Peter Krišťák, 24.09.2015

What Counts Is the Amount of Discount Not the Price!

Are discount community stores just simple stores selling expired goods at reduced price for low income social groups or is there anything more to them from the point of view of an entrepreneur?

 The title of this article is a bon mot popular with my entrepreneur friends. Even though it is more of a joke, there is some truth to it.

Best Before vs Use By

A lot has already been written about the discount community stores (DCS). This concept is not new and it has not been invented in our part of the world – even though in Bohemia the price war of retail chains in recent years has prepared very good breeding ground for it. This concept is based on the idea of selling goods – mainly food – after the “best before” or short before the “use by” dates. It may be still surprising but our legislations allow selling expired goods providing they are separately placed, properly labelled as expired and if their (poor) quality does not endanger the customer in any way. Thanks to a lot of coincidences (planning failures, accidents, catastrophes) such goods can be purchased in large quantities at very low prices and later on, also sold at very low price, too – either in the original packing or as one´s own brand.

Incredibly Low Prices

Everybody, without any distinction, responses to aggressive pricing policy. Yet, if the quality of any goods is all right at first sight, how is it possible that it can cost as much as 90% less than one is used to?

Our research and experience show that a well-functioning discount starts at as low as minus 20 %. Discounts at over minus 50% are already almost magical. But they have to be properly presented. A visual of the original price stricken through next to which an energetically highlighted new price is presented is one of the most widely spread symbols on the planet!

So from the point of view of marketing, a commercial success of a concept appears at first sight to be only a cleverly utilized gap in the market. The Czech “Levné potraviny” (Cheap Food) retail chain has gone beyond extreme discounts and added a deeper sense to the DCS marketing concept.

Shopping Changed into a Game

According to the statements of Ms Havriljaková , the founder of this retail chain, the times when mostly old age pensioners and self-supporting mothers used to do the shopping in their stores are long gone. Nowadays, their super cheap shops are normally frequented by all people – i.e. also by well-off customers. These, however, are not dependent on such shopping, so why do they do their shopping there? Our surveys and experience again reveal that price-sensitive individuals can be found in all social strata and they look for discounts simply because they get pleasure from it. They can easily spend more time looking for a bargain in order to enjoy the sweet feeling of satisfaction afterwards.

“Levné potraviny” seems to have understood this moment and on top of the extreme discounts they have added a customer promise of “new goods every day!”. This way they turned their natural weakness of the unstable offer in a strong point, namely surprise and fun. They experiment with the range of products - also beyond food - and varying it regularly, they play an innocent but well working game with the customers.

Wrinkles on the Foreheads of Conventional Retail Chains

Why can the expired goods not be found in conventional retail chains? Undoubtedly, one of the reasons is the concern that if they sold the goods after the expiration date, they would destroy their expensively cultivated image of suppliers of “freshness”. It can be assumed that ordinary customers cannot see any difference between the best before and the use by dates. That is why businesses prefer to reduce extremely the price of the expiring goods and to remove the goods which cannot be sold.

However, what is worth special mentioning is the business model of successful retail chains such as Lidl or Aldi. With some exaggeration I can say that the only thing in which their model differs from the usual DCS is that thanks to its purchasing power it does not need to buy expired goods – it can afford to purchase fresh ones. Generally advantageous prices and a regularly varying range of seemingly advantageous cross-sell goods (with a high margin!) is the foundation of success of these retail chains.

Fire Sale of Anything

It will be interesting to follow the future development of DCS. Will they just continue in the strategy of only very low prices or will they enrich their offer with offers at the price level which will be getting closer to that of their competitors? If they add more differentiated products (private brands, luxury foreign brands etc.), it will be difficult for the customers to compare prices and thanks to the already brilliant price image they will increase their profit.

At the same time, the DCS are building a specific and difficult-to-copy business model with trained staff, sophisticated purchasing process, pricing, logistics, storage, and quality control. Money back guarantee as well as effort for an individualized approach to the regular customer are excellent innovations, too.

It will also be interesting to follow if, after all, some of the bigger retail chains will not happen to set out on the path of price differentiation based on the freshness.

This article was originally published in the printed edition of the Czech magazine MarketingSalesMedia.

Peter Krišťák

Author is partner and founder of Pricewise

He specialises in pricing and revenue management

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