Insights

Why brands must avoid a race to the bottom

Times are tough, profits are hard won and the temptation to win consumer wallets is to start discounting. This can be especially attractive if the business is focused on goods that have done well in the past, but are suffering today as consumers tighten their belts. These types of goods often include big ticket items like cars, household furniture, TVs, phones or laptops, but they certainly aren’t limited to slow moving goods categories, they could equally apply to anything that’s considered a luxury item, whether that’s food stuffs, toiletries or other items.

It is basic business sense that if people aren’t buying what you have to sell, the job is to make the product more attractive. Reducing price might seem like a good move, and it can work. But it isn’t the only way to attract a customer’s attention, and it is far from the best tactic.

Price cutting is a helter-skelter

When a retailer sets the price of goods it takes a lot of things into account, but at the heart of the calculation is maximising profit against what the market will bear. While price reduction might create a small bump in profit for a period, it can be dangerous in several ways.

In terms of the individual business, that small bump in profit doesn’t necessarily carry through to the end of the financial year. Rising costs in areas like manufacturing, distribution, storage, and any power and heating bills, as well as labour costs can wipe that profit bump out. Reducing profit while costs rise could be a recipe for insolvency.

Price cutting can have ramifications for the wider sector too. If a rival firm sees you doing well through price cutting, they might follow suit. Pretty soon the price for particular goods might be standardised across key retailers at a lower rate. Then what do you do? Cut again? How far down this spiral can any business go before it can’t go any further? When profit margins fall, the ability to invest, increase advertising, launch new products and more can all suffer. The slippery slope is a bit like a fairground helter-skelter. Once you are on it, going back is a real challenge.

The effect on brand image

Customers are highly focused on price, but that’s not all they care about. Quality is also really important to them. The rise and rise of cut-price supermarkets has shown that when a retailer can sell for lower prices and maintain high quality, customers looking to save but not drop their standards will move allegiance. But there is another side to this coin. Some food brands are highly prized, and people will pay more for them because of brand, not necessary because of superior quality.

So how does price cutting affect brand reputation? In the US, Tesla car prices have been cut several times this year, with apparently a positive effect on both brand reputation and sales. Tesla owner Elon Musk said “We found that even small changes in the price have a big effect on demand, very big.”. But Tesla is a rich company, and it has a huge economy of scale when it comes to vehicle production. It has also said it is in the business of cutting the cost of its next generation vehicles in half. So cost cutting is part of a wider and well publicised strategy.

For most businesses, the situation is different. Price and brand value are intertwined, and customers need to trust that the price of a good has been set fairly. If you look at a range of basic commodities like TVs, laptop computers, fridges, cars, you’ll see similarly specified goods at a range of prices within a narrow band, with maybe an outlier or two at the value and premium ends. Brand matters at all points along the spectrum.

So, if one brand cuts prices, it might make sales. But when it decides to raise prices again, consumers may respond with a raised eyebrow, and question the change: Why has the price risen? Does the company need to increase profit? Is it in trouble? If it fails what happens to my after-sales service? Or is it just profiteering?

Differentiation and profitability through promotions

If discounting is a poor option for most businesses, what can they do when times get tough? The answer is get a promotions strategy in place. Targeted promotions, which offer the customer a focused additional benefit alongside the goods they want, can be hugely effective.

That TV purchase which has been put off for a year but now comes with a free streaming subscription might be very appealing. The new sofa that includes a heavy cashback on the old one, plus its removal to a charity or recycling facility might be enough to seal the deal. The dishwasher that comes bundled with a hefty supply of dishwasher tablets could win the day.

Promotions like these don’t reduce margins for the retailer, and they can be managed in a highly sophisticated way – time specific, customer targeted, and with third party suppliers who are only too happy to include their goods with yours.

Partnering with a company whose entire business model is based on running promotions, from goods sourcing to campaign management and fulfilment, can ensure a retailer maintains profitability and offers customers truly differentiating value.

Forget the race to the bottom that is discounting. Join the race to the top that is brand value enhancement through promotions.

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Fraud in retail promotions is a growing threat

Promotional fraud, like other forms of fraud in retail, is on the rise. Ravelin’s Online Merchant Perspectives Fraud & Payments Survey 2022 revealed that digital sales fraud continued its rising trend in 2022, and around 62% of merchants saw new fraud types emerge. Promotions abuse was said to be on the rise by 55% of those surveyed.

