There are better alternatives to discounts. As long as you are price competitive, provide the best mattress in town and walk the extra mile to make the customer’s experience a ‘wow experience’, you can virtually say goodbye to discounts.
Is there an alternative to discounting?
Surprisingly yes. There are many who believe that discounting is indispensable in today’s world. With larger mega stores having deeper pockets and an agenda to increase footfalls by doling out discounts, retailers often feel helpless. However, there are hard-core, seasoned retailers who look at this as a passing phenomenon. So what is the antidote to this?
Well, there is one real anti-dote. “Customer service,” says Parimal. “Let me qualify this species called customer service.” It is definitely not being pally and over courteous, spending a lot to make your customer feel happy. Then what is customer service according to Parimal?
As the saying goes, ‘Just do what you say and say what you do’ Parimal says that retailers should have a no-nonsense, polite attitude to their merchandising. They should advertise what they have in store with the right price and deliver the goods as quickly as possible at the stated price. There should be no hidden costs (see some research findings above which corroborate what Parimal has to say.)
In other words, a retailer need not sell his mattress at a discount or vend coupons just to wean away customers from that online store. Well knowing that the customer likes to be told precisely what is available, offering a reasonable choice, a way to experience the product and a promise of the right price and quick delivery should do the trick. Because it is often that the customer service is soured during delivery. So a retailer should take care that the last mile, the logistics guy is polite, and delivers on time and without additional fuss – that is key. As you see when Parimal talks about customer service, one needs to understand it from a holistic perspective. From the time word-of-mouth reaches the customers until the mattress is unfurled in the bedroom of the customer, it is a continuous sale process. Retailers need to come out of the belief that once the mattress is out of the doors of their store, the sale is done. Actually, that’s when the sale begins.
Price discounting is an aberration. Some think it to be an art but it is more of an unnecessary liability. Every time you hear of a discount campaign, your first thought should be that there is a problem in pricing and a lot happens between the time the product comes off the assembly line. What makes overcoming the discount intent formidable is the complex buyer environment that is so full of noise and one can easily be dissuaded by hype rather than be guided by reality.
One of the best ways to handle discounts is to completely ignore its hype and to focus closely and see if there is a factor in customer service and loyalty programs.
The consumer is ever more informed and has at her fingertips the ability to tap into data, anecdotes and informal opinions of friends, family and strangers. All it takes is a few minutes on the smartphone to marshal one’s information.
Why discounting is not the best bet for trade?
Quality perception could be a possible moderator of purchase intention since it is closely linked to the pricing structure. It should be taken into account that other moderators must have an effect on the attraction to the big discount advertisements, for instance, expectations and past experience. The main outcomes of the experiments support the theory that when the discount value is close to the reference value, it can increase the purchase intent for absolute values (KAHNEMAN and TVERSKY, 1979; THALER, 1985). However, here is a paradox. The buyer would like to see a visible difference between the advertised price versus the reference price.
In order to better understand how discounts are not the way to go but the businessman is better off understanding the pricing mode, we should look more closely at how pricing is perceived. Just to let you into the secret, if you get your pricing strategy right, discounting need not even be on your radar. And customers will love you for not taking refuge under discounts.
How pricing is perceived?
In order to understand how price is understood we need to understand how the consumer perceives information. For this exact reason, we turn to two Nobel Laureates, Daniel Kahnemann and Amos Tversky. Both Psychologists wrote a paper in 1981 called The Prospect Theory, which has since been a guiding principle in perception studies. Kahnemann and Tversky suggest that consumers may have different perceptions of the same information depending on how it is presented. This change in perception is moot for us, especially while communicating pricing and discounts of a product. This phenomenon of changing consumer perception is called the Framing Effect. The Framing Effect qualifies the precise conditions of how it occurs: even if the key features of the decision-making situation [to purchase or not] are maintained without any alteration, such as alternatives, probabilities and results, consumers will have different perceptions of the same purchasing situation, a fact that should not occur in the normally accepted rational decision-making process.
Looking further, we come across researchers putting the Framing Effect to the test. While Kahnemann and Tversky opined that different people react differently to the exact same information or the same people react differently when the same information is presented differently, it was not taken seriously in the beginning. In 2004, two researchers, Figuereido Avila and D Serpa, delved into this factor. They directly approached the subject of how the price is presented in a particular way (the Framing Effect) can have a strong impact on personal purchase decision-making. They conducted an experiment in which the only differences in the descriptions were in the pricing. According to their study, the Framing Effect results from a subconscious decision-making process. In fact, the two came up with an astonishing discovery that even the marketers who were knowledgeable about the Framing Effect and would have used it in their own campaign were not able to resist it when it came to their own purchase decisions. They were no better than the common consumer; they did not make more rational decisions despite their knowledge of the pricing strategy. This confirmed that the framing effect also affected professional marketers and showed that even when people had managerial experience in marketing, they were only partially aware of the Framing effect on price perception.
An increase in price sensitivity is directly related to the price presentation format. Take for instance, a discount on the regular selling price (i.e. a regular price of Rs 1999 vis-à-vis a discounted price of Rs 1029) increases price sensitivity. Advertising a product with a reference price and discount increases its value perception and, consequently, the value of the product.
