Full price is dying. Social is the perp.

March 25, 2011 by George Eberstadt

As discussed in a couple recent posts (one, two), it’s much harder to get people to share purchase-related information than other types of personal news and content.  And the type of sharing you can get people to do in bulk (“contextual sharing”) is more limited than the broadcast-to-all-your-friends type that most merchants dream about.

But there’s one big exception: discounts!  Discount offers and social are a perfect symbiosis. Access to deals is the #1 reason people fan brands on Facebook (driving brands to offer more deals to get more fans).  Deal-a-day services (Groupon, LivingSocial) and private sale sites (Gilt, Rue La La) owe much of their explosive growth to the eagerness with which members share their deals.  And new services like CureBit and SocialFeet have realized that even paying customers to share purchase news with their friends doesn’t work unless you also give those customers a discount offer to share with their friends at the same time.  In a nutshell: social networking is driving discounting to levels never seen before.

But how far can discounting strategies go before full-price has no meaning any more?  Discounting has always been used in a limited way to bring in new customers and as a price-discrimination tool.  (Clipping coupons is a pain, so only people who care more about the savings than their time did it.)  But those uses of discounting are only affordable to merchants when the bulk of sales remain at full price.  Also, most customers don’t mind paying full price if just a few people, for special reasons, got a discount; but no one wants to be the only jerk who paid full price when most others got a discount.  With too much discounting, the full-price-with-occasional-discount model breaks down, and everything has to be sold at a discount.  And then the discount price has to be raised to preserve margins, so the full-price price becomes a meaningless number no one would consider paying.  And that sort of price confusion is paralyzing to buyers.

Clearly, the discount tsunami is still coming in – no one knows where the high-water mark is going to be.  But in this environment, we think it’s more important than ever that merchants continue to explore tools that help them grow without compromising margins and not just get swept along in the discounting frenzy.