The discount ring

I’m amazed that Wall Street analysts are “surprised” that as hot brands get bigger (think Michael Kors, kate spade), their level of discounting increases. Apparently they were all sleeping during their first year economics course when supply and demand was covered.

Target_market_bullseye

 

 

 

 

 

Whether it’s Walmart or Chanel, at the center of any brand’s customer bullseye will be customers who don’t need a discount (or any extra incentive) to buy. This is what I referred to in my recent obsessive core post. As we move out in the rings, away from the center, we encounter customer segments that are less and less intrinsically loyal and thus more in need of extra incentives to buy.

Since Walmart’s value proposition is largely about price–whereas Chanel’s rests on a high percentage of full-price selling–the composition and dynamics of these various customer segment rings will obviously be quite different. But the fact remains that as a brand grows by casting a wider net for customers it will, at some point, develop a discount ring.

As the name implies, customers in the discount ring don’t buy unless they get a deal. In fact, most brands will have multiple discount rings. There will be a ring that needs only minor or modest incentives to pull the trigger. Others only come off the sidelines when prices hit a much deeper level of markdown (or some other incentive).

Unless we are examining a brand that has decided strategically to shun price discounting completely–or assessing certain companies early in their life-cycle–the existence (and relative growth) of a discount ring should surprise no decent analyst.

The real question for anyone trying to understand the validity of a brand’s long-term customer growth strategy is whether the company has a firm grasp of the dynamics within each of these rings and is intelligently balancing the portfolio of these different customer segments.

Coach is a brand that in recent years lost its grip on its customer portfolio and pushed too far on the discount ring. They have paid a steep price and are now trying to rebalance.

In Michael Kors’ case, there are only so many customers willing to pay at or close to full-price for their core offering. Sustaining growth means appealing to more customers. And that means they will need to become more reliant on more price sensitive customers.

Ultimately the point at which the discount ring becomes meaningful is mostly a matter of brand maturity and math. If you get shocked by that it just means you’re not paying attention.

The starting point–the pivotal matter of strategy and intelligent customer development–is to build a level of deep insight about each relevant customer segment. Then we must become intentional about how each plays into the brand’s long-term growth. Having a discount ring emerge is not automatically a matter of good or bad. How it plays out over time is a strategic choice.

Choose wisely.

The obsessive core

Every great brand has an obsessive core. The person who camps out for hours before the next iPhone is released. The Harley Davidson fanatic who sports the logo tattoo and is dressed head to toe in Harley gear. The frequent shopper who willingly pays full price and is an incredible source of great word of mouth. The raving fan. You get the picture.

The great thing about most obsessive core customers is that they are highly profitable and help acquire new customers at a low-cost. If you lack such a passionate group, chances are you are making average products for average people. Good luck with that.

Yet brands blessed with an obsessive core–or even a bit less enthusiastic but significant group of “heavy-users”–are often led astray.

Many luxury brands–including my former employer Neiman Marcus–tilted too heavily towards their obsessive core shopper and neglected other important, profitable customer segments. When the recession hit, the day of reckoning was harsh indeed.

Most high-flying e-commerce companies gain their initial traction with an obsessive core. By focusing on an underserved niche that loves to shop online, these brands can often quickly and cost effectively acquire thousands of profitable customers. Alas, as we’re starting to see with many companies that have attracted millions in venture capital funding, growing profitably beyond that initial core is not so easy.

Unfortunately, the factors that create the obsessive core, the raving fan, the incredibly passionate brand advocate, often cannot be scaled.

Unfortunately, in our quest to exploit the seductive virtues of the obsessive core, we can lose sight of the big picture.

The key, I think, is to not let ourselves become obsessed with this group, but to place them in the appropriate context.

 

Let’s get physical

Amidst all the breathless pronouncements about the inexorable decline of brick and mortar retail emerges an interesting phenomenon: some of the fastest growing and most exciting internet-only brands are opening stores.

Recently, Bonobos raised $55MM largely to accelerate its foray into “Guideshops.” Other e-commerce innovators such as Warby Parker, Trunk Club, Nasty Gal and Bauble Bar are all expanding into physical store fronts. Expect more announcements soon, not only from earlier stage companies, but from larger direct-to-consumer brands as well. This seemingly counter-intuitive trend reflects a few realities.

First, most of these venture capital funded darlings have thrived in their first few years by exploiting a highly specific customer niche and leveraging the heck out of the advantages of a direct-to-consumer model. Alas, the number of customers who are willing to buy product sight unseen, without working directly with a sales person and lacking the instant gratification that physical stores provide, is comparatively small when it comes to product categories where fit, material quality and fabrication are important. For these brands to continue to grow–and have a chance for material profitability–physical locations aren’t a nice-to-do, they are a necessity.

Second, brick and mortar retail is different, not dead. In most product categories, for many, many years to come, the overwhelming majority of sales and profits will continue to come from, or be influenced directly by, physical locations. Regardless of whether a brand started as an actual store or as a virtual entity, the ones that will ultimately win will offer a tightly integrated experience across their various channels and touch-points. They will eschew traditional mass, one-size fits all strategies and embrace more personalized missions. There remains plenty of business to be done in brick and mortar locations–if you have something remarkable and meaningfully customer relevant.