On the basis of these studies, it can be safely said that consumers may prefer a sales promotion that is framed in “percentage-off” terms when the discount is found to be a high discount rate. However, when the discount is small and shown in the form of rupees, the consumers tend to prefer it stated as an absolute value. And here lies the cue for a successful discount campaign.
Let us delve a bit deeper and see why this is so. Consumers can be loss-averse that is, they care more about avoiding losses than they do about obtaining the same sized gains, or they might be bargain-loving and experience pleasure from extracting a bargain from a seller. Thus, in our simple model, all that matters is that a consumer’s propensity to buy increases if the reference price in our context, the initial price increases. One implication of this argument is that there exists a high suggested retail price, which serves as a reference price, and a price discounted from this suggested price may provide consumers with a transaction utility.
“If I offer a discount and call it a Clearance Sale then it has a precise behaviour. There are genuine buyers, bargain hunters, people who are waiting for this moment, who walk into the store,” says Narayan Bhatt, an apparel retailer. “However, if I just put out a “30% Discount” board outside and the store, walk-ins are less to zero.” There is a definite cognitive pattern even the not-so-informed consumer applies while processing information.
That brings us to the question of clearance sale. It is common knowledge that sellers will often discount their products to clear their shelves of unsold stock. The reason a particular product did not sell well is likely to be that early consumers did not think its perceived quality justified its price or because they found a better-value alternative elsewhere.
In order to beat discounting, you need to understand how it works
Next, let us train our thoughts on the information contained in the communication of prices and discounts. Researchers call it semantic price cues. Two researchers Eric N Berkowitz and John Walton discovered that such cues are contextual stimuli that can influence consumers’ perceptions of numerical prices and they found partial support for such an effect. It was also argued that semantic cues are expressions within an ad that facilitate a buyer’s ability to evaluate an offer. They suggest that if a sale price is perceived as a reasonable substitute for a higher price, a bargain will be perceived, and the new price information will be assimilated into the product-price category reference price. However, if the sale price represents too much of a contrast, it will be perceived as belonging to a different product-price category and will not yield a reduction in the internally held reference price. If you look at common combinations of the semantic cues “regular price,” “sale price,” “
amount off," and "percent off." Dependent variables included multiple measures on value of offer, interest in product, search intention and willingness to buy. Results showed that the "sale price" only cue yielded lower perceptions of savings and offer value than "regular price" and " off.” Generally, the “percent off’ format also yielded less favourable perceptions across the dependent measures than the “amount off’ semantic cue. Further examination of the impact of semantic cues by situation and context, informs us that semantic cues providing between-store price comparisons (measured by “compare at/sale price”) are more useful to consumers for at-home viewing of ads and have a stronger impact on value perception. Within-store comparisons measured by “regularly priced/sale price” can be found to be more useful when they are situated in the store itself.
Research in cognitive psychology and linguistics demonstrates that, based on the similarity of meaning, individuals categorize words into semantic neighbourhoods, and the strength of associations formed between these words influences the degree of spreading activation when a word is confronted in the environment.
Dr. Hrishikesh Damle, CEO of Atrimed Pharma says, “Research shows that individuals develop multiple semantic representations of numerical data encountered in the environment which is influenced at least in part by the format of the data.” In the context of pricing and other areas characterized by word-number pairings, semantic neighbourhood brings up strong associations between product, price and discount. Specifically, if words used in sale ads have consistent discount or value associations as a result of past exposures to sale ads (conceptually driven memory), then such words would form semantic neighbourhoods around the associated value perceptions.
In fact, contextual semantic cues such as “Compare At” and “Now Only” are perceived as ambiguous, yielding varied interpretations. Berkowitz and Walton’s research shows us that there is precise behavioural economics in play here. Semantic cues of “% Off” and “Now Only” are judged less positively by respondents for perceived savings and price acceptability of a product while “Compare At” was judged slightly more positively.
When to use discount pricing?
Before we get down to when to use discount pricing, let us look at when not to use it. “Do not be perceived as a discount store,” says Parimal, a retailer for 30 years. “It is easy to get into the discount rut and to not be able to come back.” That begs an answer to the question: Is there a time for discounting and is it easy for us to time it?
Let’s take the case of Parimal who started offering discounts in his store for students. This was driven more by his desire to give students an affordable way to buy curios. He also instituted an exchange offer only for students. Discounting to particular categories of market segments is a well-used strategy. Apple also has a discount for students. “When people see discounts for certain categories, their value perception of the products sold in the store goes up.” However, you need to have additional checks and balances so that the system is not gamed. “Fake claims happen and you cannot stop it. But let me tell you that fake claims are far fewer and genuine claims are much much more,” says Parimal. An important lesson here is that just because someone games the system, do not throw the baby with the bathwater.
Especially when the on-hand stock is larger than the optimal stock level retailers can adopt a price reduction special sale to increase their profit. For this one needs to compare the benefits of a special order in terms of lower purchase price with the additional inventory holding cost.
“When I sell to my dealers, I always offer them the most competitive price in the market, leaving enough room for them to discount in the market if necessary,” says Manjunath. “I never offer any discount to my dealers but only offer it to direct customers,” says Manjunath. Manjunath highlights the need to exercise caution when it comes to extending discounts and be discerning between dealers and direct consumers. Most often, retailers are offered discounts by manufacturers to pick up additional inventory even when the product is not moving. This is only detrimental and will come back much later to bite the manufacturer.