Small Business Questions & Answers


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Ask About Brand Discounting Perils

by Iman Mba | May 26, 2012

Subject :Sales and Marketing

Dear Toolkit,

Why do companies go for price cuts? Doesn't this spoil their brand image?

Iman Mba

Dear Iman,

Sounds like your typical marketing class essay question if ever I heard one! But, it's an interesting query nonetheless so I'll tackle it, albeit against my better judgment. The realities of business rarely correlate with academic dogma but, for what it's worth, my humble opinion is that YES discounting can indeed spoil brand value.

As I mentioned in a previous Ask Toolkit column on branding,

"Current wisdom says that 'brand' must not be confused with 'identity' or 'image.' Identity allegedly refers to a company's name, logo, slogan and things of that ilk. Image, theoretically, is the public's perception of the company/product/service--for good or ill."

To that let's add the idea of brand equity, which we might define as what the brand's identity/image is worth. In short, its value.

The old Marketing 101 definition of brand value is the relationship of its quality to its price. Quality is kind of a slippery, subjective (qualitative) element. It exists more in the eyes of the beholder than in the product (or service) itself. Your definition of quality may not be mine. You and everyone else in our neighborhood may think the corner Starfish lattes are the bee's knees, while I think they're bitter and overpriced. Different strokes!

The element of price, on the other hand, is fixed (quantitative) by definition. That tall latte, bitter or not, will set us each back exactly $3.68. You believe it's worth it. Who's to say you're wrong? In any case, this Starfish outfit is the only game in town, so I'm forced to patronize them, bitter and overpriced or not.

But what happens when Evelyn's Java Emporium moves across the street from your Starfish cafe and sells the same size latte for $1.68? It's kinda bitter, too. . .but two bucks cheaper. Evelyn brings competitive advantage into our equation.

I am thrilled and become a regular at Evelyn's and tell all my friends as well. Business starts to fall off a little at Starfish. Does your Starfish manager start a defensive promotion and discount his price to $1.67 during Evelyn's grand opening month, thus giving you "better value". . . latte you believe to be of superior quality at a lower price?

If the manager does, he's taking a big risk. His loyal customers (that's you) will think either (1) he was ripping you off before or (2) he's reduced his quality in order to reduce the price and compete with Evelyn. Either way, he's messing with your beliefs about his brand's value.

Remember, in branding, perception is everything! Intrinsic value has little or nothing to do with it. If I were in his shoes, I'd leave my price alone and try to gain a competitive advantage some other way. . . like, for example, building a drive-thru window to make it more convenient for folks to buy my overpriced lattes. Or maybe I'd increase the quality perception by touting an optional free shot of sugar-free vanilla mint syrup with each latte as a special one-month promotion. I would not be inclined to discount my brand as I believe you, the loyal customer, would buy Starfish latte at the original price anyway and new customers, enticed by the discounted price, would run to Evelyn's as soon as the discount was removed.

But as I said at the outset, these decisions are all a matter of opinion, not fact. And the type and size of industry can impact the outcome of discounting as well. (Automotive rebates and Wal-Mart-itis are the mass marketing flip side of my small retail outlet example above.) That's why marketing will always be more art than science.