Marketing without drugs
[As published in Marketing, August 1998]
Are you an addict - hooked on price-driven promotions to prop up turnover? Andrzej Gorecki explains how to break a dangerous habit.
Few would argue that drug addiction isn't a serious problem. The addict cannot stop taking the drug, and as the body gets used to the chemical, ever-larger doses are craved. Not only is the habit very costly, it can also lead to serious health problems and possibly premature death.
But what does this have to do with marketing? Unfortunately, many organisations have become addicted to a drug known as 'constant promotion'.
There are many examples of it: 'Fifteen percent off everything'; 'buy now - no need to pay for 12 months'; 'free mobile phone'; 'fortnightly catalogue'; and so on. What typically starts as a great promotional idea gradually turns into a routine part of the business, costing money and damaging profits.
Such corporate behavior is similar to drug addiction. The organisation knows it is not good for its health, but whenever the promotion is stopped, sales plummet, management runs scared and another 'Fifteen percent off everything' follows - this despite earlier assurances that 'we will never do anything like that again'. Customers learn quickly that it pays to wait for another across-the-board reduction, rather than pay full price today.
Worse still, the problem goes deeper than just extra costs and lost profits. As the practice of repeating and escalating offers continues, competitive organisations frequently feel compelled to respond in kind, resulting in long-term damage to the total market. Overall profitability shrinks, forcing some players out of the industry altogether. As competition decreases, customers suffer. Obviously there are three parties afflicted by the predicament: the 'addicts', other players who would like to avoid addiction, and consumers.
How To Avoid Addiction
If your organisation is committed to avoiding the trap of never-ending promotions, how can you remain competitive, in spite of all the discounting and 'special' offers that have become everyday practice?
Generally speaking, every retail or service business can be reduced to a single statement of value. It is this value (as perceived by the market) that determines whether a business will expand or lose clientele. As such, when threatened by competitors who engage in aggressive promotions, you must first analyse your offer. Only then can you decide on a specific action to defend market share.
One suggestion (when faced with 'buy now - pay in the future' offers), is to adopt a dual pricing policy. For example, if a competitor selling a particular model of fridge charges $900 with nothing to pay for 18 months, you could advertise similar terms, with a 'buy now - pay less' offer alongside; for example, $845. This achieves two things: first, customers who want extended credit can still get it from you and you don't lose the sale. Second, you are actually cheaper for those who pay on the spot - hence you gain a competitive advantage.
It is important to recognise that 'buy now - pay later' promotions are nothing more than concealed credit purchases. Of more significance is the issue of how to handle competitor promotions such as 'Fifteen percent off everything', and even regular letter drop catalogues.
The first point to remember is that a competitor engaging in this type of activity is incurring additional cost. Given this, some times it is best not to respond at all you may be better off losing some sales but keeping your profit margin intact. The second point is that if your competitor keeps repeating the offer, it loses its impact. Therefore, if you continue to avoid a response, the impact on your business will be less and less.
Finally, it seems to escape many marketers that when they promote, for example, a Holden Commodore, they are at the same time promoting a more general proposition - in this case a large family car. Research indicates that during such promotions sales of competitor brands also increase, especially if the promoter in question does not have widespread territorial coverage.
So, when trying to run a business without regular or heavy promotional activity, avoid a knee-jerk, discount-based response, unless it is absolutely necessary. If you manage to sail through and emerge clean of any promotional addiction, you will have gained an ongoing competitive advantage.
Can Addiction Be Cured?
Breaking the habit is not easy. It requires commitment from business owners and the board. Additional capital may be required to cover loss of profitability during the period when the organisation adapts to operating without reliance on an ongoing, single-theme promotion. Also, business owners must be prepared for not only sliding sales, as alternative product or service lines may be needed to assist the transition.
To avoid a catastrophic drop in demand and at the same time make it easier for people in your organisation to adjust to a new method of operation, take a gradual approach. Staff need to make a psychological adjustment and learn that profitability is more important than increased customer traffic.
Most importantly, it is essential to initiate change as part of a formal marketing process. Monitor your market and adjust strategy accordingly. Of course, for whatever reason, not everyone will want to quit their addiction. For those retail and service organisations hell-bent on continuing ever-escalating promotional offers, it is not hard to envisage a slogan that is yet to come: 'A once in a millennium opportunity - buy now, pay in the next century'
Catchy, isn't it? Just remember that I have the copyright! However, if you want to use it, contact me and for a moderate fees you can have it. I'm sure that in the short-term it will work for you. Drugs always do.
Andrzej Gorecki is a Director and principal consultant with Melbourne-based Retail Directions Group, which develops and supplies state-of-the-art software solutions for retailers worldwide.
Copyright (c) 1998 Andrzej Gorecki