The Impact of Discounts on Brand Equity

Retailers like to offer discounts. Reducing the price of a popular item is a great way to bring in more customers, and it can be done extremely easily. Changing the product itself takes time, and might make it less popular with your customers. Lowering the price temporarily is quick, easy, and in the short term almost guaranteed to raise sales. In the long term, though, too-frequent discounting can seriously damage a brand's image. Luxury goods manufacturers like Michael Kors and Coach have recently felt the effects of this, adopting sweeping changes to their distribution policies in an attempt to restore brands damaged by department store price wars.

Your Brand is Your Greatest Asset

Your brand is what allows you to charge more than your competitors for a comparable product, and so maintaining its strength is essential. Having a high-quality product isn't enough. Consumers often aren't equipped to judge the quality of a product, and in any case, their perception of your product's quality is heavily influenced by the positioning of your brand. In blind tests, consumers famously have trouble telling Coca-Cola apart from cheaper, off-brand rivals, yet report a significant difference in taste when they can see the famous red label. Consumers do not see quality and price as unrelated. Higher prices are taken as indication of higher quality, even when that isn't necessarily true. Similarly, lower prices are associated with lower-quality. When a product is regularly discounted heavily, people assume that there is some reason why that product wasn't selling at its original price.

Is It Really a Discount?

While infrequent, modest discounting won't destroy your brand image, the problems start when consumers are trained to wait for sales. If consumers can reasonably expect to see your products discounted, particularly if retailers hold regular and deep sales, they wait for them to go on sale. They come to think of the discounted price as the "real price". In fact, big-name retailers like J.C. Penney have even been hit with lawsuits because so few people bought products at regular prices that their discounted prices were, in effect, based on a full price that never actually existed. When consumers see prices this way, they will base their perceptions of quality on the discounted price and ignore the original price. In fact, entire sectors have been poisoned by competitive discounting. No-one buys mattresses at the full retail price. The problem is especially serious for products that consumers don't need to repurchase often. They might not be able to wait a week to buy food or gas, but they can certainly choose to stick to the sale rack when buying clothing, for example. This even applies to loyal customers who enjoy your brand and know that it is worth purchasing, even at full price. Discounting might attract new customers, but it also allows existing customers to pay less than they otherwise would have.

Protect Your Brand Equity

As a manufacturer, it is essential to protect your brand's perception by preventing retailers from engaging in damaging discounting practices. Enforcing a Minimum Advertised Price policy prevents retailers from over-discounting your products, making it an essential part of your brand equity strategy. You can also work with retailers to ensure that your products are presented in ways that enhance brand equity, even when sold at a discount. For example, you could require brick-and-mortar retailers to give them an end-cap instead of displaying them on the same shelves as budget brands. Third, choose your retail partners carefully. Selling through premium stores can help to preserve your brand's image, as their brand image also depends on high prices and infrequent sales. Alternatively, partnering with stores known for their low prices can help to insulate your brand from the damaging effects of discounting. If your products are available in Walmart for a low price, consumers will see Walmart as responsible for that: their strong brand image as a low-priced retailer means that consumers will attribute the discounts to Walmart's across-the-board pricing policy, not your brand's quality.