In this morning’s San Francisco Chronicle, a story reports that “Discounts failed to help sales” over the holidays. Despite deep discounts of up to 70%, the sales figures were dismal.
The biggest loser was Neiman Marcus, which reported a 27.5% decline in sales compared to the previous year’s holiday selling season — the five week period ending January 3.
But Abercrombie & Fitch was down 24%, Saks down 19.8% and my favorite retailer Nordstrom was down 10.6%. A few retailers, mostly discounters, managed to keep the decline in the 4-5% range: Costo, Macy’s, Target and TJX.
There was only one major retailer that reported an increase: Wal-Mart (1.7%). While this fell short of expectations, of late Wal-Mart has been one of the few retailers able to keep growing in an economy that’s going the other direction.
All this leads me to my question: Are low prices customer-centric?
I ask because nearly all the discussion on this site and elsewhere about customer-centric business seems to revolve around “service” or “experience.” The conventional wisdom these days seems to be that product and price are not differentiators, so focus on the experience.
Yet Apple thrives mainly based on product innovation (Yes, the in-store experience is great, but would you shop there if the products weren’t cool?) and Wal-Mart succeeds as a low-price leader without winning any awards for great service.
Our research over the past few years has found that the average importance rating in driving loyalty is as follows for these factors:
40% — the product or service being purchased
40% — the experience in using what was purchased
20% — the cost of what was purchased
This data was mostly collected in good times, but notice that price doesn’t have zero value. And I suspect that price would get a much higher weight right now.
So, in this economy especially, why shouldn’t low prices be part of the equation in being customer-centric? I fear that companies will spend too much time and money trying to “wow” customers with a great experience, and not pay attention to the fundamentals — delivering a product/service that does what it’s supposed to do, at the lowest price possible.
I like great service as much as anyone, that’s why I normally shop at Nordstrom. For the past holiday shopping season, though, I spent my money at Costco and Target.
Hi Bob
Great post.
You are so right. Price along with all the other elements of the marketing mix are obviously a factor in customers’ purchase decisions. All the evidence so far suggests that customers are much more price sensitive than a year ago and are going to become even more so as the recession deepens.
But this doesn’t apply uniformly across the board. Luxury items, e.g. expensive holidays and autos, are a much harder sell at the moment than everyday essentials. And some purchases are actually experiencing a boom, e.g. education and healthcare.
See this Harvard Busines Review Daily Stat for further details of the winning and losing categories in the recession to-date:
How Recessions Affect Consumer Spending
http://view.ed4.net/v/CIZ4/N1NAH/IYDKE5N/JLUH/
I suspect much of the stuff we have been reading about differentiation based upon service or experience was written by people with a vested interest in promoting the same services or experiences. Maybe it’s time to get back to the business basics of great products, that do exactly what they say on the tin, at great prices.
Now where did I put those grocery coupons?
Graham Hill
Customer-driven Innovator
Another SF Chronicle article about the impact of the recession (Bargains Not Bygones Yet) cites a new IBM study that found that more consumers are buying less, postponing purchases, and shopping for deals.
What I found interesting, though, was that the study found “a growing number of customers remaining loyal to a primary retailer at the same time they are willing to go to new retailers to get the best deal.” Hmmm, I thought the idea with loyalty was that customers were less likely to go elsewhere.
Anyway, the key question is: Why are consumers loyal? Service/experience advocates may be dismayed to learn…
Balboni went on to say that the challenge for retailers is to turn shifters into advocates.
But advocates for what — lower prices? This is a slippery slope that plays right into the hands of the megadiscounters like Wal-Mart. Price as a loyalty driver may be the new reality, but most retailers don’t have the business models to compete on that basis, profitably. Neither do their suppliers.
And will there be long-term damage to more premium retail brands as a result of becoming de-facto discounters to survive the recession?
Hi Bob
The study the SF Chronicle quoted is probably ‘Shopper advocacy: Building consumer trust in the new economic environment’ from the IBM Institute for Business Value
http://www-935.ibm.com/services/us/gbs/bus/pdf/qr_gbe03143-usen_nrf08.pdf
The key is to view price as just one part of the total value equation, along with all those other things that help customers get their everyday jobs done more effectively. If the value equation from the customers’ perspective is changing because of tight money in a recession, retailers should change their value propositions to match.
