Friday, July 08, 2011

Death by Discount

Unless you are Walmart, discounts will drive you out of business.

You lose your identity and condition buyers to never pay full price.

Al Ries wrote about this for AdAge.com:

Discountitus, the Disease That's Sweeping the Marketing Community

Positioning Is the Only Cure

Published: July 06, 2011

Al Ries

Last month, J.C. Penney hired a new chief executive who used to run Apple stores. In a New York Times article, here's how CEO Ron Johnson described his plans for Penney: "Take this great American brand and make it become something unbelievably exciting."

Fat chance.

Most department stores are infected
You seldom see a department-store advertisement based on anything except a sale. The latest J.C. Penney ad was a six-page insert promoting a "Fourth of July sale."

In addition to dozens of "super hot buys," the insert features "Red Zone clearance, final-markdowns 80% off. New markdowns 50-70% off." Also featured is "jcpCA$H," offering consumers "$10 off any purchase totaling $25 & up."

Belk, Dillards, Kohl's, Macy's, Sears and most mainstream department stores are also infected by discountitus.

Kohl's, in particular. A typical mailing: "Start with these incredible sale prices of 20-60% off. Take an extra 15% off everything. Plus add a $5 bonus."

Airlines to pizza to car insurance
In industry after industry, the discount is the focus of the advertising.

Here's the opening dialog of a typical Progressive commercial featuring Flo and a potential customer.

"Are you a safe driver?"

"Yes."

"Discount! Do you own a home?"

"Yes."

"Discount! Are you gonna buy online?"

"Yes."

"Discount!"

Over at Geico, "15 minutes could save you 15% or more on car insurance." Geico and Progressive are the biggest spenders in the category. Last year Geico spent $741 million on advertising. Progressive, $506 million. Longtime car-insurance leaders like State Farm ($453 million) and Allstate ($368 million) are lagging behind.

Penney vs. Apple
Over at J.C. Penney, if Ron Johnson plans to use an Apple strategy to turn his company around, it's too late. Once discountitus has spread through an industry, it's awfully hard to eradicate.

Take airlines. Yesterday, airline companies competed on the basis of who could build the better brand. Today, airline companies compete on the basis of who can offer the bigger discounts. No wonder Southwest Airlines is a big winner, and most airline customers can't explain the difference between American, Delta and United.

One reason why discountitus is spreading so rapidly is the internet. Clipping coupons is being replaced by typing on keyboards. Groupon and the other daily-deal websites are only one factor. Anybody who owns a computer today can get competitive prices on a host of items almost instantly.

Unless you want to spend the rest of your life doing discount marketing, you should be asking yourself, "What's the cure?"

Believers vs. agnostics
Take a closer look at the consumer a company is trying to reach with its advertising and PR.

Psychologically, consumers can be divided into two categories: 1) Brand believers and 2) Brand agnostics. And they vary by category. They can be believers in one category (ketchup) and agnostics in another category (airlines).

Watch believers go through the Sunday supplements. They only clip coupons for brands they already use.

Watch agnostics go through the Sunday supplements. They ignore brands and clip coupons for categories. (Extreme agnostics don't buy anything without a coupon.)

Discountitus is turning brand believers into brand agnostics. The lure of a "big discount" is enough to seduce a consumer into thinking that all brands in the category are pretty much alike.

In categories that have not been seriously contaminated, the cure for discountitus is a dose of positioning. But as Prophet, a leading marketing consultancy, reported in its latest state of marketing study: "Positioning has always been about differentiation. But in this unfolding environment, differentiation is short-lived."

We differ on that. The cure for discountitus is not differentiation. Nor is positioning essentially about differentiation, either.

Positioning is owning a word in the mind
As discountitus spreads its way through the marketing community, that word more often than not is "leadership."

Leadership is what makes Google the most powerful brand in the "search" category. Leadership is what makes iPod the most powerful brand in the "MP3 player" category. Leadership is what makes Heinz, Hertz, Haagen-Daz, Hellmann's, Home Depot and a host of other brands powerful in their categories.

But how to you get to be the leader? And how does the leader keep from catching the discountitus disease?

Launch a new brand in a new category
Over the past few decades, it's become clear that the only way to become a leader is to launch a new brand in a new category.

Like Apple did with the iPad, the first tablet-computer. Currently, the iPad has some 75% of the tablet market.

An also-ran that has been line-extended to death has no hope of ever becoming the market leader. The best it can do is to narrow its focus to shore up a position in a segment of the category.

Has Pepsi-Cola ever substantially increased its share of the cola market with Pepsi-Cola Retro, Pepsi Throwback, Pepsi Twist, Pepsi Natural, Pepsi Raw, Pepsi A.M., Pepsi Kona, Pepsi Light, Pepsi Max, Pepsi XL, Pepsi Blue, Pepsi One or Crystal Pepsi?

No, it has not. In fact, regular Pepsi-Cola has fallen behind Diet Coke to third place in the cola category.

What's next for Pepsi-Cola? More of the same. Pepsi Next.

Lower the boom on price
If you read the papers, you know the regular price of most products or services on the market today is "50% off."

Every Thursday, our local newspaper, The Atlanta Journal-Constitution, features "This week's best deals." Last week, there were eight. One was "free." One was "40% off" and the other six were "50% off."

That's not unusual. By far, the vast majority of daily deals are 50% off or BOGO -- buy one, get one free.

When rumors of Apple's imminent launch of a tablet computer circulated on the internet, the pundits predicted the product would be priced around a thousand dollars.

Apple surprised them with a list price of $495. The company lowered the boom at a level that competitors had difficulty getting under. Today, you find the table-computer market remarkably free of discountitus.

Apple used the same strategy with its iTunes brand by insisting on a 99-cent price. (Don't feel sorry for Apple. The company is making its money on volume, not on margin.)

When you're the leader in a category, you cannot be overtaken by a competitor who thinks differentiation is going to make a big difference.

And when you're the leader in the category and you lower the boom on price, you can inoculate the category from the disease of discountitus.