eliminate price promotion and shift to some nonsensical version of Every Day Fair Prices? We all know how that turned out. Consider that there are only three price buckets: regular price, promotional price, and everyday low price.
- The luxury players need to assiduously avoid expanding price promotions, which, if left unchecked, will destroy their brand equity.
- The mid-tier players, from Macy’s down through Kohl’s and J.C. Penney, must rebuild their promotional strategies, promotional calendars and discount schedules to restore some semblance of balance between regular and promotional prices. There are no more weeks in the year to play with. There are no more events that can be put on the calendar. And once past 50 percent-off, there is no more gross margin to be gained. Print more coupons? Double and triple them up? Keep that up and there is no hope. Isn’t there something wrong when customers’ wallets are stuffed with just as many Macy’s and Kohl’s coupons as Kroger? Yes, customers’ demand for constant, ever increasing discounts, is insatiable. But their all-consuming attraction to price promotion is not killing them—it’s killing the retailers who do business with them.
- Last, to the discounters like Target and Walmart who have increasingly strayed from their “Every Day Low Price” heritage into high/low promo-tional pricing: beware. You are as vulnerable as the luxury players that have greedily opened outlet stores.
Those other four pillars do not, in and of themselves, offset the fatal attraction of promotional pricing. But when balanced, they can go a long way to insuring success.