Case Study: Second Thoughts About a Strategy Shift | Harvard Business Review

So it was considered a great coup when Emilia’s board announced that Augustín had been recruited as the company’s next leader. His mandate was to radically reinvent an enterprise that seemed to have lost its way in the face of challenges from fast fashion, big-box stores, and e-commerce.

Emilia, named for the mother of the chain’s founder, had acquired a distinctly matronly air over the decades; it was where frugal middle-aged women shopped for sensible clothing for themselves, their husbands, and their school-age children. This didn’t exactly constitute a thriving market. Even worse, Emilia’s customers had become conditioned to buying only when prices had been slashed. No deal, no purchase. So for years Emilia had competed aggressively on price, offering more and more “door breaker,” holiday, and clearance sales and churning out circulars with coupons, just to get customers to visit the stores or go to the website.

“We have to break people from their addiction to discounts,” Augustín said to María as they sat on a bench outside the store. Then he asked, “Do you remember my aunties, Tía Marta and Tía Teresa?”

María smiled. She and her husband had known Augustín since school days in Galicia, and she well remembered the aunts, who had often taken him in when his parents were traveling for business.

“They would put on their matching hats and take the bus and spend the day going into one store after another, hunting for bargains,” Augustín said. “I still remember the junk they came home with. And why? Because some shop owner had made up a ‘full’ price for a fan or a pair of gloves and then, after much haggling, dramatically caved in and slashed the price to what it should have been in the first place! Whereupon my aunties would gladly pay the so-called bargain price and go running out of the store, crowing about their great victory.”

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The Experts Respond
Shari Rudolph is a vice president and the chief marketing officer for the apparel and home retailer Gabriel Brothers, which has 45 Gabe’s stores in six U.S. states.

Yes, Augustín should abandon his no-discounts strategy, but not so that his company can simply return to its old ways, which weren’t working. Instead, Emilia’s executives should learn to make smart use of discounting to enhance shoppers’ enjoyment and establish a clear perception of the brand’s value.

There are obvious parallels to J.C. Penney in this case study. Everyone in the industry wondered if the company’s recent pricing experiments would wean customers off the expectation of constant sales. That story is still unfolding, but what’s often overlooked in the debate over J.C. Penney’s strategy is that discounts themselves aren’t always the issue. What really matters is how you deploy them to build customer excitement and loyalty.

Many people, myself included, have bought something not because it’s needed but because it’s an incredible bargain. You get a rush when you find a great deal and another when you broadcast your savviness to your friends. I can’t tell you how many times I’ve heard a woman respond to “Those are gorgeous boots!” or “What a beautiful shirt!” with “You wouldn’t believe how little I paid!”

At Gabe’s we embrace the power of amazing price points to enhance the shopping experience. Although great style and famous name brands are key parts of our value proposition, we also want to be a place where consumers are so blown away by the prices that they call their friends and say, “You’ve got to get down here.”

At the same time, we’re well aware of the danger of discounting. You can’t use ad hoc sales and discounts in desperation to juice store or website traffic, or to try to match the sales of the same day last year, or to tackle Walmart or Amazon head-on. If you do, you’ll get caught in a hamster wheel of destructive markdowns, and you can quickly run yourself to death. Plus you will train your customers to sit back and wait for the inevitable discount to come around before they shop.

That’s why our low-price offer doesn’t include short-term sales. True, like most retailers, Gabe’s follows a markdown cadence, and items are moved to clearance racks at a certain point. And we do offer coupons as part of our loyalty program. But you won’t see Gabe’s circulars in newspapers advertising weekend sales, and we don’t do blanket couponing.

Instead, all our marketing communications tell the same story: Customers can get up to 70% off department-store prices on name brands. Other retailers offer 50% off—maybe as much as 65% off—but 70% stands out for consumers.

A low-price value proposition would enable Emilia to capitalize on shoppers’ love of bargains—instead of pointlessly trying to resist it.

So my advice to Augustín would be to stay away from the desperation discounting that has undermined his company for years. Emilia should combine price with some other perceived value to differentiate its stores from competitors’. For example, it could offer opening price points on key items (say, three T-shirts for $15) and continue to promote those bundles until customers come to rely on them and associate them with the company.

Everyone wants a great deal. Using a low-price value proposition to establish a beachhead in customers’ minds would enable the company to capitalize on shoppers’ love of bargains—instead of pointlessly trying to resist it.