Sign-up discounts: Bad strategy for eCommerce firms

A lot of eCommerce players in the Indian eCommerce industry offer  up to 25% discount coupons on sign-up which give discounts up to Rs. 2000 (~$35). These include Jabong, Myntra, and fashionara, among others.

The logic that these players might be using for this strategy may be:
1) The discount coupons allow them to acquire new customers, that may remain loyal after the initial discounts are over.
2) They operate mainly in the apparel category where regular gross margins are 30-40% to begin with. So a 25% discount would not lead to a negative gross margin on each sale.

I think this is not a good long-term strategy because:
1) Based on chatting with a few young friends, I feel that most have figured out that they can use multiple email addresses to get multiple coupons. They don't use the same email address to purchase after the discount coupons are exhausted. This also leads to a problem of customer duplicates in the database of the eCommerce retailer.

2) A 25% discount on an item which had an initial gross margin of 35% may not sound like unprofitable business. However that calculation ignores the free shipping given to the customer and the cost-per-action commissions (up to 10% of the sale!) given by the website. This implies that the items purchased by these 'acquired customers' are often being sold at a negative margin. The terms of the discount coupons (e.g., 'Cannot be combined with other offers') mean that most signups occur for fully-priced merchandise during the regular season. This is clearly a double whammy.

3) Most of these online apparel retailers are getting into accessory businesses. The discount coupons are often valid on accessories. This converts what should be a regular, high-margin, attachment business into a money loser.

4) I imagine there would be a significant sales backlash when the sign-up discounts are eventually withdrawn.

My advice: The industry needs to move from rewarding customer sign-up to rewarding long-term customer loyalty.

JC Penney's pricing experiments (continued)

I had written about JC Penney's failed experiments with reducing discount sales a few weeks ago (click here). I had made 4 points:
1) Everyday Low Price needs to be tested before being implemented
2) Need to continue store-in-store concept
3) Need good exclusive designers
4) Website needs major overhaul

I heard that they are getting discount sales back in the store (click here). They are also showing price comparisons for comparable products and maximum suggested retail price for each product.

While I think this is a good move, it will take significant effort to turn-around JC Penney. They will have to convince shoppers who have struck JC Penney off their shopping list to visit the store again...and that's not an easy task.

JC Penney's experiments with pricing and holiday season discounting

Around a year ago, JC Penney's CEO Ron Johnson announced their 'Fair and Square ' pricing policy, to wean customers off discounts and move towards a three-tiered pricing strategy that focused on 'Everyday Low', 'Monthly' and 'Best' price levels. This was supposed to reduce the number of annual promotions from 590 to 12, thereby simplifying the shopping experience (and allowing customers to 'shop anytime on their terms'). In August, they moved completely to an Everyday Low pricing scheme.

The strategy seems to have failed...last week JCP announced that their sales have dropped 26% year on year for Q3 and have dropped 23% year on year for the first nine months. Even the online business seems to have shrunk significantly (37% year on year in Q3!). It is burning through its cash reserves and may need to raise capital soon.

In the backdrop of these bad numbers, JCP announced that they will not be using holiday season discounting this year, choosing instead to hand-out 8 Million buttons that allow customers to get freebies. Shoppers can redeem the buttons online for a chance to win one of 20 million gifts by entering a unique code located on the back of the button at jcp.com/Christmas. On Black Friday, 100 vacations to U.S. destinations will be awarded, including trips to Los Angeles to see a taping of JCPenney spokesperson Ellen DeGeneres' show. One additional trip will be awarded each day through Christmas Eve, along with gift cards, holiday certificates and merchandise.

However Ron Johnson also announced that they will offer the company's lowest prices on Black Friday and Cyber Monday.

All this begs the question: Is JCP doing the right thing on the pricing strategy front? What else can it do before it exhausts its cash reserves?

