Dec 1, 2021 | Branding, Innovation, retail
Promotional pricing is often the only tool used to generate volume. Ask any salesperson ‘Why’ and they will say ‘because it works’. Go next door and ask a marketer, and their response is more likely to be something like: ‘to encourage non-users to try the product, and if they like it, to come back, become loyal customers’
Therein lies the paradox. The well intentioned promotion of a brand results in killing it.
By promotional pricing the product down, you reward current users who would have bought at full price, while not being effective at persuading potentially new users to try for any reason other than price.
The power of habit is huge in routine purchases, like the ones we make every week in the supermarket. A regular consumer is not necessarily loyal to a particular brand, they are more unthinking, more habitual than most marketers will concede, especially to themselves. If a choice is to be made to change brands, that decision takes up cognitive capacity better dedicated elsewhere, and involves risk, which we are programmed by evolution to avoid.
To change habits, we must change behaviour, an extremely challenging thing to do.
Psychologists have found over and over, the best way to change habits is to change little things, one at a time, progressively leading to the changed behaviour that in its turn becomes a habit. Each stage takes 3 or 4 times to become sufficiently entrenched to start to take on the characteristics of a habit.
Back to our supermarket.
Price promotions follow each other on a weekly basis. No brand is given the time to establish its routine purchase as a new behaviour, as there is a price promotion of an alternative brand every week, often several at the same time.
The net result is that for every product on shelf, the discounted price becomes the ‘real’ price, which becomes less and less relevant as consumers are trained by the retailers to think that the discount price is the real price for the products and the categories.
That, in a nutshell, is why we are seeing less and less brands on the supermarket shelves, and as a direct result, less and less innovation, as suppliers have little chance of recouping development costs in such an environment.
Nov 29, 2021 | Customers, retail
On Friday last week, I had to go into the city. About 10.00am I turned up at Town hall station, and the shopping precinct around it was crowded, people lining up to get into shops that a few days previously were deserted.
It took me a while to realise that it was ‘Black Friday’.
Retailers were making extreme offers to generate a sale, and seemed to be succeeding. When I got back to my home office and opened my computer, it was deluged with digital ‘Black Friday’ specials from everyone to whom I had deliberately or inadvertently given my email address since 2010. ‘90% off Black Friday Special’ was not an uncommon header.
‘Black Friday’ is the wrong description, coming as it does from the US where it joined Mother’s Day and Father’s Day created by Hallmark cards, as a marketing construct. In contrast, Black Friday should be called ‘Stupid Discount Day’ or ‘The day we went broke’.
The attraction of deep discounts does a few things to a retailer’s sales numbers:
- Generates volume, (hopefully) sometimes at a loss on the discounted item, so retailers are hoping you buy something else at the same time to recover margin. This volume comes, if it comes, with the advertising costs. For a small retailer, these costs might be just a few banners in the window, and someone outside the store spruiking, but are more likely to include some email marketing, and social media posts, and usually some of which are paid to generate reach.
- Rewards non-customers who buy once, try, and you hope come back. Rarely happens, especially in the madness of a mass discount.
- Attracts the worst customers, those who never buy anything at full price, who only chase discounts. It is often these same customers who create most customer service costs.
- Rewards existing customers who would have bought anyway at full price This usually results in a ‘pantry stock’ that kills sales and margin in subsequent periods.
- Erodes brand positioning, sometimes built up over years, establishing a new ‘base price’ for their products and brands.
Most of the offers in my computer were for digital products, where the marginal cost is zero, so they can give away 90% price and not go into the red. Bricks and Mortar retailers, the ones with queues outside them in the QVB, Town Hall station underground mall, and the giant Westfield next door do not have the luxury of zero marginal cost.
I suspect many of these retailers are desperate after 2 years of struggle, and desperation often leads to very poor decision making.
Hopes that deep discounting will increase volumes sufficiently to recover margin are almost always in vain. When you do the numbers, depending on the gross margin, and additional promotional expenses, volumes have to increase by a factor of at least 3 or 4 in order to break even. The more frequent outcome is a very nasty shock when the P&L is done at the end of the month.
Anyone can sell anything at a deep discount. It does not make you successful, just thoughtless, desperate, stupid, or a bit of all three. The lesson should be, not to go broke being successful.
Nov 26, 2021 | Analytics, Management, Operations
Communication of outcomes, from the strategic drivers of your business to what was produced in the last 5 minutes at a station on the factory floor, is increasingly recognised as the key to performance improvement.
Communicating the right things, to the right people, at the right time is as important as the communication itself. A communication is only successful when the meaning received is as intended, and the receiver can do something useful with the information.
Most businesses are already able to collect more data than they know how to use productively. The challenge is to pick the few that are the drivers of decisions at each level. Collecting data for the sake if it makes no sense. If it does not provide insight to decision making, why bother?
