The Economics of Discounting

"Discounting smacks of desperation," says Liz Gunnison. "That's why brands like Louis Vuitton (LVMUY.PK) and Apple (AAPL) don't do it."

Is this a common strategy, or is it a very tough one?

All department stores have sales, no matter how high-end they might be; I'm quite sure that a number of LVMH retail brands do as well, even if Louis Vuitton stores specifically do not. Sales are a great way of moving inventory which otherwise wouldn't sell, and of broadening a retailer's customer base. And even Apple strategically drops its prices; it just does so on a permanent rather than temporary basis.

My feeling is that a no-discounting policy is something which can work in rarefied circumstances, but that it isn't necessarily a model to be emulated. What's more, when it does work, it can work at the low end (Wal-Mart, I think, has the same policy) as easily as at the high end. If Starbucks (SBUX) can make money by selling cheaper coffee in the afternoons, they should. Right now, they need any boost to profits they can get.

Comments

[kapsrules:]

Infact, customers respond well if something is on sale or discount taking it as their fav brand available at cheaper prices (which might not be the case)..i dont think it gives any impression of desperation

2008 Aug 06 09:30 AM

[Logikos:]

In the early years, I think Starbucks appealed to a customer base where a "no-discount" attitude was accepted and this attitude enhanced branding. However as Starbucks expanded, particularly into stores like Target, they encountered different customer expectations. When in Rome ..... or leave Rome. Discounts dilute branding but "no-discounts" closes stores.

To my mind, this is the yet-to-be answered question: Who is Starbucks? A unique experience in specialized settings commanding $4 for a cup of coffee? Or the global coffee shop where everyone gathers? They're trying to be both, and that's a tall ... er, venti ... order.

2008 Aug 06 11:12 AM

[wjewje:]

A cup of good coffee costs $1.95. That is a far cry from your $4.00 ?


On Aug 06 11:12 AM Logikos wrote:

> In the early years, I think Starbucks appealed to a customer base
> where a "no-discount"... attitude was accepted and this attitude
> enhanced branding. However as Starbucks expanded, particularly into
> stores like Target, they encountered different customer expectations.
> When in Rome ..... or leave Rome. Discounts dilute branding but "no-discounts&quo....
> closes stores.
>
> To my mind, this is the yet-to-be answered question: Who is Starbucks?
> A unique experience in specialized settings commanding $4 for a cup
> of coffee? Or the global coffee shop where everyone gathers? They're
> trying to be both, and that's a tall ... er, venti ... order.

2008 Aug 12 08:34 PM