Should you differentiate or discount in a recession?

People still buy in a recession so whilst it may seem sensible to discount luxury goods to bring in more customers, could it actually damage the brand in the long run? Shaun Smith offers his advice on how you can still attract and retain customers in a recession.

By Shaun Smith, smith+co

The luxury goods market may be shrinking but that doesn't mean consumers have stopped buying, just that they are spending less and are, therefore, much more choosy about where they shop. That means that if you offer customers a superior customer experience and better value (and that doesn't mean the lowest price) then your brand can gain market share in this climate.

The Luxury Board reported in its February edition of the Wealth Report that like-for-like sales at the luxury department store Neiman Marcus tumbled 24.4% in January. Saks, another up-scale retailer posted a 23.7 percent decline, despite heavily discounting its merchandise to clear away inventory. Meanwhile, Nordstrom, long admired for its excellent customer experience, reported a somewhat less dramatic 11.4% decline in same-store sales.

The third annual Customer Experience Impact Report, conducted by Harris Interactive, reveals that outstanding service remains the top reason consumers will recommend a company, with 52% of consumers saying they would feel encouraged to spend more with a company if it were to improve its overall customer experience. Even in an economic down-turn, 50% of consumers will always/often pay more for a better customer experience.

"A true luxury brand is never going to win on price, no matter how deep the discount. You are just trading margin for volume and attracting consumers looking for a deal rather than long term relationship."
Shaun Smith
 

There is an old story about two explorers in the jungle coming face-to-face with a grizzly bear. One of the explorers quickly changed from hiking boots into trainers, whereupon his colleague remarked: "I don't know why you are doing that - you can't out run a bear". His friend replied: "I don’t have to; I only have to outrun you!". The analogy is true for retailers too - you can't beat the recession but you can beat your competitors, and in so doing you will emerge from the recession stronger and more clearly differentiated. Even mediocre brands can make money in a growth market, but it takes those brands with strong and enduring relationships with consumers to sustain their position in a soft market. So what are some tips to creating a customer experience that wins share of wallet from competitors?
 
Be brave

The tendency in a downturn is to slash prices to stimulate sales but if you do that, it simply indicates that you do not have a clear view of your strategy. The fact is that a true luxury brand is never going to win on price, no matter how deep the discount. You are just trading margin for volume and attracting consumers looking for a deal rather than long term relationship.

Instead, focus on your classic products like the pin-stripe suit or signature bag, for example, that provide enduring value for customers. Luxury customers are likely to become more discerning and less ready to buy the transient fashion accessories and brand extensions that so many organisations have moved into in an attempt to increase reach. Instead, return to your roots and heritage, and focus on the products that are closely identified with your brand.

The other knee-jerk reaction in a downturn is to cut costs and slash budgets across the board. If you do that, it indicates that you do not know how you create value. By all means be cost efficient and cut out the internal processes, stop the executive junkets and trim the expenses that do not create value for customers. But if you start slashing sales staff or reducing product quality, you are cutting into the muscle of the business, not the fat. It is far better to close the 20% of poorer performing stores than to simply take 20% costs out of the whole operation, thereby demotivating staff and offering poorer service to customers in those stores that are making money.

Be different

Now is the time to be bold and focus on those things that differentiate your brand from the many 'me-too' competitors. The Luxury Institute found that firms have homogenised to the point that 63% of wealthy consumers feel that luxury is rapidly becoming an expensive commodity.

We recently conducted world-wide benchmark research for one of our luxury retail clients. Our consultants conducted detailed experience audits of four leading international luxury brands at stores in London, New York and Hong Kong and assessed each on a 10 point scale for the experience provided at each major touch-point, and then overall. We concluded that these four competitors were more alike than distinctive. The greatest difference lay between stores of the same brand than between the brands themselves. In fact, we found if you were to take away the logos and signage, you would be hard pressed to tell one from the other.

This was particularly true for the customer experience, where to walk down Bond Street or 5th Avenue is to be viewed suspiciously by one black-suited security person after the other, standing in similar entrance ways. If you look at the table above, with the exception of Brand A, you will see that whilst there are minor variations between the touch-points, the scores for the overall experience are remarkably similar. We concluded that if you really want to benchmark best practice, you are better off being greeted in a Lexus dealership, asking for advice in an Apple outlet or visiting the Build-A-Bear store or website if you want to experience true customer engagement. These brands may not be luxury but they are the new benchmark for customer experience.

