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Are discounting discrepancies killing customer loyalty in retail?

6th Aug 2014
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Is it unethical to “manipulate” the prices of your products across channels, in order to deliver discounts that seem more attractive to customers?

Certain news outlets in the U.S. believe so – the Wall Street Journal’s Marketwatch recently broke a story declaring the practice as “the sneakiest thing stores do to trick consumers”, and called into question the reputations of major retailers, including Kohl’s and J.C. Penney, in their pursuit to keep customers buying with them.

Marketwatch’s Catey Hill stated that many big retailers are frequently raising the prices of their products in-store to then attach hefty discounts on top of them, because, “shoppers are usually attracted to the magnitude of the sale — 30% off always looks better than 15% off – [so] retailers can fairly easily increase the list price of an item to make the discount appear deeper”.

Ethics were called into question. However, in a world where customers are increasingly turning to showrooming to find products they like in bricks-and-mortar stores before buying them cheaper online, isn’t this so-called “price manipulation” just part of a bartering game both customer and retailer now expect to play out across channels? 

Killing loyalty?  

Beyond the ethical argument Hill refers to, a potentially more pertinent factor may be emerging as customers become savvier about pricing: brand loyalty. Is a retailer’s constant price fixing as damaging to customer loyalty as it is (or isn’t) unethical? Is it more damaging?   

As Richard Hyman, founder of Verdict Research states, loyalty is everything; especially in retail: “We have too many retail mouths to feed. Busting a gut to get someone to buy something is wasted if the experience they then have turns them away to the competition.”

Hyman believes that the economic collapse in 2008, pooled with the rise and rise of ecommerce has led many retailers into too many aggressive pricing strategies, in order to improve their bottom lines.

“Customers have become far more savvy and they now have the power of vastly greater knowledge about pricing than before,” he says. “Online retailing has brought price transparency to the customer and this has been a major issue. Online has hugely increased retail capacity without increasing spending. Retail used to be a sellers’ market: demand outstripped supply and consumers' spending power increased in real terms annually, boosted by easy cheap credit. Today, supply greatly exceeds demand and for the first time ever, the customer really is in charge.”

The increase in customer savviness no doubt provides pricing challenges, especially for retailers that sell their products through third-party means as well as their own, or those that act as third-party retailers. However, Chloe Thomas, founder of and author of the eCommerce MasterPlan suggests that retailers are essentially competing with themselves by creating different prices online as well as in-store; and that customers dipping into different channels to find cheaper prices on products do so because they have already lost the feeling of loyalty they may have once had with that brand:     

As consumers we are lucky enough to live a world that promotes competition, so there will always be a savings to be had if you shop around and jump through the coupon hoops, but that shouldn't mean shopping across the channels of a single retailer,” Thomas says.

“For consistent retail success a business needs the loyalty of its customers, and that loyalty is strongest when there is trust between retailer and customer. A very quick way to reduce that trust is by selling the same item at different prices online and offline.

Discounting danger

The main concern with this type of pricing is in relation to discounting, as many retailers have become entangled in a pricing strategy that encourages people to buy online by making products cheaper, and encourages people to buy in physical stores through discounting on top of prices higher than online. The process is flawed, according to Ian Hammersley, co-founder and director of Smartebusiness

“Discounting has become overused during the recent recession and has created its own industry,” he says. “Many consumers check cashback sites like Quidco before making a purchase and other coupon sites. Given the presence of coupon sites in the consumer sales process retailers have to inflate prices to accommodate the cut that coupon sites take, this is usually around 5 – 10% of the sale. What’s more, to get through the recession, retailers have had to discount to keep selling and use mid and end of season sales to generate a large proportion of revenue. 

“This has had the unfortunate effect of ‘training’ consumers to wait for a sale before buying, thus, in order to maintain margins a retailer has to increase prices to be discounted later. Consider RRP the recommended retail price, as consumers we never expect to pay this price anymore, it’s become more of a marketing tool that manufacturers give retailers to discount against and show value.”

Top tips for retention

If this type of price fixing really is forcing customers away, what solution does a retailer with a presence on and offline turn to in such a competitive and accessible landscape?

“I would advise retailers to have the same pricing policy across every store and every channel,” says Richard Hyman. “This is the most clear, transparent approach and allows you to promote and advertise nationally. Clearly, some stores are more profitable than others. Same goes for channels: online retailing is far less profitable than physical, contrary to the general view.”

Having one pricing policy can be offset by the growing sophistication customer loyalty schemes offer, Hyman argues, as well as personalisation tools which reward customers with their own discounts at the right time for the right products, but on the basis of fixed RRPs that don’t fluctuate across channels.

Ian Hammersley believes this type of data-driven targeting will eventually flush out many of the more blatant price fixers, as customers naturally become more loyal to the retailers with a better understanding of their ‘in the moment’ needs. And as the global economy improves, the consumer will once again lead a shift in mentality that might give retailers less financial and an opportunity to focus on loyalty over price:

“We are already seeing a transition in ecommerce providers, with many transitioning from the ‘sale’ cycle and using the end of season sale to clear stock rather than buying stock specifically for the sale to shift at low margin. The consumers are also changing as the economy picks up and we are seeing aspirational brands do better as compared to discount shops.  There is a trend towards quality but it’s going to take time to wean off the consumer from the sales addiction that was created during the recession.”

For those retailers that do continue to fluctuate prices and discount across channels, however, it is important to be transparent when a customer finds out. As Catey Hill explains in her Marketwatch article, some stores — like Banana Republic and Gap — are taking to giving a one-time price adjustment if a customer sees a product discounted at a price higher than in another of their channels. It’s this type of transparency that is likely to keep customers onside, says Chloe Thomas, in among the confusion of a multi-faceted pricing strategy:

“At the end of the day, retail is a margin game - so it makes sense that one of the most sophisticated areas should be pricing strategies. It's where the margin is made after all. However, a sophisticated pricing strategy shouldn't erode the loyalty of your customers - so it's still vitally important to keep prices transparent across channels.”

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