1)  While Everyday Low pricing may be a great idea in grocery and household purchases, it may not be such a great idea in apparel because customers have different price perceptions for different brands. If most customers prior to January 2011 were drawn to stores by the discount sales on the jcp brand, they are unlikely to change their behavior abruptly. JCP needs to conduct focus groups and surveys to understand the pricing preferences of their customers (since their current understanding of their customers' preferences seems to be flawed). While modeling apparel sales using price data, we always model the 'price effect' (the effect of the effective discounted price) and the 'sticker effect' (the effect of the X% off sticker). An item marked at everyday $15 price may have lower sales than if marked at 25% off from a $20 price.

2) JCP needs to aggressively continue the store-in-store concept which seems to be working well for them.

3) They need to sign up good designers to design exclusively for them (like Target does).

4) The JCP website needs a major overhaul:

• The landing page has fewer merchandize displayed than most other apparel websites. While the uncluttered look may suit Apple stores well (with its limited range of products), it does not suit an apparel website very well. 
• The quality of in-image zooming is much inferior to the out-of-image zooming in other apparel websites. 
• Finally, the checkout page does not have recommendations for 'People who bought X also bought Y" which is usually very useful while purchasing clothes

Let me know what you think

Will Windows 8 hybrids kill laptops and ultrabooks?

Most PC companies are lining up tablets, hybrids and Touch-screen ultrabooks using the Windows 8 and Windows RT operating systems to be launched in October 2012 (click here for a Technically Personal article on the topic).

I wonder whether the Windows 8 hybrids will kill the Ultrabooks category? and what will happen to good old non-SSD laptops?

While I think that there is ample room for tablets and hybrids, I still think that Ultrabooks, non-SSD laptops, and even desktops will survive for a while. Here's why:

• Price: While few companies have given any indication of pricing, Samsung has announced a $1,199 price for the Series 7 hybrid (11.6" screen, Intel Core i7, 4 GB Ram, 128 GB SSD) and a $649 price for the Series 5 tablet (11.6" screen, Intel Atom, 2 GB Ram, 64 GB SSD). These are significantly higher  price points compared to today's Ultrabooks ($700-1000), non-SSD laptops ($200-700) and desktops (even lower). The tablet is priced lower than the current generation of high-end tablets (64 GB iPad at $699), but with bigger screen, and more memory.

• Screen size: There is a significant segment of corporate workers that do need a screen bigger than 14" for their work. I am sure 14" hybrids will eventually be announced. However I expect the price points to be much higher.

• Emergence of the touch-screen Ultrabook: HP has announced yesterday (click here) that it will be launching the Spectre XT TouchSmart (15.6" touch screen, with NFC for $1,399) and an Envy Ultrabook 4 (14" touch screen Ultrabook). This sub-category seems like a compromise between touch-screen, media-creation using keypad and large screen size. I personally don't see why many folks wanting a fixed keypad would want a high-priced touch screen. Imagine stretching out and touching the screen to consume media while the keypad is still fixed to the computer...too un-ergonomic :-(

For these reasons, I feel non-touch Ultrabooks, non-touch non-SSD laptops and the good old desktops still have ample market potential. Of course, I do expect the price war going on in non-SSD laptops and desktops to soon affect non-touch Ultrabooks... which means even better deals for consumers!

Let me know what you think!

Pricing issues for Abercrombie & Fitch

I had blogged 3 years ago (click here) about why Abercrombie & Fitch should consider using selective (and end of season discounts) to increase volume so that it does not have an inventory pile-up. Most of the world might have considered me silly for saying that... A&F was hot, had raging sales growth and industry-high margins.

After 3 years, I hear this from a Reuters article in May 2012 of its Q1 report:

Abercrombie & Fitch Co (ANF.N) posted a sharp drop in profit and its first quarterly decline in sales at established stores in more than two years, leading to concern that a growing inventory could mean future discounting.

