Discounting can wreck brand value and profits. Follow this discount strategy to avoid those pitfalls

Steve McKee

Steve McKee

Steve McKee writes in BusinessWeek that: Discounting stinks.

As a marketer whose job is to create preference and profitability for my clients, I don’t like discounting. In fact, I hate it. I call it the D-word. It’s distracting. It’s demeaning. It’s destructive and depressing. And yet I see companies do it all the time.

These days discounting is more prevalent than ever. Now into the second year of our economic tsunami, we are getting used to headlines bemoaning declining sales and shrinking profits across virtually every sector of the economy. The current issue of the Harvard Business Review even coined the term Post-Recession Consumer, whose “new thriftiness and desire for simplicity” will change business for a generation. Just this month Yahoo! (YHOO) introduced a new Web site called Yahoo Deals, offering coupons, information about limited-time promotions, and even a cheap gas finder. The company reports that searches for the term “printable coupons” are up 50% this year because, as Greg Hintz, head of Yahoo Shopping, puts it in a recent Brandweek piece, “Frugality is the new ‘cool.’ ”

Many companies are getting caught up in the frenzy and slashing prices. Even marketers who should know better—those who have made big bets on discounting in the past and lost—have not been immune. Both McDonald’s (MCD) and Burger King (BK) recently fought public skirmishes with their franchisees over the price point of their low-end burgers. Their corporate offices want to drive traffic, but franchisees complain that it does them no good to sell any product at a loss. And Macy’s (M), the nation’s dominant department store chain, lowered its price on a popular line of men’s slacks in an effort to generate sales. While the decision resulted in “tremendous sell-through” according to CEO Terry Lundgren, it also required “low price points and no margins,” an article in The Wall Street Journal quoted him as saying.

Discounting destroys brand equity, hamstrings investment in innovation, and zaps profitability for companies and their stakeholders. Which raises an interesting question: Can discounting ever be an acceptable strategy for a business?

Rules for discounting wisely
If there’s one thing I’ve learned in more than two decades as a consultant, it’s never say never. There may be times and places where a discount can make sense to achieve a limited, well-defined objective. That said, discounting should be rarely used and carefully managed. Let me suggest three rules of thumb that should be kept in mind if (when) you begin flirting with the discount beast.

First: Discount briefly. Discounting is like a drug. Employed for a limited time to treat a specific condition, discounting can have its place. But like a drug, it’s addictive. Companies that get hooked on it do little more than drive their value proposition down, sometimes past the point of no return.

This is one reason why department stores have been in decline over the past two decades, launching Red Tag sales as soon as their Red Apple sales are over. They discounted so often that they trained customers not to shop if there wasn’t a sale going on. (My firm even produced a campaign for a retail client that spoofed how department stores would look for just about any reason to discount, such as the “Life’s Not Fair” and “President Polk Day” sales.)
Second: Discount credibly. Handled carefully, discounting can be used to achieve specific business objectives without compromising your brand’s overall value perception. The key is to make the rationale behind the discount credible (and obvious) to consumers, so they don’t perceive it as an act of desperation.

For instance, Apple’s (AAPL) student discount on laptops doesn’t damage the brand because it’s based on a rational corporate reason (get young computer users hooked on its products) and a credible consumer need (students are poor). The company also offers 10% off a new iPod when customers recycle their old one, which not only encourages upgrading but makes Apple look like a responsible corporate citizen. Both of these tactics enable Apple to maintain (perhaps even increase) brand equity while making its products more accessible.

Third: Discount creatively. Smart companies understand that price is just one element of the value equation, and find ways to “discount without discounting” by focusing on other elements of the marketing mix. Luxury leather goods maker Coach (COH) did just that by adjusting its merchandise inventory so that half of its handbags are regularly priced between $200 and $300 (compared to its historical average price of $325). While this will have a negative impact on the long-term equity of the Coach brand name, it’s less damaging than hanging a “30% off” tag from the handle of every purse.

Or consider video game retailer GameStop (GME), which is pushing the sales of more used games (that have a naturally lower price point) while times are tough. That will keep customers in the habit of coming to its stores to find what they want. GameStop understands that when the economy comes back, so will the sales of new games. Rather than hurting its future pricing power by discounting new merchandise, the company has found another way to satisfy its customers in the short term.

And then there’s Quizno’s, which has taken some licks from franchisees for discounting in the past. Facing not only a down economy but a powerful competitor making a compelling offer (Subway’s Five for $5), Quizno’s developed new sandwiches that it can profitably sell for four bucks or less. According to CEO Rick Schaden in an e-mail interview with me, the “Toasty Bullet” and “Toasty Torpedo” were designed “to appeal to consumers’ wallets and tastes while still protecting franchise owners’ margins” under a program called the Flex Plan. A major component of the Flex Plan is to provide, “a constant pipeline of new product innovation,” including, if necessary, additional lower-priced menu items.

The bottom line: In your customers’ eyes, your product is either worth regular price or it’s not. In tough times like these that may be a more difficult case to make, but if you’re not winning the value equation in their eyes you should focus on finding a way to meet their needs without reflexively taking a percentage off the top. If you do choose to incorporate discounting into your strategy, it must appear sensible and smart, not irrational or a result of panic.

People understand that prices are a market mechanism. If you start playing the discount card too much, you’re sending a signal that you don’t believe your product or service is worth it. And if you don’t believe it, who will?

Steve McKee is president of McKee Wallwork Cleveland Advertising, a firm that specializes in helping stalled companies rekindle growth. He is the author of the new book, When Growth Stalls.