Many brands and retailers who are feeling the pinch may be in a slight quandary – do we lower prices to retain more of our customer volume or keep things as they are and try to maintain more of our customer value – in fact is it possible to both maintain volume and value?
Brad Farrell, skincare brand manager for L'Oréal Paris answered the question about price quite succinctly when he said at a recent event "We don't want to see huge price cuts that will create a lower-priced brand, because you don't want to tarnish your brand. When this is all said and done, you still have your brand reputation to uphold."
Commenting in the early 90's in the wake of the coffee wars, Jeff Caso, director of Nestle's coffee business had a similar sentiment, but highlighted the struggle many brands wrestle with: ''If maintaining market share involves jumping off a bridge, I am not jumping off a bridge. But I am not sure the other guys see it that way."
So for many brands, overt price cutting cannot be high on the agenda – but maintaining the status quo in the face of increased price based competition is tough.
Knowing Brand Loyalists
Interestingly customer value is not always tied directly to customer volume. In most industries, a high percentage of revenue (70-80%) typically comes from a small percentage of customers (20-30%). For some brands like Prada this can be even more concentrated with a reported 50% of sales coming from just 5% of customers. With such a large percentage of customer value coming from so small of segment of customers, the most important question for both brands and retailers should be "who are these customers?".
Many successful retail loyalty schemes such as Tesco Clubcard are reported to be able to track 70% or more of their purchases to individual customers, providing real insight on who drives value and what products/services they purchase.
Focusing attention on these key customer segments with communications and non-price related offers can help to maintain revenue levels even when a larger number of less valuable customers may fall away.
Adding Brand Value
Customer volume is still important however – they contribute to fixed costs and ultimately will have more to give in the future. So is it possible to put in place strategies which retain more price sensitive customers?
One way to do this is to look back at the 4P's of marketing – Product, Price, Place, Promotion. The first thing that strikes you here is that there are three other "P's" apart from just Price.
Product – The product itself can be modified to make it less costly without cutting back on the quality. Many brands use size as a tactic here – making smaller versions of the same product so that it becomes more accessible. This can also have the positive effect of introducing new customers to the product who previously couldn't justify it as well as potentially allowing higher margin pound for pound than the larger version. More accessible brands may be able to also achieve this through a change of packaging – using different materials to lower production costs whilst not compromising on quality. As highlighted in brandgymblog, Hellmanns Mayonnaise did this in Canada by changing the packing from glass to plastic.
Place – Looking at other distribution channels, whether its online or different retail sectors can provide different cost models that allow the product to be made more accessible whilst not devaluing the brand within its heartland. This can be a double-edged sword though – witness brands such as Burberry and Cristal – which is why many premium cosmetics and clothing brands like Levi's have actively fought to keep them out of discounters.
Promotion – Adding additional value to a purchase rather than lowering the price of it can be enough for many customers to swing the purchase decision back from a rational one to an emotional one. The Anchor Make-A-Moo promotion is a very good example of this which has allowed the brand to maintain market share in what is seen to be a highly homogenous market.
Using both these techniques so that you know who buys your brand and can target the added value is by far the best approach. L'Oreal has been very successful in this area through the implementation of a company wide CRM system. Commenting on this in their white paper, Daniela Giacchetti, Head Customer Strategy Officer said "this has seen a 57% decrease in the volume of direct mail [and associated costs]. Through more accurate targeting a 62% response rate."
Having a customer retention focus that combines CRM and doesn't rely on price discounting activities is why companies as diverse as Anchor, Tesco and L'Oreal may be better able to weather the storm with their brands un-tarnished.
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