Retailers – stop price cutting yourself to death

Times are tough for UK retailers.

38 major retailers have failed this year in the UK. Affecting over 40,000 employees.

This year the likes of Toys ‘R’ Us, House of Fraser, Maplin and Poundworld have all gone bust.

BHS in 2016. Woolworths in 2015.

This week, ASOS’s shares crashed by a staggering 38% due to a shock profit warning. We’ve all read the headline “death of the high street” thousands of times over the past few years. But online retailers? We all thought they were safe…

It takes a sequence of poor decisions to make a company go bust. But one damages more than any other. And thats long-term price cutting.

Price cutting now seems to be seen as a business strategy and a marketing tactic for many. Price cuts certainly do have a place for some brands but they should be used with caution.

Retailers (high street and online) are slowly suffocating themselves by creating a price-cutting bubble. This has been accelerated by the financial crash in 2008. A war of who can go lower for longer – in the hope we will all part with our cash. In the short-term, it looks great. Huge peaks of revenue. But then the plateau. And finally, the unsurprising decline until retailers inevitably get a call from Mike Ashley “helping” to bail them out.

Pricing cutting destroys brands. It’s the opposite of brand building. Everything advertising tries to do.

In October this year, ASOS revealed they had reduced their traditional ad spend from 6% of revenue to 4%. Instead, they’ve been investing heavily in voice tech and AI to convert browsers to buyers.

This is where a misguided “Insight” can be extremely damaging to a brand.

“Innovating” or to put more simply “being useful and relevant to your customers” is one thing. But chasing only extremely narrow marketing tactics, that does the opposite of the above, is a very dangerous game.

The seductive illusions of cost efficiency to marketing teams are part of the problem. The ‘zero-based budgeting’ the ‘minimising of wastage’. Research by the IPA shows marketing ‘wastage’ can make marketing less efficient.

The effects of advertising aren’t always immediate. And they aren’t always direct. Peoples brand choices are hugely influenced by what people around them think.

If you buy something from Prada you do so because everyone knows what the brand stands for. Even if they’re not in the target market themselves. To create shared cultural meaning, we need people outside our target to overhear our communication. In other words, we need wastage.

A display of such wastage can also be a sign of quality. A nod of “oh they’re doing well” if they can afford to do that.

Price cutting does the opposite. It gives off the impression of a struggling brand, poor quality and at worst desperation. And without any brand building, only sales activation tactics there is only one way. And thats down.

So there isn’t much surprise ASOS’s shares fell so dramatically. The real question is who will be next?

Retailers, if they want to survive, need a renewed focus on the long-termism. Brands have the opportunity to live forever, unlike us humans. To do this, retailers need to switch up their spend. 60% on brand building and 40% on sales activation. With creativity at the core of everything they do. Retailers shouldn’t get sucked into a price war with competitors. They need a long hard look at what is commercially realistic to themselves, not only in the short-term but more importantly in the long run.

The first question should always be – will what I do today harm the business in years to come?

Posted by

Alex Dixon