The five questions:
Who is it for?
The MD needs different information to the operations manager, whose needs are different to those on the factory floor. This cascade exists across the business, up and down the functional silos. The more the information can be made responsive and relevant to the cross functional users the better.
What is the objective?
What are the people using the data trying to achieve, and by when? Information is most useful when it charts progress towards an objective. Again, the nature of the information and the cycle will vary by level and role in the organisation.
What is the frequency?
By the minute, hour, day, month, all users have unique needs, and all information has a cycle time that makes it relevant. Typically, the higher up the organisational hierarchy, the slower the cycle time. However, making the information available to all on demand is an extraordinarily effective way of generating functional and cross functional alignment.
How do we improve performance?
Solid data is the starting point for every improvement initiative, from the smallest improvement on the factory floor to the drivers of strategic success. The scientific method prevails and requires the stability of good data on which to work.
What data is needed to answer these questions.
Data needs will evolve over time as objectives and progress toward them evolve, and is highly context sensitive.
Danger signals: there are two of them.
- Too many metrics. The dashboard should be three, up to five at a stretch, certainly no more. Data is only as good as the decisions and behaviour they drive, and the more there are, the less motivating they become. Ideally the three are: rolling current, next period, progress towards the objective.
- Vanity metrics. I see these all the time, they are easy, may look nice, but are functionally useless. The obvious example is Likes on a social media platform.
The cadence of an organisation is one of the defining factors of success. The frequency and relevance of the dashboards at every level, the way they make outcomes transparent is a key to performance improvement.
Nov 24, 2021 | Branding, Marketing
Customers read much into the price you choose to charge, the architecture of your price list, and willingness to deploy price tactically.
Price can also override all your other marketing activity, as it is the quantitative reflection of what you think your customers are prepared to pay. It reflects the market in which you choose to play.
When was the last time you saw Grange discounted in Dan Murphy’s, or a ‘dinner-deal’ at the perennially ‘three hatted’ Quay restaurant in Sydney?
‘Never’ would be the right answer.
Price is a key part of the strategic choices that must be made to establish a ‘Price Architecture’. This architecture is in its turn a fundamental driver of the business model.
So called ‘premium’ products have many characteristics: extreme quality, scarcity, a differentiated offer, a strong brand, high service levels, are often hard to find and with few if any substitutes. The purchase of a truly premium product demands deep consideration and happens rarely. It is never driven by discounts.
By contrast, commodity products have none of these characteristics, but do have a low relative price, and are easily substituted.
The distance between these two extreme points is a continuum along which a product can be moved, by accident or design. The limiting factor is that it is very hard to move ‘up’ the continuum from commodity towards premium, but very easy to slide in the opposite direction.
Your position on the scale is one of both strategic and tactical choice.
Make the choice wisely.
Nov 22, 2021 | Collaboration, Leadership
When the owner of a medium sized business is thinking of selling, the road in front to complete a transaction is a rocky one.
On top of the pressure and tension of financial and strategic due diligence, there are always questions about employee reaction.
- Will it impact on the value of the business?
- Will productivity drop?
- Will key employees leave?
- Will they disrupt the process?
- How will I replace any that leave when the business is for sale?
These questions, and more will be out in force.
Given that the large majority of private sales processes do not end in a transaction, the long term impact of a failed process can be significant.
Is it better to take employees into your confidence, and include them in the process, giving them the opportunity to contribute, or better to keep quiet and hope they do not find out?
Employees in a medium sized business are generally close to each other. Rumour and assumptions that might impact them, accurate or otherwise, get around very quickly. It is also the case that employees are rarely stupid, they can see when the owner is getting near retirement, has had an approach, or just getting tired of the grind, and draw their own conclusions.
The stress of uncertainty is far more corrosive the certain knowledge of difficult things to come.
On several occasions, once in defiance of instructions, I have taken employees into my confidence when a plant has been nominated for closure. In every case, all I did was confirm what they suspected, and knowing the truth proved to be much better than the uncertainty of not knowing. In every case, the plant closure, or sale process has been greatly assisted by the employees, who now had a clear picture of what lay in front of them, and of the measures put in place to assist.
Similarly, I have been in several situations where the closure of a plant or sale of a business was kept as confidential as was humanly possible. In every case, the corrosive impact of the suspicion that something was up amongst employees greatly impacted the outcome negatively.
My recommendation: Always assume employees are not stupid, and that they will react positively to being taken into your confidence, and even assist the process, not just for your benefit, but for theirs. There are many examples around the world of the impact employees can have on the success of a business. I have been in a small way involved in several. The current poster-boy for employee engagement is Chobani founder and CEO Hamdi Ulukaya, who turned an old, broken yogurt plant in upstate New York into a global success by engaging employees, then told the story in this TED talk.
Cartoon credit: www.gapingvoid.com
Questions in cartoons
