Ramakant Khandelwal, CMO, Payback India, sheds light on how businesses across sectors are seeing evolving trends in pricing strategy & how discounting got overdone when the world got hit by COVID-19.
Price can create demand! While it has been true for a long time, it has perhaps been the most used ammunition, over the last decade.
Price management via discounting and cashback were most evident in the eCommerce growth strategy. They took the onus of bringing about a dramatic shift in consumer behavior, from the touch-and-feel-experience of offline stores to adding-to-cart by browsing product shots and by trusting the reviews by fellow users. Heavy discounts appealed to everyone but some willing to try this change became the early adopters. It didn’t stop there.
As more players came in there was an additional goal of gaining market share. That meant, even more, discounting, bringing it almost to the point of predatory pricing. More customers fell for the bait, and we started to witness a rapid offline to online migration across many sectors – Travel, Electronics, Apparel, Household appliances, and many others. New categories started emerging, led by discounting, like Food delivery, Cab hailing, etc.
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What was the core thinking behind discounting? Most likely that the price arbitrage will drive trials by consumers, while the superlative buying experience will retain the consumers in the long run. Brands would make an upfront investment but reap the benefits over the long term. Nothing wrong with this thinking, except that it got over-done and we got hit by an unprecedented event – COVID 19.
Two important things have changed suddenly – One, price elasticity of demand has taken a backseat in several categories, and second, businesses are going through a major financial crisis which has impacted their ability to offer discounts.
Here’s a look at some of the trends:
If consumer needs have changed, the same product at a discount doesn’t work
The most telling example is travel. You could offer an air-ticket or a hotel room at a 50% discount, still, you wouldn’t find many takers. People just don’t want to travel right now. Their needs have changed. You can track the daily flyer numbers; it has been less than one-fifth of the usual. Airlines are not able to fill even 50% of their seats. Discounting has little relation with demand elasticity in this case. Although, discounting might still help you in gaining market share, in an expensive manner.
If the consumer needs your product badly, why offer a discount
Now, this is another scenario we are witnessing. Due to the lockdowns and social distancing people are resorting to new behaviors like working-from-home, schooling-from-home, taking care of domestic duties, etc. It is a huge challenge to get your preferred brand of laptop, tablet, dishwasher, or Vacuum cleaner. Demand is far exceeding supply. Do these companies need to offer a discount or cashback – Of course not, just the product is good enough!
Brands have to look beyond pricing, pivot to the emerging needs
A lot of apparel brands ran their End-Of-Season-Sale (EOSS). Discounts offered were in a similar range as last year. However, the uptick was only 20% of an average week, versus more than 100% growth seen in the previous years. Once again, the reasons are more around changing consumer needs. There is very little interest in buying formal clothes if people are sheltering-in. Perhaps, brands that appeal to a stay-at-home lifestyle, like comfort clothing, are finding favor in these times.
Loyalty program is like a Swiss Army Knife, works in every situation
A loyalty program is a strategic initiative. It does offer monetary rewards, but it doesn’t stop there. Most of the effort is focussed on engaging the customer. The process starts with understanding the consumer through purchase behavior data and is followed up by building communication. Whether it’s the pandemic or the usual times, there are enough and more levers to influence the customer’s choices. Even if you don’t want to take the cost of issuing too many points during this period, you may tweak the point redemption rules and make it more favorable during this period. If you have a well-established communication channel that customers like to open and read, you can keep the consumers informed about your safe hygiene practices, new product launches, and keep their fears in control and interest alive.
Cashback or Discounts- Consumer is always ready, but can the brands afford it?
Cashback or discount is an investment which needs to be recouped over the medium to long run. The instability created by COVID has put a lot of investment at risk. The prime example is of Cab hailing services. The choice for brands is between sinking-in a lot of money upfront to drive growth or choose a sustainable route and settle for profitable growth. I suspect it’s going to be the latter, for the next several quarters. An example I can see is in the Food delivery segment. The order counts may have reduced but unit economics have improved, due to less discounting.
Finally, it is important to realize, that Cashback is assumed to be an upfront investment by a brand while returns are expected over the mid to long term, however, in reality, consumer engagement via cashback is short-lived and tactical in nature.
In contrast, investment in a well-structured loyalty program delivers long-term customer engagement. The loyalty program can be a real asset during pandemic times.
This article piece is authored by Ramakant Khandelwal, CMO, Payback India.