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A Breeze in the Face

Thomas F. Schuster

Harvard Business Review

No. 87613
HBR
NOVEMBER–DECEMBER 1987

A Breeze in the Face


Thomas F. Schuster

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

HARVARD BUSINESS REVIEW November–December 1987 5


frequent promotions. Recently, retailers stepped out
of line in two major cities to price-promote Gold Toe Exhibit II Breaking Even at 25% Off
on their own. Other Gold Toe retailers in those cities
immediately responded. Consumers got their Gold
25% off
Toe socks for 20% less, and total consumption and Normal break-
each store’s market share remained constant over price 25% off even point
the course of the year. But, boy, did those stores give
away profit dollars! Units sold 1 1 2
Retail $1.00 $ .75 $1.50
sales
Pretty Poor Economics Wholesale 1 .50 1.50 11.00
cost
A look at the economics of a store promoting a Gross $ .50 $ .25 $ .50
profit
staple product on its own to ‘‘build market share’’
tells the story. The graph in Exhibit I clearly illus-
trates that the break-even point on unit volume goes
up very sharply as stores discount—it is highly un-
likely that such promotion will break even on gross Exhibit III The Cost of a Promotion
profit dollars. The graph reflects simple arithmetic.
At a common discount of 25% off, a store must dou-
ble unit volume just to break even on gross profit Units Units Total for Total
sold at sold at the without
dollars. 25% off full price promotion promotion
At the normal retail price of $1, the company
makes 50 cents when it sells one sock. At 25% off, Units 20 80 100 100
selling one sock will generate only a 25–cent profit. Retail $ 2.63 $ 3.50
Exhibit II shows that, to make the same amount of price
profit (50%), the company will have to double its Margin .333 .50
unit volume. Gross $17.52 $140.00 $157.52 $175.00
More important, even this theoretical relationship profit
does not hold. Other stores in the same market will
always, eventually, meet the lower price. It’s highly
unlikely therefore that unit volume can ever actually
double. In fact, consumption of and demand for sta- volume doubles, the number of units sold each year
ples remain constant over time. Even if promotion stays the same.
In this example, the result of the promotion is a
10% decline in the store’s gross profits. As Exhibit
III shows, the store normally sells 100 units a year
Exhibit I Where You Can Break Even of a $3.50 retail item at a 50% gross profit. It pro-
motes at 25% off during a month that normally ac-
Gross Break-even counts for 10% of annual unit volume. When the
profit units
margins promotion doubles volume for the month, the store
feels lucky. But in the end, the store does not increase
50% 2.5
long-term consumption and sells the same 100 units
for the full year.
40 2.0
Unit volume is unchanged, but gross profit dollars
are down 10%; at full price the profit would have
been $175. In addition, expenses were up because
30 1.5 the promotion meant the store had to handle double
the usual units during the month of the promotion.
In the long run, giving away profit dollars is a
20 1.0
minor expense in overpromoting. The real cost
shows up later when consumers learn the multibil-
lion-dollar lesson all too well—don’t pay full price
for anything.
% –20 –25 –30
Discount Packaged-goods manufacturers have discovered
how good a breeze in the face from discounts can

