ditch the discount

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H THE DISCOUNT y Aditya Kumar

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Page 1: Ditch the discount

DITCH THE DISCOUNT

By Aditya Kumar

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What are you talking about ?

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But Discounts bolster sales in timeOf weak demand.It doesn’t make sense.

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After extensive analysis, it has been found that

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1. Across-the-board discounts unnecessarily reduce profits.

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Even if sales decreases by 25%, firm would still be making 75% of it’s usual sales at full price.

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2 . More importantly, deep discounts devalue products, making it difficult to increase the prices when demand picks up.

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Large pizza sold at discounted price of 10$ during weak demand.

Once people get used to discounted price. It becomes difficult to bring the price to original level.

Price restoration becomes difficult.

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How to avoid discount trap ?

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Adaptive pricing is the new strategy

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Principle : Different customers have different needs, therefore they place different value on different services provided. Frugal customers

want to experience a product & service without paying the

premium.

Free-spending customers are willing to pay

extra to experience the full

service.

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How does it work ?

• Adaptive pricing is based on realization that pricing is just another attribute of product like color or style.

• Companies routinely vary their attributes to cater to different segment of customers.

• Companies sell through various channels( online, brick&mortar ) and charge vastly different prices based on the channel.

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Simplest adaptive pricing : Versioning

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Versioning – Offering “Good”, “Better”, “Best”

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Harley-Davidson offered it’s lower priced “Super Low” model during recession period.

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P & G offered it’s lower priced version of “TIDE” brand.TIDE BASIC was withdrawn after recession effects wore off.

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• Lower priced versions – Fewer features & lower quantity acts as a magnet for price sensitive customers.

• It allows companies to charge fully for it’s signature items at the same time it can attract price sensitive customers through lower versions.

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How to price in recession ?

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Introduce lower priced versions.

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Use promotion instead of price drop.

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Unbundle services & charge for extra services.

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During recovery

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Introduce premium options

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Offer new ways to experience luxury.

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Adaptive-pricing Innovative techniques

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HYUNDAI Assurance Program was introduced during height of recession in Jan 2009, when auto sales were declining even after steep cuts.

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How did it worked ?The Assurance

program let buyers who lost their jobs stop

making payments and return their

vehicles.

By providing this safety net,

Hyundai was able to prosper

without making further price cuts.

While the U.S. market for auto

sales dropped by more than 20% in 2009, Hyundai’s

U.S. sales increased by 8%.

The cost to the company was minimal: During the first nine months of the Assurance program,

fewer than 50 cars were returned.

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Creative financing techniques

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After 9/11

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introduced 0%

financing.

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Adaptive-pricing offers flexibility as

economy rebounds.

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Through proper use of adaptive-pricing, we can reach new customers &

transfer more of their money to our bottom-line.

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This presentation has been made by ADITYA KUMAR of MNNIT Allahabad during internship under the guidance of DR. SAMEER MATHUR (IIM LUCKNOW).