Road Map for Deflation Survival 6

A Road Map for Deflation Survival

BY KATIE MULDOON

Ah, you know the price increases you wanted me to put through in the catalog?”

“You mean the catalog I'm looking at doesn't already have them?”

“Well, I took a quick look at our competition and every one of them has lower prices than we do — before the discount.”

“Not to worry. Our positioning will be ‘Own the most expensive because you once could afford it.’”

Dreaded deflation, so unfamiliar to most of us that we aren't even sure what it means, may well be making a comeback. A recent issue of Fortune magazine even dubbed it the “topic du jour.”

Inflation can be a killer for your business. Put very simply, deflation means that most everything costs less…you know, like all those products you've been putting on sale. Price increases become a distant memory and consumers hold even tighter to their purses and wallets, waiting you out for even further discounts.

Unfortunately, not everything will cost less. Dan Naistadt of New York's Turtle Map Strategy Advisers notes that deflation is “not widespread now, but selective and most expense categories, such as healthcare, insurance, fuel and wages, are actually inflating, a scenario that presents catalogers with a new, extremely challenging set of economic conditions to navigate.”

Deflation is a complicated business. Most economists will agree that one major contributor is excess inventory, like all that stuff sitting in your warehouse right now. The threat of terrorism, as well as unemployment and ballooning debt, are other reasons.

Consumer debt is truly frightening.

Early this year, The Washington Times reported that “private sector debt has skyrocketed from 100 percent of disposable income in 1960 to 120 percent in 1980 to nearly 180 percent today.” Catalogers will have to squeeze out market share in what will become a desperately competitive market, if deflation becomes more prevalent.

Oh sure, the Fed will probably continue to lower interest rates, maybe even to Japan's latest negative-interest deal. (Yes, some banks in Japan are paying people to borrow money.) President Bush has what he believes is a plan to get the economy going. If worse comes to worst, the US of A could even print up some money to expand the supply.

Catalogers have only voter control over the big economic picture. But we have total control about what we can do to survive deflation. We need to plan now, in deflation's early stages, for what could become a real torment.

For starters, really and truly know how much your competition is charging for their products. Get on their mailing lists and order so that you get every customer catalog. Then get on the list again (under a different name) and don't order, so that you also get every catalog that goes to prospects. Keep a tight tally of offering prices and promotions. Watch carefully for any price tests. In this environment, you need to do your own price testing, so try to get as much guidance from what others are doing as you can.

Price testing is a must. You need to know what the market will bear. Sometimes just dropping a price can actually depress response. Yes, we could be experiencing the early stages of deflation, but don't overreact by just chopping prices. Through extended testing and research, know what the right price is based on, as well as its effect on response and revenue, both initial and long term.

Understand that price reductions most likely do not have to be made throughout the book. Evaluate categories for themselves and their effect on each other. For instance, can lowering the price on a jacket allow you to keep the matching pants at the same retail? Test configurations that allow you to offer bargain packages (also called bundling). The computer folks are geniuses at this. Watch, learn and adapt their methods.

Look at geography. Gasoline prices, grocery prices, drugstore prices…these and others vary by location. So should ours.

Make certain your new prices continue to reflect your catalog's overall strategy and positioning. If you haven't been promotionally based up till now, it's unwise to suddenly start screaming about how low your prices are. A better approach might be to brag about a new, lower priced resource for your goods, one that allows you to pass the savings on, as some catalogers have done.

Go back and talk to your vendors about price decreases and incentives. Ernst & Young's December 2001 Retail Industry Accounting Policy Report asked several business segments if they “receive money from vendors to fund programs of various natures.” Seventy-one percent of direct marketers responded yes. Sounds good? Not! One hundred percent of department stores, grocery and drugstores receive money from vendors.

From our experience, vendors are open to discussing almost anything that will help them make more money. Talk to them not just about cutting costs, but sharing expenses, such as additional mailings or free package inserts. If marketing costs are lowered, margins can temporarily be reduced to be competitive, if necessary.

Attempt to lock in your customers even more. I found it interesting to be so willing to open a Bloomingdale's charge account once I learned about its loyalty program. In the past, I wouldn't have wanted to give up airline points, but who wants to fly anymore anyway? It's much more compelling to enjoy a fantasy buying spree with points earned at Bloomie's. Don't ignore loyalty-building programs if they haven't worked for you before. Motivations have changed greatly in the last few years, and you may be able to construct a successful program now, based on those new attitudes.

Another way to Velcro your customers to you is through a proprietary credit card. Yet, according to Ernst & Young's study, only 29% of catalogs had proprietary charge cards vs. 100% of department stores, 60% of mass merchants and discounters, and 35% of specialty stores. With a host of proprietary charge-card companies making it easy and relatively safe to offer such a card, why aren't more of us doing it?

And the last word: Concentrate with all your might on private label. If they can't get it anywhere else, price comparisons are beside the point.