6 HARVARD BUSINESS REVIEW November–December 1987


feel—and how much it can cost. Manufacturers have turers should avoid the breeze in the face of bumping
offered discounts without any trade-buying restric- sales by expanding distribution to anyone whose
tions—’’forward buying.’’ Campbell sells up to 40% check won’t bounce.
of its annual soup volume during a six-week discount Remember to work with retailers to rediscover the
period. This increases the company’s manufacturing rest of the marketing mix, to boost sales and profits
and distribution costs without increasing long-term over the long haul. Train your salespeople to advise
consumption. and guide their accounts on the total department
Campbell’s managers defend their actions by category and not just on their particular line. Re-
pointing out that they have also introduced pre- member that retailers properly place their self-inter-
mium-priced line extensions whose profits offset the est first. Manufacturers must learn to analyze
discounted sales of the basic line. But that strategy retailers’ businesses from their point of view.
doesn’t justify the original overpromotion. There is At Gold Toe, sales representatives were positioned
no basic relationship between the two strategies. It as ‘‘sock consultants’’ who worked with department
just doesn’t make sense to offer unlimited discounted store managers to build volume and profits for the
merchandise. entire department. They understood main-floor sales
per square foot by each product category and could
recommend the appropriate sock department size,
layout, lighting, and display, as well as explain re-
Avoiding the Breeze gional consumer preferences. Since most socks are
sold from pegs, consultants even analyzed sales and
The best way not to fall on your face is not to jump profits per peg for the retailer.
in the first place. Try to offer the best product instead When Hartmann Luggage worked with a major
of the cheapest, or offer some difference to generate department store account to analyze its store-by-
trade support and consumer pull-through without store stock position, it discovered serious out-of-
cutting prices. Gold Toe ships its retailers 98.5% of stocks on key SKUs, revised basic stocks, and nearly
an order within 48 hours and gives consumers readily doubled the account’s retail sales—all at full price.
identifiable product quality. As a result, Gold Toe Manufacturers and retailers have also discovered
does 80% of its volume at full price and full profit. the value of in-store display. Gold Toe’s sock consul-
Next, zealously police your distribution to make tants use display kits to work with its accounts and
sure retailers don’t need to promote to remain com- lay out featured items of the month. As in food stores,
petitive. A manufacturer can’t legally set retail display alone can pump up sales; the sizzle sells the
prices, but it can legally refuse to open new accounts. steak.
Gold Toe religiously clung to selective distribution
and only opened department store accounts. As a
result, its accounts didn’t have to compete with dis-
count stores. Coming Back Up
Hartmann Luggage suffered the overpromotion
fate when it took a different tack several years ago. But what if your retailers heavily price-promote
To increase its volume quickly, the company began already? How do you get out of this situation without
to sell to highly visible discount luggage stores in killing your volume? Use a break-even analysis to
addition to the prestigious full-price department show graphically that you’re in business to generate
stores it already had. Although Hartmann claimed profits, not sales volume. Work with key account
to be antipromotion, these discounters cut the price managers toward a common overall goal: to limit
at their own expense, which forced department promotional activity to the bare minimum. In that
stores to put the line on sale often. Tiring of dwin- way, you ensure that promotional events retain their
dling profits, department stores eventually began to effectiveness, generate incremental sales and profits,
replace Hartmann with more profitable lines. Hart- and are infrequent enough to protect and maintain
mann sales shrank more than 50% in its largest New day-to-day full-price business.
York department store accounts. As Hartmann be- Help your accounts understand that getting away
came less visible—and less prestigious—in depart- from unnecessary price promoting is not impossible,
ment stores, it lost its attractiveness to the but it is a slow and usually painful process. Jack
discounters and they began to de-emphasize the lug- Schultz, president of B. Altman’s, is doing it. In 1986,
gage as well. he refused to repeat several major price promotions
Department store accounts will pay a lot more run by Altman’s during the 1985 Christmas selling
attention to full-price business if the same line isn’t season. Having earlier trained its customers to wait
sitting with the discounter up the block. Manufac- for a sale, he’s now starting to get out of the fix.

HARVARD BUSINESS REVIEW November–December 1987 7


If you’ve gotten trapped into overpromotion, you consumer discounts. Along with several other
can do several things to escape: manufacturers of branded apparel basics, Gold
Toe found net store profits to be greater with a
1. Eliminate your least important fringe promo- 20% off sale than with a 25% or 33 1/3% off sale.
tions, both to cut down on the frequency and visi- Higher discounts didn’t generate enough addi-
bility of promoting and to retrain customers to tional unit volume to pay out.
forget about sales. 5. Encourage new promotion approaches. Rather
2. As a manufacturer, strictly allocate the quantity than promoting Gold Toe at a flat 25% off, Bam-
of off-price units you’ll allow retailers to purchase berger’s successfully ties the consumer discount
and hold them to quantities they can sell during to the number of pairs purchased: consumers save
the event for which they’re intended. At Gold 20% if they buy one to eight pairs and 25% if
Toe, we allowed each account to purchase only they buy nine or more. Average unit sales—and
20% of the prior year’s net shipments at promo- profits—have skyrocketed.
tional discount—and no more. This helped us en- 6. Don’t be swayed by the argument that promotion
sure our control over our profit mix, prevented doesn’t hurt you but brings customers into the
the shipping department from going crazy, and store. This line of thinking hinges on the promo-
discouraged overpromoting. Every account was tion’s ability to create incremental traffic. But the
treated in the same way. more promotions, the less effective each becomes,
3. Cut back or contain the amount of trade dis- and the less incremental traffic it creates. Too
counts. Don’t make promotions too profitable. If much of a good thing quickly becomes too much
you sell sale units to the trade at 20% off, they of a bad thing in retailing.
may think they can retail those units alone at 20%
off. If you increase your promotional discount to Every breeze in the face has a price that must be
30% off, you may encourage accounts to run the paid, sooner or later. If retailers and manufacturers
sale at 20% off and use their pocketed 10% to work together, they can control their promotional
fund another promotion later on. destiny—and profits—and preserve their long-term
4. Help retailers test the way they want to lower health.

8 HARVARD BUSINESS REVIEW November–December 1987

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