The point about shifters being turned into advocates is a great idea but probably a mite unrealistic. Retailing has always been rife with ‘promiscuous loyalty’ as it is known. Customers have always bought, e.g. premium yoghurt for special occasions and basic yoghurt for everyday use. And other retailing services also play a part too. If the make-up of what constitutes value for customers is changing, then retailers will have to ask them to find out.
Whether that means they will use different retailers to do their shopping is a moot point. I do all our basic shopping at cheap and cheerful Aldi in Germany. It has the keenest prices and the quality is great. But I go to expensive Edecka for fresh cooked meats from the butcher’s counter. And to wholesale Metro for speciality french cheeses you just can’t buy anywhere else (except in France). Am I buying more in Aldi? Maybe. But I am still shopping for meats in Edecka and cheeses in Metro.
Customer behaviour is changing. It is time for retailers to recognise that, to go out and find out exactly how and to adjust their value propositions accordingly. As you point out, there is so much more to this than just price.
Graham Hill
Customer-driven Innovator
Bob and Graham,
The discussion of price and commitment/advocacy often gets twisted and turned because of a tacit assumption that mental operations that drive them operate on the same principal. They don’t. In your second post, Graham, you admit to judging value on different parameters in different circumstances.
The distinction between price driven behavior and emotional gratification was quite evident during black friday, the day after USA Thanksgiving. Shoppers lined up at 5 am to take advantage of heavily discounted sales. People were aggressive, shoving and pushing to make sure they got the most bang for their buck on items they were going to give away. Down the hall at Starbucks, the line of people spilled out into the street as they waited to spend a premium on there favorite version of java. Interestingly, the average sale price per customer in December of 2008 was up over over 2007, so was the frequency with which they bought at Starbucks. Yet, the only time some people went to Macy’s was when there was a sale.
John
John I. Todor, Ph.D.
John,
I don’t assume that mental operations are the same. My point is that being “customer-centric” is not just about delivering a differentiating experience, which is how many think of it.
The “product” and “price” are also important, and probably more so for most customers now.
Experience may be central to Starbucks’s strategy, even in a recession, but the same is not true for most businesses. If you haven’t created a brand where experience really matters, I don’t think a recession is the time to start. Although it certainly doesn’t help to have negative experiences, in any economy.
Bob Thompson, CustomerThink Corp.
Blog: Unconventional Wisdom
Hi John
If we look at recent evidence from evolutionary economics, we see that customers use what Chicago University economist Richard Thaler calls ‘mental accounting’ to identify their best course of action. That means they subconsciously weigh-up various factors, such as how close a retailer is (got to reduce those nasty carbon emissions), their last experience at the retailer (the queues were short last time so I was in and out really quickly) the prices at the retailer (I have to be careful and the retailer is a bit pricy) and a whole load of other factors. Many of the factors are context dependent, for example, when the customer is in a hurry and being located nearby is the only driving factor.
The implication of mental accounting is that these factors are all trade-offs dependent upon the customer, the context and in this case, their experience with the retailer in question. Loyalty, price and all the other factors clearly do get considered at the same time during mental accounting.
Richard Thaler
Mental Accounting Matters
http://faculty.chicagogsb.edu/richard.thaler/research/MentalAccounting.pdf
Graham Hill
Customer-driven Innovator
Follow me on Twitter
Bob,
You raise a good point, what does a business do if they are did not focus on the customer experience before the recession? Certainly, customers may have expectations. Like Graham, I shop at certain grocery stores on price and convenience. Safeway cannot become Whole Foods overnight but they could offer an experience that helps customers deal with their plight. For example, they could use their advertising to promote the value of starting with basic ingredients. Value both in economics and nutrition. A growing customer response to the recession is to seek ways to gain value in the food department by taking the time to prepare more at home.
Graham,
I am not a big fan of the additive factors model used by economist to account for human behavior. I am not saying it is all wrong but do believe that context and emotion play a role. I think you are getting at this also. The counter weight to Thaler is Ariely and Kahneman, psychologist/behavior economists who have demonstrated over and over again that a purely rational model doesn’t explain buying behavior.
I think this discussion is valuable because it brings to light the conundrum Bob raises. What do most companies do now to deal with consumers who have redefined or at least accentuated their definition of value because of the pressures (financial and emotional) they feel because of the recession.
This would be a great topic to keep alive in a Customer Think Forum and encourage others to join it.
John I. Todor, Ph.D.
I’m an analytical sort, but have to agree that I can’t explain all the buying decisions I make based on rational thought.