Finally, when we think about the market or the customer we inevitably get it wrong. Global pronouncements about industry dynamics or the “typical” consumer are rarely particularly illuminating and almost never sufficiently actionable. The brands that are winning–the ones that are stealing share from you–go beyond the averages and the mega-trends. They understand how to apply technology to create frictionless commerce. They delve into data and apply customer insights that inform stronger acquisition, growth and retention tactics. They are committed to experimentation. They treat different customers differently. And on and on. None of this is fundamentally rooted in how a brand started or whether trends tend to favor its success.

Of course it’s far from certain that these previously web-only brands will successfully transition to an omni-channel world. Some will stumble mightily. A few will fail completely. Others will see their growth stall at only a handful of profitable locations.

The one thing for certain is that for quite a lot of customers, the benefits of physical shopping are here to stay. For traditional players the rush to close and down-size their store base may have some merit. But it’s equally likely the problem isn’t just the real estate portfolio.

 

Rewarding stupid

The brand that incentivizes lowering the cost of its customer service function, when faster response time–and assuring the customer’s problem gets resolved the first time–is what drives customer value.

The retailer that slavishly measures–and provides bonuses for silo leaders based upon–individual channel performance, when the majority of its consumers research and shop across channels.

The credit card company that relentlessly increases late fees and other nuisance charges to maximize “other” income, while card-holder retention and usage rates are dropping.

The marketer that continually increases the frequency of promotional e-mails because they are cheap and reach a lot of people, when opt-out and conversion rates of its very best customers continue to decline.

It shouldn’t surprise anyone that when we reward stupid, we get stupid.

But apparently, sometimes, it still does.

Retail’s zero-sum game

I’ve got some bad news for you if you are in retail in North America or Western Europe.

In just about every sector–if you strip out inflation–the size of the pie is not growing. Moreover, you would be hard pressed to argue that this will change any time soon. With few exceptions, the brutal reality is that the capacity and willingness of most of your customers’ to increase their category spending is stuck in neutral. Get used to it.

Sure, the high-end is doing a little bit better (for now), but that’s largely driven by relatively price inelastic demand and an influx of foreign shoppers. Chances are that’s not your situation.

And, yes, there is continued strong growth in e-commerce, but most of that is either channel shift or leakage to unprofitable pure-plays. Of course if you are Amazon it’s a totally different story. But you are not Amazon.

Perhaps you work at a handful of brands that offer something truly differentiated and highly relevant to a sizable part of the market. If so, you are grabbing a greater share of that pie. For the rest of us, that just means our share of the pie is shrinking. Unaddressed, that is almost certain to end badly.

More and more, the vast majority of retailers are playing in a zero-sum game. More and more, the opportunity to drive top-line through store openings has evaporated. In fact, most retailers will be closing stores and shrinking the square footage of the one’s that they keep. Shrinking to prosperity is rarely a sustainable strategy.

Simply stated, driving real growth only happens by stealing market share, by growing share of wallet. And that means being more relevant and more remarkable than the competition.

It demands developing actionable customer insight as a basis for competitive advantage. It requires abandoning much of what you got you to where you are and embracing strategies and tactics that will get you to where you need to be. It means taking on more risk than you are used to.

Sure it can be scary. But quite frankly you have no alternative.

Oh, and I’d hurry if I were you.

 

 

This is not for you

Maybe it’s somehow coded in our genes.

Or maybe society conditions us to mindlessly think that bigger is definitely better; that more is always more.

Perhaps our fear of failure drives us to cover every imaginable base?

Yet the brutal reality is that the list of organizations that require scale to succeed AND can actually pull it off is undeniably short. And friends, I’m here to tell you, chances are neither you nor your organization is on that list.

Alas the pull of mass is undeniable. Let’s reach more people. Let’s gain more subscribers. Let’s try to sell more stuff, regardless of customer relevance or potential for profit.

As media choices explode, and the world becomes ever noisier, our default tendencies seem rooted in casting a wider net and shouting louder. That’s just stupid. It’s also expensive.

The best marketing plans are crystal clear about who the product or service is for and what it takes to become highly relevant and remarkable for that precise audience. By extension, the other thing a great marketing plan does is to declare who the brand is NOT for. As most brands are at the end of the life cycle of mass-driven strategies–or never should have been there in the first place–this is a critical distinction.

Confident brands don’t chase their tail or get sucked into a race to the bottom by reflexively pursuing volume for volume’s sake. They spend their time in search of depth and meaningfulness with their core, not trying to rope some generic somebody into engagement with gimmicks or endless discounts.

More and more, there is great power in knowing who your brand is for and who it most clearly is not.

More and more, there is great freedom in declaring simply and confidently: this is not for you.

 

 

 

 

 

Timid transformation

Funny how many companies speak of the fundamental shifts affecting their industries but haven’t gotten around to changing much about they way they go to market.

And isn’t it peculiar how most brands talk about putting the customer at the center of everything they do yet–with few exceptions–they are still organized by channel and cling to a heavy reliance on mass marketing techniques?

As disruptive new business models emerge and gobble up market share in just about every sector of our economy, you would think that more industry incumbents would be motivated to change and to change profoundly. Alas, mostly we get rhetoric, empty promises and tepid experiments.

The transformative forces shaping consumer behavior–the connection economy, all things digital and so on–fray traditional loyalties, make many historically strong business models obsolete and only serve to accelerate the shift in power away from brands toward the customer.

So you would think that companies would realize the need to change as fast as their consumers. But evidence suggests that this rarely happens.

It’s far from obvious that timid transformations work.  So why then is that the path you’ve chosen?