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NRF: Is Deep Discounting a Race to the Bottom?

Retailers need to back away from pushing price as the primary driver of value.

That’s according to Brian Kilcourse, managing partner at Retail Systems Research, who spoke during a discussion titled “How to Break the ‘Death by Discount’ Cycle” at the National Retail Federation’s (NRF) 2016 Big Show on Monday.

“Underperforming retailers, or laggards, want to create a better value proposition. But a value proposition to these retailers equals a low price. The problem with that is that any retailer on any given day can decide to beat their price and take them out,” he stressed. “Underperformers are really feeling the pinch. They’re worried that promotional reliance will lead to brand equity erosion. They’ve fallen into the trap of making price their number one lever to push.”

Cheryl Sullivan, senior vice president of product strategy at Revionics, a U.S. company that makes lifecycle price optimization software for retailers, explained that when retailers try to price-match or put out promotions that aren’t strategically driven it leads to erosion.

“Consumers are price sensitive but not on every product and you should promote but you should promote strategically,” she stressed. “Promotion needs to have a purpose. Products that will drive your basket. Products that will increase the frequency of trips and maintain your most loyal customers.”

Linda Voracek, group vice president of merchandising at Sally Beauty Supply, said that while the frequency and volume of promotions offered at the beauty supplies retailer have increased over the past few years, the company uses price perception in its marketing without calling out price.

“Most retailers are offering some kind of discounted price and you need to offer an avenue for the consumer to pick your store to come in and shop at. There can’t be a continuing cycle of eroding margin to do that. You need to increase margin and offer consumer value as well,” she said, noting that reacting to change becomes part of the challenge when maximizing margin.

Sullivan continued, “If you make a price change, what are your competitors going to do? It’s either a race to the bottom or you’re going to get the response you want while also satisfying the consumer.”

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“It’s not always prices going down. They have the opportunity to go up and down depending on what’s happening in the category,” Voracek pointed out, adding, “I probably send out 200 price changes a week. It really is impacting the way we do business.”

Price is important—but it’s only a piece of the puzzle.

“Having the right assortment and variety is important as well. Availability actually drives prices in many cases. You’ll see Amazon’s prices go up if an item is out of stock everywhere else,” Sullivan said, noting, “It’s about giving a good experience but making sure when you are giving offers to the consumers that you’re giving them on the products they want.”

And as Kilcourse said, “Repeat customers are easier to work with than a one-time price.”