There is a lot of stress in the world today. Potential customers are worried about their jobs and the future. For some, that may lead them to search for bargains. For others, to find comfort in food, booze, whatever.
While companies can’t change their brand image or operation overnight, at least they can strive to be more empathetic with customers. I think it would be a mistake for premium/experience-driven brands to become discounters in a knee-jerk reaction to customers asking for lower prices. But it’s also a mistake to just assume that it’s “business as usual.”
Ultimately, isn’t it important for companies to communicate to customers that, “We care about you and your issues, and are trying our best to adapt what we offer to help you cope with these difficult times.”
Bob Thompson, CustomerThink Corp.
Blog: Unconventional Wisdom
John & Bob
I think that we are all largely agreeing, albeit from subtly different starting points.
I introduced Thaler as an example of useful thinking that we ought to consider. He is a future Nobel Prize for Economics winner for sure. I also considered introducing Kahneman (in particular his Nobel Prize acceptance speech) or Damasio (in particular his work on the ‘Feeling of What Happens’) but decided that Thaler would get a broader discussion going.
Customers are not perfect information processors and use bounded rationality to limit their decision problems. They take account of a variety of factors whilst making decisions (mostly unconsciously) using a form of mental accounting. Price information greatly raises the likelihood that they will use a more classic mental accounting approach. Once they have decided and enacted the decision, they use bayesian updating to learn from the whole episode. Then they start the whole process again.
Isn’t this all part of evidence-based CRM? If only we had more evidence and could deduce what to do next. Wishful thinking.
Graham Hill
Customer-driven Innovator
Follow me on Twitter
I viewed the keynote and Q & A session with Lee Scott, Walmart’s outgoing CEO, at the NRF convention held last week (recorded, in its entirety, on YouTube). He made some interesting observations. From the retail perspective, he’s seeing that people still have money, but sales are very targeted (flat panel TV sales are up 25%, 10% to 15% in whole meal frozen food), and consumers appear to be giving up things like eating out and going to the movies; so there’s a lot more ‘nesting’ taking place. He also noted that their research shows consumers seem to feel good about the cutbacks and reductions they are making in their lives (remember, 20% of Walmart customers don’t have checking accounts) and seem to no desire to go back to overt consumption and debt. Rather than viewing people as depressed and disillusioned, he’s seeing that consumers have had a dose of fiscal reality and are focused on living more within their means. They even seem to be feeling positive, he said, about shopping less – – something that Walmart isn’t particularly overjoyed about.
Walmart continues to succeed because of highly focused customer targeting, market coverage, pressure on suppliers for pricing and productivity management, and inventory control. Walmart is at the top of the food chain of commodity-oriented retailers. Competitor Target succeeds because it creates a better, more customer-centric in-store experience, while still providing low prices.
In general, having a low-price strategy is what I describe as a ‘one-trick pony’. Most companies flying this flag have failed. In Walmart’s retail space, witness Caldor, Ames, and Bradlees. Kmart is on the ropes. So, not the best approach for building long-term customer loyalty and value
Michael Lowenstein, Ph.D., CMC
Senior Vice President and Senior Consultant
Harris Interactive
Mike,
You make a very important point, it is hard to be the Walmart of your industry. In a recession, competing on price leads to lower margins and increased competitive. In effect, competitors enter into a battle to bid on customers’ business. These business leaders must be hoping that the recession will be very short and things will go back to the way they were. I don’t think either will happen.
What does that leave them? The need some form of competitive differentiation. Your examples of Target is on the mark. Relative to their competitors and in the eyes of their target customers, they are differentiated as being more customer oriented. They don’t have to be a Whole Foods, Starbucks or Apple.
John
John I. Todor, Ph.D.
The Friday January 16th WSJ had an article by Daniel Akst (“I Once Was Chic, but Now I’m Cheap”). In short he explained why he had passed on buying another Mac and went with a PC. The bottom line? Price – end of story. In his article he articulated his thoughts on how “cool” is too often connected with “cash.” And mentioned the usual companies we often associate with “cool customer experiences” like Apple, Whole Foods, etc.
My take away is that marketers (and marketing faculty!) will be talking a little more about “Price” when it comes to the 4 P’s than we have in the last few years. Recent financial events, President Obama’s speech today, etc suggest real change is in the air. This time when consultants use the phrase that “it’s not business as usual” they will really mean it.
Just my two cents … but then that’s all I can spend right now!
Alan See
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http://www.linkedin.com/in/alansee
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