The cost of dealing with fraud is far greater than the cost of just ‘taking the hit’ on profits; according to Lexis Nexis’s True Cost of Fraud report in the US, every $1 of fraud costs retail and ecommerce merchants $3.75. While the attitudes towards fraud have always been a balance between zero tolerance and an acceptance that closing the fraud window completely isn’t feasible, in the current economic circumstances, as brands and merchants feel the financial pinch, many are less able to absorb the cost of fraud even at low levels.

Fraud is not a victimless crime.  Vendors who take the hit experience shrinkage – i.e. reduced profit levels – and must increase their overall costs, which get passed onto customers. For example, if a fraud is based on a free goods or an introductory offer promotion, and fraudsters take the free or low cost goods and cancel a subscription after the promotion ends, a vendor has not only given away goods, it has lost new business. And if a vendor is subject to a particularly significant, focussed fraud that is publicised, its reputation may suffer.

Types of promotional fraud

Fraud is present on most promotions. The industry standard for banking is a fraud rate of less than 5% of customer contact, this provides a benchmark for other industries and a typical fraud rate for retail promotions is between 0.3 to 0.7% of claims, with 3 to 5% of claims requiring investigation.

Fraud analysts focus on the Fraud Triangle, comprising motivation, rationalisation and opportunity. As far as brands and retailers are concerned it is opportunity that must be the focus for fraud prevention, because this is the only part of the triangle they have any control over.

Brands and retailers must ensure that fraud prevention is an active part of every promotion. Some types of fraud are much more prevalent than others, and these are often extremely easy for people to put in place, and so it is very important for vendors to be aware of them and watchful for them.

The most common types of fraud are:

1. Falsely modified documents: a fraudster edits documentation relating to a real purchase in order to claim a promotional reward – buying a low value item and making it look like they have bought the more expensive item that qualifies for the reward. Spotting edited documentation is incredibly difficult using the human eye alone. Factors such as the sophistication of readily available editing software and simple human fatigue come in to play. But our software tools are faster and more efficient at flagging potential fraudulent submissions, and once identified, we can investigate further.
2. Malicious returns: these scams occur when a person purchases an item from a retail store or online, immediately claims the promotion, but with the intent to return it immediately or use duplicate receipts to get the money back and the promotion.
3. Maximum redemption limit: the fraudsters use promotional codes many times, using multiple email addresses, or multiple home delivery addresses, for example. A human would struggle to correlate the many variables that can be at play here, but our software tools can do this task as a matter of course, on every promotional code redemption, not just on a random subset.

Threat analytics and promotional understanding go hand in hand

To understand promotional fraud, it’s important that the fraud team understands the promotion itself, including the relevant purchases and mechanics. Unlike other merchant frauds, promotional fraud is very unique. Threat analytics help to flag suspicious activity and trigger alerts – based around digital identity, IP addresses, browsers and hundreds of combinations of data – but it’s the threat analysts themselves that have to investigate and take action or allow the customer transactions to go ahead.

That is an equally important consideration: the customer journey has to remain frictionless. Fraud governance can’t be so severe as to make the act of claiming a promotion too difficult for legitimate customers as that impacts negatively on the brand. Hence, it’s important to risk assess every promotion based on the type of promotion, mechanic, value, volume of claims expected and speed of fulfilment.

This has never mattered more. All promotions are different, all vendors are different. The trend for fraud is upwards, not downwards, and vendors are more conscious than ever of the fact that finances are tight, and profit margins at risk. When putting promotions in place, brands and merchants need to know that their in-house fraud teams are supported by specialist teams with the experience to spot and prevent fraud in high profile promotions campaigns.

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Financial Frugality and the Technology Device Market

The global economy is not having a great time at the moment. In January 2023 the International Monetary Fund (IMF) forecast that global growth for the year would be 2.9%. The predicted rise in 2024 is slight at 3.1%. Advanced economies will be hit hardest says the IMF, with growth forecast at just 1.2% this year, down from 2.7% in 2022.

When this trickles down to individuals, it is often in the shape of rising costs across many sectors:  energy, food, fuel, entertainment, and the purchase of essential and non-essential items. Not surprisingly, consumers are hunkering down, budgeting carefully, and in many cases wondering where they can cut back.

