The Discount Trap

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Updated: February 23, 2015 5:23:53 PM

Brands are rushing to offer deep discounts as e-commerce sites play on flash sales to lure customers. Even as sales spike, comes a sobering thought: what does it do to brand value?

ANY damn fool can put on a deal, but it takes genius, faith and perseverance to create a brand,” said David Mackenzie Ogilvy, hailed as the father of advertising. But that advice seems to be lost on today’s marketers as they rush to offer deals and discounts round the year. Walk into any shopping mall in the country and you find your way littered with coupons, sales, discounts and over-zealous staff. Online, the rush to entice the customer with deals and discounts is even more. Online retailers such as Flipkart, Myntra, Amazon and Snapdeal have been running their sales periodically and the discounts are anywhere in the range of 40-60%. They run high powered full page ads that pitch discounts and freebies. Individual brands such as Woodland, Hush Puppies, Levi’s and Pepe’s have jumped into the fray with sales seasons stretching for over a month. This phenomenon isn’t restricted to retail alone. India has the distinction of some of the lowest airfares in the world. Flash sales have been the norm in the past one year, offering a new lease of life for a loss making airline industry. The four P’s of marketing —price, product, promotion and place is now reduced to one all important “P.” The price. And the catcalls are only getting louder.

Ambi Parmeswaran, advisor, FCB Ulka Advertising agrees that all categories are getting “commoditised”. “Pricing is an important element of the marketing mix and at times, it is the dominant feature that is played up. The reasons are manifold. It could be the year end stock clearance, entry of a new strong player or push in order to move consumers to a new category such as mobiles in the past or e-commerce in the present day. In India where consumers are very value conscious, even a premium brand needs to play the price card.”

While it may be necessary in some situations—a downturn in the economy is perhaps the most warranted—to reduce prices, discounting has its risks. The biggest risk is that it can create a negative long-term perception of a product in the consumer’s mind. This impacts the brand value, ultimately leading to market-share erosion. Customers hand over their money in return for something that meets or exceeds their perceived value. When an aspirational brand turns into a brand ‘on sale’ that logic no longer holds.

Discounting can turn a Shopper’s Stop into a Big Bazaar, a Hidesign into a Bata and an Audi into an Amaze.

KV Sridhar, chief creative officer at Sapient Nitro and former creative chief at Leo Burnett says that it’s all a bit like a street-fight. If you need to survive this round, you got to slash your margins and offer the danglers. But in exchange, you have to take a massive hit in your perceived brand value. From being a high-street brand, you can find yourself bracketed with the “me-too” brands. Not too many brands have the gumption to retain their price premium. “I have personally been involved with the Jet Airways brand. We took care while planning its ad campaigns and made sure that the airline retained its premium values and catered to business travelers. Today, websites such as Makemytrip.com and other e-commerce firms have commoditised air travel. You log on, and purchase the best deal. Irrespective of whether it is brand GoAir or Jet or Indigo. There is no such thing as brand loyalty.”

Brand loyalty is the first casualty in a discounted economy. As customers pick up products attracted by the price tags, brands lose their sheen. People buy a brand for two reasons, either it is  discounted or it is differentiated. So as prices are lowered continuously, the differentiation starts vanishing. The customer comes back only when there is an offer, or switches to another brand which offers a deeper discount.

Anil Nair, chief executive officer and managing partner, L&K Saatchi & Saatchi says that the kind of discounting that happens today is proof that brands are not being built. “The difference between a brand and a product is this—you assign a certain amount of premium to a brand. Packaged tea is different from loose tea. There are a lot of products masquerading as brands today. The consumer is not assigning any value to you and hence not willing to pay a premium for the brand. You must have a certain amount of emotional equity in order to command a price and get loyalists. Like Titan. Or Apple.”

The internet enables people to crawl through countless websites, comparing prices, picking up coupons and timing their purchases to flash sales. Arvind Singhal, chairman and managing director at Technopak, a management consultancy that specialises in retail and fashion says that the growth in e-commerce has brought in a never-ending season of discounts. In order to compete, brick and mortar retailers are also forced to cut on their margins, making the business unsustainable in the long run.

“Usually the end of season sale begins in January but this time around, most departmental stores are bringing in early discounts. The e-commerce firms have no particular time period on sales. This means that soon, we could have year-long sales, even in brick and mortar retail. For the Indian consumer, there’s never been a better time to shop,” says Singhal. The good times are likely to stay, as most of the e-commerce companies are flush with funds, he adds.

