The refrain from retail CMO’s has been consistent and almost deafening. They say:
“We don’t just need more customers, but the right customers.”
“We need to grow margins.”
“We need to reduce our dependency on discounts.”
Even during this year of economic recovery, luxury brands in particular have been seeking to improve margins and sales by selling more full price purchases –all while retail at large has largely been crushed.
But the high-end isn’t the only one that desires full price sales. Remember not too long ago, JC Penney infamously tried to eliminate discounting and offer a fair, low price every day? We know how that worked out.
Starting shortly after the Great Recession, as both business and consumer spending dried up, marketers were forced to adopt traditional strategies for creating incremental revenue in a difficult environment. The range of tactics deployed was extensive, yet pricing became more important and varied than ever before.
This phenomenon, you remember, was so widespread, that an entire category was born – “flash sale” websites like Totsy, Groupon, Gilt, Rue La La, and Zulily. eCommerce juggernaut Amazon came out with their “Golden Box” and more recently, ushered in PrimeDay.
The Customer is in Control
While price cadences, markdowns, and closeouts are not new, something more fundamental began happening among consumers. The confluence of accelerating globalization, mass adoption of the web, and the deep scarring from the recession –driving up savings rates, and reduction of debt appears to have infused a new ethos among consumers and their perception of bargains.
Millennials today refer to saving money as a sort of “hack”. The internet is filled with “life hacks” and more relevantly: “savings hacks.” Even if they are spending those savings on going out at night –that too has spawned what may be a generational interest in getting more for their money. It’s a badge amongst them to find the cleverest ways to pay less and get more.
While walking to a meeting, I realized I had not put collar stays in my shirt collar. I was going to stop at a retail store on the way, and instead of googling where to buy them as I did (I’m a Gen X, and that’s what I would do) a millennial did a different search, and we stopped at Starbucks. He came out with a wooden stirrer and snapped off a piece to fit each side. Then he started on where I could buy custom dress shirts for 30% less than what I was likely paying (he was right).
This anecdote isn’t intended to communicate how clever this was. It’s intended to illustrate a new consumer behavior, born of the intersection of rising influences of ‘digital natives’ mobile tech, cloud computing, and the impossible rate of change that comes with it.
If you don’t sell to millennials today, odds are you will be targeting them soon. Today, the oldest millennials are entering the accessible and luxury buying brackets, and they will take their toll on them. I’ve already worked with Clients who are offering products designed to entice new buyers of their brands into trial, they are not discounted products, but new products designed to appeal to the more price-conscious millennial. These new offerings are changing the way brands market and sell.
Existing Full Price Buyers
In a recent study, we looked at the impact of eliminating sale items for a brand that typically sells to more affluent customers. A few things happened almost immediately:
- With sale items gone, on-site searches skyrocketed as the price conscious consumer hunted for the sale.
- The conversion rate plummeted for consumers who looked for and could not find a sale.
- Full price purchases went up as a percentage of sales –yet revenue declined.
The short-term effect was that revenue dropped materially at the outset. Essentially the same behavior of discount buyers at other organizations that abruptly “eliminated” sale pricing. The longer-term impact is still unfolding, but surely not every customer is a full price buyer, and some will never return –unless the sale returns.
Further analysis illustrates there are at least three types of buyers when it comes to price:
- Full Price Buyers (price inelastic)
- Discount Buyers (price elastic)
- Both (buyers that consume incentives and buy at full price)
Strategies for these different types of customers range from simple to exhaustive. In short, our goal is to understand the elasticity of demand associated with each customer and the goods she purchases. The best place to start is with a simple segmentation of each of the types of buyers based on their consumption of discount promotions.
When we do so, we see that full-price-only buyers are, overwhelmingly, the best predictors of future sales at full price. Identifying the best-selling SKUs is the next step, as these buyers are more likely to buy a similar category, trend, or style. Most predictive methods focus on these targets.
Those who bought either way is perhaps the most challenging. Maximizing sales to this group requires systematic testing to identify a customer’s price elasticity with different product categories.
Lastly the discount-only buyer, is a challenge. Many will readily trade brands –up, down, or laterally. These buyers aren’t buying the brand so much as the “experience” of getting a bargain. Not surprisingly, those most experienced and habituated in holding out for big discounts become unlikely buyers at full price. Shifting the focus slightly to limited editions and leveraging scarcity in marketing messages and introducing new products may serve to improve performance, but on balance, these are not the best sources of revenue.
All of which brings us to the second, and potentially most important part of a strategy to generate full price sales, that being, acquiring full-price buyers.
Acquiring New Full Price Buyers
Simply put, some buyers do not have the means, the will, or the desire to shop at full price. The rise of taglines like “never pay full price again” by dominant retail chains is testament enough to this reality.
So it is essential that the marketer develops an acquisition program that doesn’t just add trial buyers to their database, but those that are most likely to spend more often, have higher AOV’s and of course, buy at full price.
These higher margin customers will become worth investing in a relationship now, and over time, and the MVB (Most Valuable Buyer) Law states that these are the customers that will drive up to 80% of the profits of a brand.
Acquiring these coveted full price and most valuable buyers (MVB’s) is addressed in two columns I have developed called, “The Most Important CRM Metric You Might Be Missing” as well as “Bigger Is Better –How to Scale Up Customer Acquisition Smarter”
A “Full Price” or “Margin Growth” Strategy Must Be Holistic
Keep it simple. You have three segments of customers you need to discern in order to execute a full price or margin growth strategy –and two of them demand most of your focus. The full price buyer needs to be excluded from any and all discounts, or price breaks. Instead replace those touches with “appreciation touches” –thank them, lavish them with attention, and show them that you value them. This ranges from super luxury brands sending a Rolls Royce to pick them up, to a server in a fine dining chain acknowledging a guest who’s in the top loyalty decile accordingly and surprising them with a desert or cordial.
The buyers who buy both ways (full price and discount) also need special consideration. Testing is a must, as the behavior will vary by brand, product and timing. Discounts can be methodically reduced using predictive algorithms. The concept is to reduce the number of discount purchases that could realistically be made at full price.
Lastly, the group of buyers that simply won’t or can’t pay full price for your product ultimately needs to be replaced over time. Discount buyers can be migrated to an off-brand clearance product, elevating the premium brand. Consider Nordstrom Rack and their success in selling to discount seekers, while Nordstrom retains their premium branding and offers personal shoppers to their highest value customers.
“Damn The Torpedoes” vs. “Ready, Aim, Fire”
Perhaps the biggest lesson we’ve seen is a data-driven and thoughtful strategy trumps a big decision, with a “damn the torpedoes, full speed ahead” style… Remember when Admiral David Glasgow Farragut first cried the now famous expression, the ‘torpedoes’ Farragut referenced are today commonly referred to as a minefield.
With planning, testing and measurement, you can minimize the negative effects of losing revenues by changing pricing strategies, and maximize the relationship with the customers you really want.