What this means for technology sales

When it comes to the tech sector, people are holding onto devices for longer and postponing upgrades. Some reports already put the average age of a phone at trade-in at over 3.5 years and the next year or more will be a tough market. Canalys figures for Q4 2022 show worldwide smartphone shipments fell 18%, the wearable band market fell 18%, smart personal audio fell 26%, and PC shipments (desktops and notebooks combined) fell 29% (and down 16% across the year).

With so many consumers taking a much more careful approach to spending, it is important for technology vendors and retailers to consider the margins and value of products they offer, providing the right mix from an affordable ‘value range’ through to premium products, avoiding any duplicate ranges between price points. Significantly, GFKsays that in the tech and durables sector across Europe both high and low income customers rate price as the most important purchase factor (70% and 78% respectively), with product features running a close second (67% and 61%). Desirability characteristics might relate to a strong feature set, filling a gap in what is already owned, or providing a necessary upgrade.

Those involved in technology product marketing and sales will need to work hard in this environment. While they can’t change the wider economy, they can adopt strategies that can help maximise sales volume and revenue. Slashing prices can stimulate customer interest and action, but it can also create immediate impacts elsewhere that are hard to recover from, such as price competition and devaluing brand perception.

Develop laser-focus and pare down the offer

During any downturn, products benefit from a strong focus on value. Marketing and promotions must articulate a straightforward value proposition of product benefits in relation to cost.

Sensibly priced promotions can help shift inventory that is unsold, even as consumers reduce spending. But the strategy needs to be thought through. For example, it can be effective to bundle low margin, high stocked items alongside other products to show value and create demand.

Paring down the offer might also be helpful for vendors in some technology sectors. For example, instead of having five or more price points for different offer combinations or service levels, bring it down to three – entry, mid-market and premium. Work out where the main profit will come: premium ranges often remain resilient in downturns.

Make informed, strategic decisions on whether to offer discounts, trade-in offers, reward vouchers, loyalty bonuses, or use other means, targeting specific segments with the most appropriate offers – and be very realistic about both likely take-up and margin per transition. Know what inventory sits unsold, the cost of storage, and decide on the mix of profit, dispose at cost or loss lead as the way to go. Now more than ever it is also important to be agile. Fail fast may be something of an overused phrase, but deploy the strategy wisely. Watch competitors and react where that seems appropriate by tweaking your own strategies. Understand potential cross sell opportunities.

Technology vendors must avoid empty messages that fail to resonate or turn-off consumers, such as a derisory discount in the face of the headline inflation rate, of which consumers are well aware thanks to their personal cash flow and the media. If a gift is offered, keeping it super-relevant to the purchase item and marketing it well might mean an item sourced at a relatively low cost brings in a high take-up and strong profit. On the other hand, you might consider a strategy is successful if it helps more with brand-building than profitability.

Avoid over-reacting to competitor discounts

84% of customers are influenced to purchase by sales promotions, according to Opia’s research, and promotions bring on board both brand switchers and new customers as well as providing existing customers with an incentive not to switch.

While of the many options available, discounting sits in the mix, at all costs avoid a “fire-sale” mentality. Huge price reductions can suggest to consumers that the seller is struggling or that their profit was vastly inflated before the reduction – or both. Brand loyalty can take a nosedive in this situation. As the old saying goes, trust takes years to earn, minutes to lose.

One company taking a fire-sale mentality is bad for the company. Another following suit, and then another in a fight to win customers is bad for the sector. In a race to the bottom like this nobody wins. Short term financial gains for the consumer quickly turn into long term profit erosion, reduction in product and service quality, consumer dissatisfaction and a sector in freefall.

The coming months won’t be easy for technology vendors and their industry partners selling the goods. Those with well formulated promotional strategies, who are prepared to be agile in the face of customer response, and who understand the consumers they are selling to as well as the nuances of profitability and brand-building to a granular level with each promotion they run, have the greatest opportunity to manage inventory and remain profitable.

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Effective Promotions in a Downturn

Hitting commercial objectives in retail has never been easy and there’s no doubt that it’s harder right now. According to global retail analysts GfK in its State of Consumer Technology report, only 20% of consumers consider it is a good time to make a purchase; almost half (43%) believe it’s better to wait.

