Keep premium brand prices high, even in downturn

The holiday shopping season kicks off this week, and many retailers are already slashing prices to generate sales during what they expect to be a dismal sales month leading up to Christmas.

But a University of Iowa marketing professor thinks it might be a mistake for many of those businesses to cut prices, particularly if they have high-end images.

"If you have what the public perceives to be a premium brand, you might be doing long-term damage to that brand by lowering your prices," said John Murry, a professor of marketing in the Tippie College of Business and an expert in retailing and branding. "Building premium brands requires years of work and investment to convince customers that price is less important than premium performance or features. This perception can be quickly undone when marketers begin to tell customers to buy their products because the price is cheap."

Like other analysts, Murry believes this holiday season will be extremely slow for retailers, fatally so for some. The economy is likely in a recession, investment bank failures have panicked the markets, and worried consumers are in no mood for a free-spending Christmas.

"When consumers hear so much bad news about the economy, they become increasingly pessimistic, more conservative and tend to hoard their resources," he said. "That means they buy fewer items that are not absolutely necessary, such as Christmas gifts. Stores can cut prices to try to motivate consumers to buy gifts, but it's going to be very difficult to accomplish when consumers are nervous about their financial security."

Murry said the stores that are especially at risk are those that rely on selling high priced, premium brands. Well-known, high-end brand names like The Sharper Image and Harold's apparel have already disappeared, and many others are struggling because consumers are no longer willing to spend the extra money for their products.

In response to the lousy economy, many of those retailers lower their prices to lure shoppers, but Murry said they make a mistake when they do that. Researchers have long known that price is rarely the primary factor when customers consider where to shop or what to buy, so lower prices do not necessarily lead to increased sales.

"Shoppers pick a place to shop because it offers the best assortment of products or the best service or the best styling," he said. "During difficult economic times businesses often wonder whether their prices are too high when the real reason products are not selling is because the consumer isn't buying under any circumstance.

"If a retailer reduces the price of a discretionary purchase, premium product from $1,000 to $700, will customers think 'Wow, what a good deal' or will they still be worried about spending the $700?" Murry said. "In the end, I believe they will still be worried about spending the money. Therefore, cutting prices tends to erode margins and do long-term damage to brands while not leading to a substantial increase in volume."

On top of that, he said that if premium retailers cut prices too much, they risk venturing into the market of the behemoth of low prices, Wal-Mart, where they will likely be stomped.

"If you can't survive on quality or selection or service, you're not going to be able to survive on price competing against Wal-Mart," he said.

In the end, he said it might be easier for those retailers that have developed a high-premium image to ride out the tough times by cutting expenses or finding efficiencies so their brand is still viable when the economy turns around.