The mistake that almost killed some of the world’s biggest brands……and is killing one now, I suspect.
I came across this piece just now. I may have run a version in this blog, too, because I think it is important. As I predicted when I wrote in 2010, Dell has fallen off its perch. And more recently Groupon’s shares have slumped 80%.
Life is strange.
I am one of the most disorganised jokers you’ll ever meet but a book by one of the world’s best organised people influenced me hugely … even if it didn’t do much good.
It was “My years with General Motors” by Alfred P. Sloan.
Sloan led General Motors to become the world’s largest motor manufacturer. It was so important to the U.S. economy that they used to say “What’s good for General Motors is good for the USA.”
But General Motors – and Ford and Chrysler – got into terrible trouble and had to be bailed out, barely surviving.
There were many reasons why, but one was their marketing. Besides their ads all tending to be boastful and dull, they fell into a habit I see as the marketing equivalent of crack cocaine addiction: heavy discounting.
This gives an immediate boost to sales, but you become addicted to it. And you get nasty after-effects – as with crack.
- The people who buy most from a promotion are your best customers, who would have bought anyhow.
- People bring forward their buying so there is a slump afterwards.
- You are training your customers to expect bribes.
To explain more why this is so dangerous, I must take you back 25 years.
Ogilvy and Mather had a unit called the Ogilvy Centre for Research in San Francisco. The Director, Alex Biehl, worked on a project called PIMS – which stood (I think) for Profit Impact of Marketing Strategies.
The aim: to discover how different marketing weapons affect profits.
Over 200 firms in the U.S. and Europe took part, and the project was run in partnership with Professor Andrew Ehrenberg and various associates – I think at The London Business School. David Ogilvy said Andrew had the best mind in marketing.
One thing the project revealed was very simple, very important – yet is news to almost all marketers.
Firms that spend more money on discounting than advertising are far less profitable than those that spend more on advertising than discounting.
The project divided firms into four quartiles. Those in the top quartile spent most on advertising and least on discounting. Those in the bottom quartile did it the other way round.
The ones in the top quartile were on average twice as profitable as those in the bottom one.
Think about it. When you spend more on offering deals than explaining why people should want to buy your stuff, you are perilously close to saying “Our stuff is not good enough to sell on its merits at full price.”
To go back to where I started, today General Motors is no longer the world’s biggest automotive firm. Toyota is.
Another brand once led its market but no longer does. It is Dell.
And guess what? Every single email Dell sends me offers a deal.
They have been overtaken by Hewlett Packard and Acer.
I am not saying never discount. I offer discounts all the time.
Nor am I saying traditional advertising is the answer to your problems.
What I am saying is that messages through whatever medium that give people reasons, emotional or rational, for buying are the key to building your business and brand.
I also suggest that when you discount, give a reason for doing so. Two good reasons are to to get a new customer or to thank someone for being a customer.
I bought a Dell laptop computer seven and a half years ago. I’m typing this comment with that same computer. When it came time to upgrade (about 3 years ago), I bought an iMac, which is at my office.
I considered buying a Dell, but I’d heard rumors that their quality had gone down substantially. Plus, Microsoft Windows hadn’t done anything noteworthy since XP, which is the same operating system on my Dell.
So there was really no incentive to go back to Dell — other than maybe a discount. Since that moment, when I decided to buy an iMac, I figured Dell was in for many rough years ahead.
In 2012, simply by employing a common-place marketing technique known as indifference, I got rid of 3 customers whom I served for years, but whose profitability had ebbed long ago. Hopefully, they’ve found someone else where they can continue to take as long as they like to pay as little as possible.
Another thing I’ve seen is when businesses offer discounts at particular times: regularly. For example, on the 15th of each month.
What they don’t realise is, depending on the product they sell, they’re conditioning their customers to wait for that day, or whatever time they set, to get the ‘special offer’.
As a result, they lost customers they would usually get at other times. I see this in the shops where I live all the time.
“I am not saying never discount. I offer discounts all the time.”
And so we know you offer discounts so why should we pay full price? Aren’t you doing the same?
Your audience of people interested in direct marketing will probably know about the various discounting strategies and wait until they see the one they want.
Early Bird, full price, last minute, very last minute, it’s too late but I have 5 left, oh I found 20 more etc.
At least you have emails with valuable content between the offers.
Broadly speaking I think the golden rule is always give a reason for the discount. I think I discount too much; but quite often people pay full price when tney are in a hurry – eg whwn you have to catch a flight