Globally, there are tough times across all market segments and the ‘non-essential’ or big-ticket items in the Slow Moving Consumer Goods segment face some particular challenges. The total sales value of consumer technology declined 5.5% in the first half of last year, compared to the same period in 2021[1], sowing the seeds for a downward trend that has maintained since then. Likewise, industry analysts Gartner said worldwide PC shipments declined 28.5% in Q4 2022, its steepest decline since Gartner began tracking the market in the mid-1990s[2].

Despite some recent glimmers of hope that show UK and EU consumer confidence is improving, though US confidence fell again in recent months, many retailers are gloomy about their prospects. However, the bottom line is that though confidence is low, consumers are still willing to invest in products and brands and retailers must learn to navigate this landscape through relevant sales strategies.

There are three main business pressures facing them:

• Bigger drop in demand than expected
• Unrealistic expectations to perform in comparison to the post-Covid boom
• Stock and Inventory build-out in the channel while corporate HQ Is considering new / adjusted products to launch to the market to respond to change in demand.

The danger is that as demand drops it can be tempting to resort to fire sale discounts and huge price drops. Brand managers and retailers must resist. Consumers often don’t realize the magnitude of the price cut or they don’t even notice the reduction at all. What’s more, price drops risk squeezing margins even further as inflation pushes costs up from manufacturing and throughout the supply-chain. In this sense, fire sales are a race to the bottom, often sparking a price war, with a consequential and unsustainable impact on revenues and profitability.

Instead, sales and marketing teams within brands and retailers need to look at the mix of levers they can pull to get customer attention, stimulate interest and desire, and lead the customer to take action and purchase. The successful brands will be the ones that take a consumer-centric approach to the value they offer. The message is simple: if consumers are going to spend, give them reasons to spend with you.

Retailers can drive demand by focusing on affordability solutions, such as trade-in of old devices to reduce upgrade costs, bundling accessories, or offering rewards which help towards food, fuel and energy bills or even holidays, gift cards or cashback.  And they can provide greater reassurance to customers with solutions that don’t impact on margins, such as reliability promotions, warranty upgrades and satisfaction guarantees, which can all drive differentiation and offer peace of mind to customers.

• Cashback promotions highlight the discount, not the reduced price point, creating an irresistible promotional prospect for customers: a specially reduced and time-limited deal, which motivates purchases and delivers a substantial increase in product sales over the longer term.
• Gift with purchases and bundles are a great mechanic in a challenging economy to drive down stocks and uplift sales.
• Buy and try promotions reassure potential buyers that the risk of purchasing is reduced by giving consumers a risk-free, no-obligation trial period. It is proven to drive action and increase average unit prices.
• Trade-ins incentivise customers to upgrade their old equipment via a conditional, time-limited reward in cash or as a gift.
• When bought with… promotions give consumers a credible percentage discount at the point of purchase to drive uplift in sales of accessories, increase the total order value and inventory turnover.

Getting the right approach to incentives is a careful mix of art and science. There has never been a single lever. One incentive-based sales campaign might be part of the long-term strategy, and another might be set up, managed and closed over a short period to take advantage of an unexpected opportunity.

The major benefits of these promotions during a downturn are that they can generate demand and trigger customers into action. More than that, they enable you to be relevant to customers right here and now and show that you understand why they might otherwise delay a purchase.

If we have learned anything from previous recessions, it’s that over-relying on price discounts is a one-way street to lower margins and brand perception. There may need to be changes to the product mix or prioritising different audiences to protect margins, but by pulling these promotional levers we can reassure customers, demonstrate added-value and stimulate demand. All of which puts brands and retailers in a much better position to outperform against market expectations and emerge stronger as the economy recovers.

[1] Source GfK State of Consumer Technology and Durables report (November 2022)

[2] Source Gartner PC Quarterly Statistics Worldwide by Region (January 2023)

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Stay Connected to Your Customers

Help them embrace change

Businesses around the world are accelerating adoption of remote working technologies, providing their teams with new and innovative ways of interacting with their colleagues to get the job done.

To help you to bring the biggest benefit to your customers, the team at Opia have developed a suite of gifting incentives and promotional ideas for clients and staff to help you remain relevant and drive preference & loyalty during these challenging times.

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