Weak Consumer Sales: What To Do?
What can a retailer do about falling demand? In yesterday’s post about restaurants I discussed possible causes of weak sales at restaurants. The subject has become more interesting with some retailers announcing weakness, as Calculated Risk mentions on his blog.
The Wall Street Journal article about restaurants mentions coupon specials and value meals. The economics behind this is “price discrimination.” You try to find a mechanism that allows you to charge low prices to the people who are price sensitive, while charging high prices to those who are willing to pay more, if they have to. Good example is airlines offering cheaper prices with weekend stays. Business travelers are less price sensitive than leisure travelers, and the weekend stay is a crude way to separate the two groups.
For restaurants or retailers, it becomes harder. I’m not very price sensitive, but I wouldn’t mind using a coupon. And if I liked the item on the value meal list, I’d order it, even though I had walked in planning on spending more. So shifting to value options risks losing revenue from higher spending customers.
The second risk, related to the first, is that some shoppers equate price with quality. I know, it’s stupid, but surveys have shown that teenagers are apt to believe that things on sale are inferior. (I’ve seen the ties on sale at Nordstrom’s, and I must admit they are the ugliest ties in the store.)
The final risk is upsetting the desired experience of the upscale client. Once, while visiting Honolulu, I met my friend the distinguished economist David Ramsour. I mentioned that the Royal Hawaiian Hotel had a high vacancy rate, and I wondered why they didn’t cut prices until they had filled up the hotel. He remarked that the richest people in the world don’t want to stay in a hotel with people like me. There’s some truth in that even in a mid-priced restaurant. I don’t want to sit next to the Clampett’s when I’m eating out, and a restaurant that attracts too down-market a clientele may lose its high rollers.
However, the upside of value pricing is that the business’s pricing should reflect its customers situation. If the number of low-spending customers is rising, and the number of high-spending customers is dropping, then it’s time to make some adjustments. These changes, though should be fairly small. If a Morton’s steakhouse tries to operate at the same price points as an Outback, it will lose its top customers without beating Outback, which really knows how to run a mid-priced restaurant chain. However, trimming a couple of bucks off it the price of its lower-price fare, offering a less expensive wine or two, does make sense.
