Beruflich Dokumente
Kultur Dokumente
Thomas F. Schuster
No. 87613
HBR
NOVEMBER–DECEMBER 1987
A man once worked on the 89th floor of the Empire volume per square foot. Squeezed between discount-
State Building. One muggy August day, he began to ers below and specialty stores above, their managers
imagine how nice a breeze in his face would feel. believe they need to promote to survive. Moreover,
When he opened the window, he suddenly realized retailers have an age-old tendency to overdo a good
he could probably get the world’s best breeze in the thing—and they all ‘‘know’’ price promotion works.
face—simply by jumping out and falling face down- They’ve been wrong. Department stores have over-
ward. By the time he reached the sidewalk, however, promoted to the extent that most of their shoppers do
he understood what a high price he was paying for not routinely buy at full price. They wait for a sale.
that breeze in the face. Promotion becomes overpromotion when it is so
Through my marketing experience I have watched frequent that it depresses regular, full-price business
too many of America’s major manufacturers and re- by loading up consumers at a discount. It pays them
tailers of brand-name consumer products opt for a to wait for the next sale rather than buying at full
metaphorical breeze in the face—by relying too price. Of course, a certain amount of price promotion
much on price promotion to stimulate short-term is necessary to generate traffic and consumer trial,
volume. These companies suffer the historically high especially of new items, but the most successful lines
price exacted for the thrill of this breeze—the death do such promoting only once or at most twice a year.
of their full-price, full-margin business over the long The way you’ve structured distribution directly
haul. affects your ability to control promotion. If you have
Because they have overused price promotions, for a wide distribution network, with little control over
example, department stores now do less than half your distributors, you cannot control price promo-
their normal sales volume at full price (and full mar- tion. If you have selective distribution, you can do
gin), versus 80% just a few years ago. Leading up to a lot to make certain that your distributors aren’t
this situation is the fact that there are too many overpromoting. Finally, if you have exclusive distri-
department stores; each can generate only so much bution, like Steuben Glass with just one outlet in
each city—then you can control both price and pro-
Thomas F. Schuster is president, U.S. operations, Coats Viyella motion. The message is that if you don’t watch distri-
Knitwear, Inc., with responsibility for several branded and bution, you will lose control over price.
private-label apparel divisions. He has more than 15 years of
If you begin to hear the following warning bells,
senior-level marketing experience, including terms as senior vice
president and principal of Hartmann Luggage Company and pres-
you’re overpromoting. The first bell sounds when
ident of Great American Knitting Mills (Gold Toe and Arrow certain customers ask checkout clerks when a line
socks). will go on sale—before they buy. The next bell
Copyright q 1987 by the President and Fellows of Harvard College. All rights reserved.
sounds when post-promotion analysis shows no in- was illegal, unethical, and illogical—the result of a
crease in volume or profits. The final bell tolls just desperate company trying to remain profitable in a
before Chapter 11, when you do business only during terminally overpromoted industry.
a sale. At one point, Gorham tried to shake off the over-
promotion fever. The company realized that the mar-
ket for sterling flatware was still shrinking, no
matter what discount it offered. Gorham went to
Failure & Near Failure year-round, true-value prices. But the new approach
was too late to change the rules. The industry had
Overpromotion needlessly gives away profits
taught customers to wait for a sale. Soon Gorham
while simultaneously eroding the base of full-price
was back to running sales of 50% off inflated retail
business. Three examples will help explain its devas-
prices.
tating impact.
Retailers of bras have watched their margins
The silver business illustrates the peril and irony
shrink over the last five years because of too many
of overpromotion. After 15 years of overpromotion,
sales. Manufacturers have been hit even harder.
the silver market is still shrinking, most of the do-
What business does exist is more expensive since it
mestic silver companies have disappeared, the indus-
comes in lumps only during sale periods.
try has lost consumer credibility, and full-price
The bra industry did not recognize consumers’
business doesn’t exist.
slow but steady change to softer, more fashionable
It all began with a shift in demand. By the early
bras from functional support ones. Concurrently, re-
1970s, a change in consumer life-styles caused a de-
tail prices began to break the $20 mark for the first
cline in big weddings. Silver flatware and hollowware
time. Many bra companies saw their volume fall off.
lost much of their importance and desirability; sales
Manufacturers and retailers went for a quick
dropped dramatically. Most of the old-line silver
breeze in the face by turning to price promotions
companies failed (or refused) to recognize the decline
until today, all agree they can generate retail volume
as a fundamental shift in consumer demand. They
only at 20% or more off regular retail prices. They
reasoned instead that a good old-fashioned sale
have successfully trained customers to wait for a
would get their silver business back on track. The
sale—but these same customers still buy an average
price of silver had nothing to do with the rampant
of only six bras a year. The result is constant unit
sale activity that ensued—it was the result of mar-
volume at lower prices, which means lower profits.
keting misjudgment. To make matters worse, com-
panies kept retail prices artificially inflated to make The men’s sock industry is standing on the win-
the planned ‘‘sales’’ affordable; consumer savings dowsill, trying to decide whether to jump off and feel
were largely imaginary. that breeze. Department stores have pushed them
The sale activity began at 20% off retail prices. onto the ledge by declaring a need for more price
Then one particularly aggressive company discov- promotions to build market share. But will it work?
ered that 30% off worked even better. The sheep Probably not, because it’s virtually impossible to
syndrome took over as competitors quickly followed expand the market for dress socks. The average male
with their own bigger markdowns and destroyed the consumer goes through 12 pairs of basic socks in a
first company’s competitive edge. By the late 1970s, year. All the price promoting in the world can’t
silver products sold only when they were marked change this.
50% off the inflated retail price. Department stores are pushing for the promotions
One large company finally ended up with two sepa- not to sell more to individuals but to take business
rate wholesale price lists: a department store list away from competitors.
with year-round ‘‘sale’’ wholesale prices and a spe- At Gold Toe, we fought these trends. As a matter
cialty store list with much higher wholesale prices. of policy, we sold only to department stores. Gold
Both lists suggested ‘‘normal’’ retail prices that were Toe’s special heel and toe reinforcement has earned
openly regarded as a joke. The manufacturer ex- it an intensely loyal consumer base and two-thirds
plained that department stores could sell their prod- of the average retailer’s sock business. It has long
ucts only when they were on ‘‘sale’’ and needed lower reminded its accounts that when 80% of sales are at
wholesale prices to pay for the promotions. Specialty full price, the business continues to grow each year.
stores could still do some ‘‘normal’’ business and Further price promoting is unnecessary, won’t pay
therefore could pay higher prices for the merchandise out, and may hurt sales at full price and full margin.
which, in turn, provided the manufacturer with its Nonetheless, several Gold Toe retailers argued
only chance of making a profit. The whole approach that they could increase market share with more