Be innovative

In the wake of the credit crunch and the dramatic failures of household names like Enron and major banks, consumers are increasingly cynical of big business and wary of traditional above the line marketing. In fact, above the line is becoming below the radar for many consumers who are more likely to trust the posts from fellow customers on, for instance, Tripadvisor.com when planning their vacation than the expensive and glossy brochures put out by travel companies.

Share of mind is much more powerful than share of market when it comes to driving footfall and repeat purchase. Now is the time to leverage your marketing dollars through the word-of-mouth of highly satisfied customers, editorials and PR, rather than slick and very expensive advertising and promotions. Tell the story of your products and bring them bang up-to-date with clever innovations, all of which are guaranteed to get feature editors falling over themselves to promote your brand. For example, Kate Moss wearing your latest creation at the latest Batman premier is worth any amount of advertising.

Be memorable

According to advertising giant Ogilvy's analysis of the annual Millward Brown study of 28,000 worldwide brands (BrandZ), companies that are successful in creating both functional and emotional bonding have higher retention ratios (84% versus 30%) and cross/up sell ratios (82% versus 16%) compared to those that do not. The Ogilvy research confirms that the first "moment of truth" occurs when a customer's expectations are compared to their initial, actual experience.

At this point, the customer's journey (or the CEM cycle) is shaped by two key elements:

• Functional: What customers expect and experience of the operational aspects of the product or service.

• Emotional: How the customer is made to feel by the purchasing experience.

The emotional is the stronger of the two. As Tom Ford said when he was with Gucci: "A brand is an indelible memory". Memories are at their most powerful when associated with times, places and people, rather than things. In other words, it's more about the experience than the product.

Some years ago, Gucci allowed itself to drift down-market in an attempt to increase volumes. It took Tom Ford to stop the rot and put the shine back on the brand. This is why your people are so important: they are your brand and the means to create an emotional connection with your customers. Our own smith+co research has found that there is roughly an 85% correlation between the way your people feel about the brand and the way your customers feel. So if you want to create a great customer experience, pay attention to the employee experience first.

One person that understands this is Ho Kwon Ping, chairman of Banyan Tree Hotels and Resorts - the Conde Nast Traveller magazine award winning hotel brand. We all remember the Tsunami that hit Indonesia and Thailand in December 2004. One of the areas affected was Phuket and the Banyan Tree property located there was hit by the killer wave along with many other hotels. Almost overnight, the tourist trade dried up and hotel brands were left with low revenues, high costs and damaged properties.

Many responded by laying off staff and cutting costs whilst waiting for the better times to come back. Ho Kwon Ping recognised that his people are his brand and delivering the Banyan Tree proposition of 'Sanctuary for the senses' cannot be done without them. So, rather than lay off his people, he went to the community that he had so carefully built over many years and sought their input. The result was to multiple job share to reduce costs whilst keeping employees on the payroll, as well as involving the workforce in the rebuilding programme - and in so doing, protect the skilled employees so essential to delivering the customer experience. When the business came back, the Banyan Tree was ready with people who were already trained and highly motivated, and in a position to take market share from competitors.

For better or worse

The recession is likely to get worse before it gets better. Luxury brands will not be insulated from this - in fact, they may find it gets even harder if the recent flight to low cost brands like Wal-Mart is sustained. However, the answer is not to attempt to emulate the discounters but to recognise the true value that a luxury brand provides and stay on strategy.

'Me too' is a short term fix, not a defensible position. The brands that survive will be those that deliver a distinctive experience though the quality of their people, processes and products so that the emotional bond between customers and the brand is strengthened. What is not an option is to maintain high prices whilst continuing to provide mediocre service.

Shaun Smith of smith+co speaks and consults internationally on the subject of the customer experience. His landmark books on customer experience include 'Managing the Customer Experience - turning customers into advocates', 'Uncommon Practice - people who deliver a great brand experience' and his latest offering 'See, Feel, Think, Do – the power of instinct in business', which investigates the role of instinct and innovation in customer experience.

Related articles

Winning true customer loyalty and trust in a recession