Rafi Mohammed

Want a Discount? Pay Upfront...

Posted on November 11th, 2008 (0 Comments)

When most stores decide to discount, they just lower their price. Right? Amazon, Wal-Mart…they markdown their prices. A friend recently shared with me an e-mail from the Wegmans supermarket chain announcing they were lowering prices because “During difficult times likes these, it's okay with us (Wegmans) if we make a little less money.”

In contrast, Starbucks’ recent efforts to lower price involved rolling out a Gold card, which is targeted for “people who really love Starbucks, those of you we see everyday.” The primary privilege of paying $25 for Gold card membership is a 10% discount. Therefore, you have to spend $250 a year (which is about 6 lattes every month) before you are ahead of the game. Barnes & Noble has a $25 similar deal that offers discounts for both online and in-store purchases.

So why charge customers for the privilege of a discount?

  • Maintain brand. Starbucks isn’t known for having the lowest prices nor is B&N. For example, B&N offers my book at $24.95 for non-members and $19.96 for members. In contrast, Amazon sells my book for $16.47 (no membership needed). It’s clear that B&N isn’t striving to be the low cost leader.
  • Provide discounts only to those who request them. If someone doesn’t need a discount, why give it to them? A customer who “ponys up” $25 is demonstrating their interest in future discounts.
  • Capitalize on the law of diminishing returns. These membership discounts are targeted towards high volume customers. A 10% discount can help keep these “best customers” in the fold as well as maintain their frequency. That said, these membership discounts neglect low volume customers.
  • There may be value in being a “member.” American Express has made its name by advertising “membership has its privileges.” Some may find value in being a Gold Starbucks member.
  • Finally, in Starbucks’ case, a slew of $25 signups will add profits in what’s looking like a very challenging quarter.
  • This strategy may pass muster in a strong economy: it courts and coddles a company’s best customers. But today, especially for luxury brands, an aggressive pricing strategy needs to go far beyond offering a 10% discount to high volume customers who pay $25. Case in point, yesterday’s earnings report by Starbucks: profits were down 97% and same store traffic slumped by 8%.

    In this economy, every company needs to be hyper-proactive about their pricing strategy.

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