Maybe you remember when, specialty U.S. retailer Neiman Marcus and discounter Target Corp. announced a 2012 holiday campaign during which both chains would sell a selection of co-branded items at the same price. These two companies occupied near-opposite ends of the retail spectrum. Neiman Marcus was (and still is) known for its well-heeled clientele, high prices and the expensive gifts in its annual Christmas catalogue. Examples include life-size Lego replicas of you and your beloved for $60,000; a private concert with Elton John costing $1.5 million; and a mermaid swimsuit, complete with mermaid tail and swimming lessons, for $10,000. Target, on the other hand, is a discount retailer known for its cheap-chic sensibility, and whose clientele have a median household income of US$64,000 a year.
This high-low tie-up has the hallmarks of micro-segmentation, a process for identifying attractive groups of customers who can be served similarly. As with any good segmentation, this process relies on in-depth customer research and transactional analysis. Using this approach, the retailers appear to be working towards mutually beneficial goals: first, to expand Neiman Marcus’s range of customers, particularly among younger and less-affluent shoppers, and second, to retain Target’s customers through association with the Neiman Marcus name and “glow”.
What to Consider Before You Rebrand
This partnership held far greater risk for Neiman Marcus. Working with well-known designers was nothing new for Target, which had built a reputation for smart designs at lower prices. Neiman Marcus, on the other hand, was gambling with its aura of exclusivity and a pricing power that had allowed the company to grow in the face of a troubled economy. Managers contemplating a similar pricing move, may want to consider the following:
Consider Saying No
The most important word in pricing is “No!” In fact, your pricing strategy is defined by whom you choose NOT to do business with. If you are not saying “no” on a regular basis, you are most likely trying to be all things to all people. By saying “yes” to this partnership, Neiman Marcus may have gained access to a big pool of Target customers, an exciting proposition. Lacking proper program oversight however, the high-end brand could have lost control of perhaps its greatest asset: exclusivity. This feature of Neiman’s business model is a polite way of saying “no” and significantly increases pricing power with its core market.
Your Brand Image
It’s important to be selective in your promotions and make sure they are connected with your product’s brand image. Promotions have begun to define the American retail landscape these days and it seems as if consumers won’t even consider buying unless they see a 50% off promo. We recently completed a project for a high-end women’s fashion retail chain that had allowed a proliferation of discounting. The result was that consumers lost sight of the brand’s value and were focusing increasingly on price — a dangerous situation. To get out of this vicious cycle, the company first had to devote itself to resetting the suggested retail price to a realistic level. The company was then able to concentrate on enhancing the shopping experience and reduce the level and frequency of discounts.
Finally, remember that segmentation is a critical consideration in any promotional strategy. When planning a campaign, ask yourself whether the added volume you may be drawing in is actually profitable to your business. A consumer packaged goods company learned this lesson the hard way when it allowed a deep discount program to expand unchecked. Although the company was aware of the margin lost to this program, it grew accustomed to the increased sales volume and was ambivalent about what action to take. A brand assessment showed that a more structured promotional program would return the product to its proper value position while improving the company’s profitability by several million dollars (about 1% of revenue). The key lesson learned: share is vanity, profit is sanity!
Any company considering a high-low retail approach would be wise to remember the experience of French clothier Lacoste. Known for decades as an elite sporting label, Lacoste lost control of its brand during a partnership with Izod, which had sought to enhance its prestige by purchasing the rights to market Lacoste in America. By the 1980s, the Lacoste brand had become overexposed and lost its elite status. Today the crocodile has regained its luster, but only after considerable time and effort spent reigning in branding arrangements and taking back control of the Lacoste brand name and logo.
Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve world-class pricing competency. Paul occasionally publishes a pricing column in the FP Executive. He also writes for the Pricing Solutions Club. Article written in partnership with David Schnetzer, Senior Consultant of Pricing Solutions