Deep Discounts Can Damage Brands

Report shows short term fix can have long-term effects
Posted March 12, 2009

According to a Dollars & Consumer Sense 2009 study, discounting prices deeply during a recession can damage brands in the long run.

The report was released by The Futures Co., a consumer-trends research company that was formed in 2008 by the merger of Yankelovich Inc. (Chapel Hill, N.C.) and Henley Centre HeadlightVision (London).

Although 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 study, 70 percent of consumers assume when a brand lowers its prices during economic times like these that the brand is normally overpriced. Sixty-two percent say they assume 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 doesn’t 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," says J. Walker Smith, executive vice chairman of The Futures Co. "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.

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.