The Impact of Product Discounts on Brand Equity
Acquiring new customers is the hardest part of running any business, whether it’s a new brand or a well-established company. To get customers through the door and to compete with rival brands, many businesses are tempted to offer deals and to discount their products. Unfortunately, this move can often hurt businesses more than they actually help. Take for example, luxury brand Coach and Michael Kors.
During the early and mid-2000s, Coach dominated the “affordable luxury” market – selling handbags and accessories in the range between $200- $600. While higher-end luxury brands like Louis Vuitton and Gucci kept their handbags priced at around $1000 to $2500, Coach and Michael Kors sought to attract the masses and tap into the broader audience of aspiration shoppers.
They achieved this by producing a collection of products at a reduced price intended for the outlets – handbags and accessories for less than $200 and labeled 20%-30% off the manufacturer’s suggested retail price (MSRP). Both brands launched outlet stores to separate the discounted products from their full-priced retail stores: Coach introduced Coach Factory Outlets and Michael Kors launched his lower-end line called, MICHAEL Michael Kors.
For years, both brands enjoyed widespread success from the income generated from both their retail and outlet stores. Coach watched its market share increase from $2 in 2000 to $78 in 2012, while, Michael Kors – after its initial public offering in 2011 – increased his shares from $24 in 2012 to $98 in 2014. But soon, the increasing accessibility and ubiquity of their brand began to take a toll on their luxury status.
Marketer Zach Heller explains it best, “Discounts and special offers can carry a negative connotation. In the mind of the consumer, you are changing the value of what you offer. And offering too many discounts can train consumers to look for discounts, meaning fewer and fewer people pay full price.”
This became especially true for Coach and Michael Kors. Despite having 354 retail stores and only 169 factory stores, Coach’s outlets accounted for as much as 70 percent of overall retail sales, according to Wells Fargo analyst Paul Lejuez. This indicated that Coach was failing to generate substantial revenue from their full-priced retail stores and that their position in the luxury market was slipping. The same applied to Michael Kors, who lost nearly 50% of its market value last year. The company entered 2015 with a 65% inventory increase, indicating its dying popularity and increasing struggle to sell products.
While it is clearly not the end for luxury brand Coach and Michael Kors, the take away is that discounting and heavy markdowns can devalue your brand and decrease brand equity. Both companies acquired significant revenue during the first few years after they launched their outlet stores, but moving forward today, the brands will have to invest twice as much to reverse their brands negative association to discounts.
ReachOut founder Edsel Oliveira has over 20+ years of management experience in assisting businesses from all over the world establish and significantly grow in the U.S, particularly in the apparel retail industry. Contact us today.
