Deep Discounts during the Recession can damage Brands.

Discounting prices deeply during a recession is a mistake, according to a new Yankelovich study, and can damage brands in the long run.
 
Although price is a starting point – products and services must fit into consumers’ budgets – consumers have negative reactions when brands discount their products and services in response to the recession, according to the Dollars & Consumer Sense 2009 study, conducted in January 2009.
 
When asked what they assume when a brand lowers its prices during economic times like these, 70 percent of consumers responded, “The brand is normally overpriced,” and 62 percent said they assumed that “the product is old, about to expire or about to be updated, and the company is trying to get rid of it to make room for the new stuff.”
 
In contrast, when consumers were asked what they assume when a brand does not lower its prices during economic times like these, 64 percent reported that they assume that “the product is extremely popular,” and 64 percent assume that “the product is already a good value.”
 
“Lowering prices during a recession clearly raises suspicions among consumers,” explains J. Walker Smith, Ph.D., president of the Yankelovich MONITOR and Executive Vice Chairman of The Futures Company. “Drastic price cuts like those seen during the past holiday season create a double-barreled risk for brands. First, such price cuts generally fail to generate enough business to pay for themselves, although clearing inventory is of some value. Second, they create long-term difficulties in terms of consumer expectations.”
 
Those “deflationary expectations” cause consumers to postpone purchases because, when they see that a price is reduced, they anticipate that prices will come down even further. “These expectations of deflation are difficult to break and can keep a category mired in unreasonably low prices for years,” Smith notes. About half to 60 percent of the study respondents think that when companies lower prices, it means that prices will go down further if they wait long enough. And roughly 50 to 70 percent think that brands that do not lower prices will have to do so eventually.

Now, it’s more important than ever for companies to deliver the right incentives to the right consumers because they’re not all motivated by the same attributes. To help companies do that, Smith and his research team developed the ASSAY model as part of Dollars & Consumer Sense 2009. The model makes the connection between brand incentives and consumer budgeting strategies.
 
The study also divides consumers into eight key segments to show the wide variation in consumers’ economizing behaviors and lifestyle priorities, and it suggests how marketers can appeal to each segment. For example, one of the eight segments is called the Postponers; it represents 12 percent of all consumers in the United States. These consumers are distinguished by the fact that they are putting off purchases in an effort to economize. Their economic anxiety is moderately high, and their financial situations are fair. They have made moderate to a lot of spending cuts. This segment consists of the highest percentage of GenXers, or thirty-somethings. They skew female and heavily Caucasian. They are better educated than consumers in other segments, more likely to be married and have higher incomes. Postponers are looking for ways to get what they need without incurring the burden of paying now, so they are juggling and putting things off.