Interestingly, e-commerce sites such as Flipkart, Myntra or Amazon are now seen as discount platforms. Labelled as a place where brands are offered cheap, sales drop when products are being sold at regular price. Sales spike only when there is a discount. At the same time, there is always the threat of new discount players emerging in the market.

Prahlad Kakar, film maker, Genesis Films says e-commerce has forced every other brand and category to play their hand and flag off the discounts. “Hotel chains and airlines are compelled to hand out the best rates in order to get customers on these sites. Retailers like Shoppers Stop and Lifestyle have to hand out attractive deals. Even then, I am not sure about how far they can compete. What is happening now is that the consumer goes to a physical retail store; she touches and tries out a product but doesn’t purchase it. She returns home, logs on and makes the purchase on an e-commerce site. That’s because someone else is paying for this party. The venture-capitalists who are funding these discounts.”

This sort of price-centric commodity driven economy will be unsustainable in the long run, say experts. Santosh Desai, managing director and chief executive of Future Brands agrees. “When there is a tradeoff between the brand and the pricing, the price becomes the only way of promoting the brand. And it is often to a brand’s detriment.” In Desai’s opinion, many of the online firms that fund massive discounts are playing for time. They hope to build on the consumer franchise, before the market corrects itself. “From what I can see, the sole definition and purpose of being for some of these e-commerce companies is the pricing and deals. But it remains to be seen how the economics works out or how long the low-cost model is sustainable.”

Agrees Kishore Biyani, chief executive officer of the Future Group, which first started the trend of offering deep discounts in modern retail through its ‘Sabse Sasta Din’ campaigns. “These kinds of discounts can never be permanent. In the end, the objective of any business is to make money. You can’t be making losses forever.” Biyani said.

Globally, there have been instances when a brand has resisted the temptation of running a sale. In marketing, the advantage is in being different. A brand can be different by not running a sale. For instance, Wal-mart rarely has sales or issues its own coupons. Southwest Airlines has always been doing things differently. So when everyone was offering discounts, it ran its No change fees” and “No baggage fees” campaigns. Again, low-cost airline Ryanair, created new routes to smaller airports to save on landing fees, which serve areas not covered by traditional airlines. While some customers may have been disgruntled, the move got brand equity for the company in other target markets. AirAsia followed this strategy when it entered India, keeping away from Delhi and Mumbai where airport charges are exhorbitant. It is only now that it is planning to fly into these two cities.

In some cases, it may make sense to buck the trend and instead raise prices. Brands such as Abercrombie and Fitch, Hershey and Vodafone have taken this counter-intuitive approach. Vodafone has done this successfully in India, where a multitude of mobile operators has led to call rates nose-diving. In such a scenario, Vodafone is seen to be an aspirational brand compared to rivals such as Idea.  Ethic wear retail chain Fabindia is another example of a brand consciously keeping away from discounts to preserve its premium factor.

Rajesh Jain, chief executive and managing director at Lacoste India gives a industry perspective and says that in the last few months, the retailing industry has been impacted with the kind of buying that happens on ecommerce platforms. “Those brands that are not online, or those that don’t offer attractive prices are impacted.” he says.  But the market will simmer down over the next few years, he believes. He expects India to follow similar patterns as other developing markets, in particular China where the ecommerce boom has already happened. E-commerce major Alibaba which holds 80% stake in China’s ecommerce market sells premium products via a site called Tmall. “There is a market for both discounted goods and premium ones .”

Nikhil Chaturvedi, managing director of Provogue says that “impulse purchase” is now a lost concept. “Impulse purchase first disappeared from categories such as electronics and durables and now, its disappeared from categories such as clothing and accessories as well. I may like a shirt in a brick and mortar store, but I won’t pick it up. I might try a better priced one online.” Chaturvedi himself is not too worried as the prices for his product are competitive. “As long as my goods are reaching the consumer, I am not worried about what the platform is. “ he says.

**

These discounts can never be permanent. In the end, the objective of any business is to make money. You can’t be making losses forever.”
Kishore Biyani, CEO, Future Group

Today a consumer goes to a physical retail store, tries out a product but doesn’t BUY it. She COMEs home AND makes the purchase on an e-commerce site.”  Prahlad Kakar, Film maker, Genesis Films

Impulse purchase first disappeared from categories such as electronics and durables and now, its disappeared FROM clothing and accessories as well.” Nikhil Chaturvedi, Managing director, Provogue

In a country like India where consumers are very value conscious, even a premium brand needs to play the price card.” Ambi Parmeswaran
Advisor, FCB Ulka Advertising

Those brands that are not online, or those that don’t offer attractive prices are impacted. But the market will simmer down over the next few years.” Rajesh Jain, CEO & MD, Lacoste India

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