The recession left many retailers and brand-owners scratching their heads, wondering how they were going to shift their inventory. The challenge was how to come up with a competitive edge at a time when consumers were short of money and uncertain about the future.

All too frequently, the answer was constant price drops that undermine a brand's position and take a terrible toll on the retailer's end-of-year figures. However, as the economy recovers, the smarter retailers are finding that what worked in a recession is a trump card when there is more money around.

Brand erosion

The major problem with slashing prices as a promotional tool is that not only does it undermine profit, it inflicts something even worse. As prices are constantly cut, brand reputation and loyalty are left in tatters.

Instead of becoming trapped in this downward spiral of price-cutting competition with rivals, retailers and manufacturers should recognise that a recession changes consumer habits. Seeking out value becomes habitual and shoppers are much less willing or able to buy on a whim. Such a change in behaviour becomes engrained, no matter how wealthy the individual may be.

In the UK we can see that supermarkets, for example, have responded by engaging in a price-war, stimulated even further by the arrival of the discounters such as Aldi or Lidl.

But when every day brings the same offer of "lowest prices", what then is the differentiator for a retailer? Even Lidl, which has established its credentials as a cost-cutter, has recognised that value is not necessarily the same as being cheap. It has higher-priced items at better quality but which still constitute good value.

All of which reflects the fact that constant price-reductions are not sustainable for retailers. Other promotional mechanics however can be equally as effective but do not have the same detrimental financial consequences. By being more progressive and creative, canny retail operators protected their margins and built market share - even in the depth of the recession.

Cashback and trade-ins

The solution to the challenge of standing out in price sensitive markets lies in the use of more innovative promotional tools such as risk-managed cashback and trade-in promotions.

Tailored to a retailer's aims, they recognise that there often appears to be little difference between what brands have to offer shoppers when they are at broadly the same price points. Consumers who want to buy a new laptop, for example, will do their research and come down to a shortlist of two or three products. Then they will go into a store to have a look at the models they are interested in.

The factor influencing whether they buy will be the deal that is available on the day. If a store or a manufacturer has a significant cashback or trade-in offer to put before the consumer, it will achieve a sale.

For the shopper, a cashback or trade-in offer holds out the prospect of gaining as much as £200 on a £600-£700 purchase, which is a very attractive proposition by any standard. For the retailer, these stand-out offers are a much more affordable way to grab shoppers' attention with hard-hitting sales promotions and build market share for the store operator or manufacturer in the process.

These promotional mechanisms, based on science, rather than intuition, are as effective as price-drops but do not damage brand perception and importantly - cost a lot less. They make it much easier for consumers to upgrade to new products by reducing the price of change by as much as 40 per cent and can double sales at minimal cost.

While the idea of such a substantial reduction may seem unaffordable, the value of the promotion lies in seeding the idea of an upgrade or purchase and prompting customers to buy. This is because the outcome of the offer can be expertly calculated, based on historical data about customer behaviour, take-up and the experience of how similar promotions work in the market.

So while a generous guaranteed trade-in amount against a new laptop drives someone to head in-store and invest in an upgrade, they may later decide not to take up the deal if they discover that they could get a little more for their old laptop by selling privately. In this scenario the customer bought the replacement laptop which means the retailer gets the sale whilst the customer never actually claimed on the promotion. Likewise, the buyer is also satisfied with the outcome because they have even more money to put towards their new model.

Where brands are concerned about an unaffordable rate of redemptions, the risks are underwritten with insurance, further negating any potential exposure to damaging liabilities.

Whatever the take-up, customer experience is key. For this reason experienced sales promotions providers with a reputation to protect will guarantee that the product redeemed in a trade-in promotions is disposed of in accordance with industry standards. Furthermore, they will have accreditation to ISO 9001 and ISO 27001 level, guaranteeing customer service quality and data security.

This close attention to detail extends to providing digital dashboards so that retailers can see precisely how well their risk-managed promotions are faring. A data-driven approach of this kind also removes any subjectivity from analysis of the results, which are based on hard facts.

Premium success

Not only do such promotions achieve uplift in sales at reduced cost when compared with price-drops, they also increase purchase-frequency. Deals can be underwritten so that consumers receive a percentage of the value if they upgrade within an agreed timescale, making it more likely they will opt for a new model. This mechanism allows a retailer to build share from within its existing customer base - a huge benefit in a recession and one that is a major profit-booster as markets improve.

And when a product is suffering because its manufacturer has a poor reputation for reliability, just a single successful cashback or trade-in promotion is capable of turning round customer perceptions.

Experience shows that, even in a recession, cashback and trade-in promotions will grow market share. As promotional mechanics they have proved to be highly effective in lean times and crucially, they remain in tune with the changed and more value-driven consumer habits that are the recession's legacy. The evidence is that they will remain highly effective as the economy grows.

A business that is prepared to divert one or two per cent of revenue to pay for them, will find the outlay brings handsome returns.

 

By Andrew Marwick, managing director at Opia. 

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