Price cuts the norm as consumers seek value

MEDIA & MARKETING:IF THE events of the past year have taught marketing professionals anything, it's that no one can accurately forecast what the future holds. Companies that held their pricing steady through 2009 to maintain brand integrity are now rowing with the deflationary flow and slashing prices to generate sales.

A recent survey by Amárach Research asked members of the Sales Institute of Ireland what sales approach was the most successful. One in three said lower prices worked for them. Now even Unilever, the consumer products giant, seems to agree.

From Monday next, Unilever Ireland, the second-largest advertiser in the State, is knocking an average of 11 per cent off the price of such household brands as Flora, Dove and Surf.

Managing director Conor Kilduff says: “These are challenging times for everyone, a time when everything is being reassessed and when our customers are increasingly searching for better value. We are doing all that we can to help our retail customers drive down prices and drive up sales volumes.”

However, Damian Devaney, marketing director of mobile phone network O2, believes businesses relying on price cuts to drive a market leadership position are making a mistake.

“Just cutting price gives your company no point of difference and your strategy can be easily copied. Companies have to avoid a race to the bottom on price cuts and the way to maintain customer loyalty is to give real value and differentiate yourself from the competition in ways that you think are important,” he says.

“You have to give customers real monetary competitive value. No amount of positioning will get over that. But price cuts alone are not sustainable unless you also give your customers extra value, product innovation and exclusive offerings which differentiate your company from the competition. All of these initiatives increase the critical thing for every company, which is customer loyalty. In every market, if your only lever is price, [that] is the easiest thing for your competitors to copy.”

BMW Ireland reduced prices by importing new and demonstrator BMW models from a UK associate and promoted the initiative extensively.

“It meant our customers in Ireland were paying between 10 and 12 per cent less for their BMW and we were still protecting the value of the used BMW car,” says Michael Nugent, marketing director of BMW Ireland.

“Our argument to head office was if we didn’t buy the cars from the UK, our customers were going to do it anyway. We couldn’t just reduce prices because that would have impacted on the value of used BMW cars both for our dealer network and our customers. You do that at your peril because you will never be forgiven for it.”

BMW’s pricing strategy in Ireland is informed by what dealers and customers are saying on the ground. “Get the people in your business involved in talking to customers and suppliers. Rather than me trying to solve the problems on my own this year, I had an awful lot of help. You never know what gems you will get out of those conversations and you know you are making a more rounded decision. Most importantly, though, you need to have a plan.”

For 2010, Nugent’s firm is back importing new cars from Germany after securing agreement from head office in Munich for a price reduction that will see the top-selling BMW 520 series fall in price from €47,000 to €40,000. That reduction is substantially ahead of the annual 4 per cent decrease in average new car prices recorded in September.

“I have never come across a situation like this and I hope to God I never do again. Normally, we would not consider a price reduction of that amount. But I would argue that we will not damage the used car market because a one-, two- or three-year- old 520 is worth what it is in the marketplace irrespective of what the new car price is. The reality is if someone wants to go to the UK and buy it cheaper, that is what they will do,” says Nugent.

Devaney believes that the forthcoming budget will have a massive impact on customer sentiment. “Depending on the measures proposed in the budget, it could have a seismic effect on confidence and spending power for the first half of next year.”

Michael Nugent is cautiously optimistic about the year ahead. “We are getting enquiries which we were not getting this time last year. I think people are fed up being fed up.”

siobhan@businessplus.ie