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On Pricing, Discounting, and Value

by David Brock on March 31st, 2021

There are two retailers I’m fascinated with. One is LVMH. It’s a collection of some of the most prestigious consumer brands in the world. They call each of the brands, “houses.” They have brands like Tiffany, Bvlgari, Fendi, Louis Vuitton. All are premium priced and have the brand image of the most expensive, prestigious brands in the world. Last year, they did about 44.7 B Euros in revenue and 8 B Euros in gross profit.

The second is Dollar General. They sell low priced products, typically around $1 (Though I have seen products at the outrageous price of $7). Last year, they did $33.7B in revenue, $3.6B in operating profits and had YoY growth of 21.6 %. They want to be “America’s General Store, offering consumers everyday low prices.”

Both are very successful. Both offer great value to their customers (both actually have overlap in customers, for example I shop in both, but for very different reasons). They discount every once in a while and offer promotions, but mostly both are known for great, though very different value propositions. And neither apologizes for their pricing/positioning.

Neither would think of offering each other’s products. They each know this would betray their brand promise and value proposition to their customers.

Pricing and value are very interrelated. We expect them to be aligned. We expect consistency between them. For very high prices, we have a value expectation, for very low prices, we have a different value expectation. Regardless where we choose to compete, we have to be consistent in our value positioning.

Now let’s look at the “in-between spaces.” Here’s where it can get very confusing.

We see too many companies positioning their products as “high end.” They want to be perceived as a premium brands, with superior capability. “We offer far more capability, features, functions, feeds, and speeds than than the alternatives….” Ostensibly they are priced higher, perhaps as a representation of the value they want customers to perceive.

Often, these make sense. We see the price being asked is worth the value we receive. There may be other lower priced alternatives, but the value we perceive from the more expensive product justifies the pricing difference.

And then, in their anxiety to close an order, the sales person says, “We have an end of quarter deal…. If you place your order now, I’m willing to discount the price by X%, but that’s only good for this time frame.” We see outrageous promotions 15, 20, 25%. Recently I saw an organization whose average discount was 50%.

What does this tell the customer about the “value?”

Does the customer think they are getting a better deal?

Do they think the value that has been represented really isn’t there? Can I really believe their value proposition?

For example, if Tiffany offered me a diamond ring for 50% off, would I think I’m getting a better deal or would I wonder about the quality of the diamond? I know they wouldn’t be stupid in their offer and that they are making the profit they want. But perhaps, the quality of the diamond is different. Or perhaps, they have always thought I’m a stupid, gullible consumer buying very overpriced products.

It becomes particularly confusing when we recognize, they are making a profit at this new pricing. They aren’t looking to lose money, in fact they are happy with the profits they are getting with the special discount.

So what are they doing? What do they think of their customers? Do they think customers are gullible, willing to pay a superior price, when the vendor is perfectly happy getting much less?

Pricing and value perception are very tightly interconnected. Customers are willing to pay a superior price, if the value they perceive they are getting aligns with what they want/need and makes sense to them.

But when we disrupt that perception, when we take pricing actions that cause customers to rethink the value we are claiming.

We offer discounts to “lock in deals,” but we may actually be causing the customer to rethink their perception of our value. We may actually lose the confidence of our customers because what they thought they perceived may not be true–at least in their minds. We may create concern, if our pricing actions are inconsistent with our positioning and our brand promise.

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