Many brands don’t get involved with the retail price of their products. Even if they set an MSRP (Minimum Suggested Retail Price) to show retailers how much profit they can make, they don’t really concern themselves if it’s sold for a different amount; even if that amount equates to a 10, 20, or even 30% discount. Their overriding philosophy is, “as long as I get my wholesale price, retailers can do whatever they want.”
In one way, this business philosophy makes sense; profit and cashflow are what business is all about. But taken to extreme, this kind of thinking is short-sighted. When brands focus mostly on profit margins, they may be overlooking important factors that can have a huge impact on their long-term success.
Loss of Brand Equity
Frequent and heavy discounting of a product can generally result in faster and increased sales volumes. But if retailers are consistently discounting a brand's products, then THEY have control over the brand's positioning and perceived value. Ongoing discounts ultimately lead consumers to view products as low quality. For specialty and luxury products this is a disaster.
Even if the discounting is stopped, if it was too deep or went on for too long, it can lead to a perception that the brand's products are no longer worth the full price. When the retailers finally remove the discounts, sales drop off dramatically because consumers either wait for the discounts to return, or shift loyalty to a different, “higher quality” brand.
Loss of Profits
This perspective, while initially focused on top line sales and profits, is a long-time loser. If the discounts are too high, it cuts into the profit margins of the retailers. This could lead to retailers choosing to stop carrying the brand's products or to reduce their marketing efforts for the brand, which could further hurt sales.
On another level, if the brand becomes perceived as a low-quality, discount brand, then the initial wholesale price will not be sustainable. Retailers will demand larger discounts or even ask for compensation to make up for the lost margins. If the brand can’t accommodate then they will lose distribution or be forced to sell to a different category of retail.
Pervasive discounts can lead to a dependence on retailer relationships. When a brand is reliant on certain retailers to sell their products, it may lead to a situation where the brand has less bargaining power in pricing and promotion decisions. This could lead to a situation where the brand is forced to accept heavy discounts in order to maintain a presence in key retailers.
Thirdly, heavy discounts can lead to a short-term focus on profit at the expense of long-term success. When a brand is only focused on profit margins, they may be willing to accept heavy discounts even if it means sacrificing long-term success. This short-term thinking can lead to a situation where the brand is sacrificing its long-term potential for the sake of short-term profit.
Lastl, if the brand is mainly focused on getting their margin and doesn't care about the impact of the discounts on the overall pricing and perception of their products, they may be missing out on potential opportunities to increase their prices and improve their brand perception. And instead of rolling out line extensions, they may also end up having to spend a great deal of time and money developing a new brand that is not equated with the one that has been tarnished.
So, what can brands do to avoid these potential issues? One approach is to balance short-term profitability with long-term brand equity, customer perception and product longevity. This means considering factors beyond just profit margins when making pricing and promotion decisions. Brands should consider the impact of discounts on their overall brand image, pricing strategy, and consumer perception.
One of the simplest things that brands should consider is adopting and enforcing a MAP Policy (Minimum Advertised Price Policy). This is a unilateral statement from a brand that says retailers may not advertise a product for less than a pre-determined amount. That MAP Price should be at a place where the brand value is still apparent, and retail margins are protected across the board.
Additionally, brands should have a consistent and well-thought-out distribution strategy. They should know what type of retailer they want selling their products. Letting just anyone buy the brand for the sake of increasing top-line sales is another flawed, short-term business philosophy. Consumers frequently equate brand value with retailer quality.
That being said, brands should diversify their retail partnerships to reduce their dependence on any one retailer. Healthy competition can give them more bargaining power in pricing and promotion decisions and reduce the risk of being forced into heavy discounts. It also prevents them from being held hostage to the retailers' practices.
Profit margins are obviously important, but they shouldn't be the only consideration when making pricing decisions. Brands should carefully balance short-term profitability with long-term brand equity and consumer perception to ensure their success in the long run. In this way, they can avoid potential issues that can arise from a sole focus on profit margins and build a sustainable and successful business.