Its shares fell 13 percent to touch their lowest in more than two years on the New York Stock Exchange.Same-store sales, or sales at stores open at least a year -- an important measure of retail growth -- fell 5 percent in the quarter, and the teen clothing retailer forecast a tepid year ahead.

"While management didn't quantify international comparable sales ... we estimate total international comparables were down double digits," Paul Lejuez, an analyst with Nomura wrote in a note to clients. He noted this was the first negative quarterly comparable sales for the company's Hollister brand in Europe.

Net sales rose 10 percent to $921.2 million, but even that missed estimates.
Abercrombie said it ended the quarter with inventory up 44 percent, against the 10 percent rise in sales. Lejuez said that could signal more markdowns were on the way.
Abercrombie said margins were expected to improve throughout the year, but if it had to resort to discounting while rivals were selling clothing at full price, it could affect margins.

Earlier this month, American Eagle Outfitters Inc (AEO.N) raised its profit expectations for the first quarter sharply as it sold more clothes at full price.
Most clothing retailers, especially those that cater to teens and young adults, were expected to post strong sales for the first quarter as wardrobes were updated for spring breaks and warm weather.

For the first quarter that ended April 28, Abercrombie earned $3.0 million, or 3 cents per share, compared with $25.1 million, or 28 cents per share, a year earlier.


In Q1, ANF was holding 56 days of sales in inventory (the actual number is higher considering that I use cost of inventory and price of sales). Its gross margin has reduced to 62.5% (down from 66% 3 years ago)...but still significantly high compared to industry average.


According to this AP report:
Abercrombie & Fitch announced in June that it was closing 180 U.S. stores over the next few years. The chain had already closed 135 under-performing U.S. stores in two years. The closure will primarily be among its namesake and kids brands but it also plans to close a few Hollister stores as well. 

I will be watching their Q2 results on Wednesday to see how this story develops.

Customized database marketing for Indian e-commerce

Most of the players in the Indian e-commerce market are losing money.

My friend, Sanjay Dattatri has blogged about the challenges facing Indian e-commerce (click here). As he points out, Indian consumers are price-sensitive, dis-loyal and ill-behaved. I tend to agree with him.

As Sanjay points in another blog post, pricing sanity needs to prevail (click here). I agree with him on this one as well.

I do think that e-commerce vendors in India need to adopt a more customized approach to marketing and pricing. After all, aren't online marketers supposed to know all about their customers' buying behavior, browsing, email response (and customer care calls).

Why give the discount to all your customers when the reality is that some customers value your brand and superior delivery performance (and couldn't care less about the few rupees extra for that). The vendor can give a golden treatment to these price-insensitive customers by giving differential free shipping terms, and loyalty points. Some players like indiaplaza and healthkart do have a loyalty program.

On the other hand, one cannot lose out on selling to the price-sensitive customers, who will switch on a better deal available somewhere else.

The only way out is customized database marketing.

In my opinion, e-commerce vendors need to stick to the following rules of customized database marketing:

1) Target your discounts at customers who are likely to shift their purchases from your competition to your website, when given a discount. Examples of these customers include:

• Customers who bought a regular purchase like clothes, or diapers, or books, or groceries or nutritional products many months back and have not purchased since. I was delighted to see that healthkart sent me a  customized coupon code for whey protein 6 months after my first purchase. They avoided giving the discount to everyone as they know they have targeted a potential buyer. The key is to send out a customized coupon code which works only with the specific customer's login.

• Customers who have browsed a particular product or a category for a long time and not bought that product/ category. This can be done only when the customer is browsing with his cookie activated, and the e-commerce vendor is smart about tracking browsing behavior. A classic example would be a books-buyer browsing a mobile phone product page, getting a customized offer. My recommended approach would be to price the product at slightly higher than competition for the masses, and to give a discount coupon to customers who browsed and did not buy. (Quick programming note to vendors: Please don't send discount coupons for lingerie to men who are just browsing. But for that you've got to read the next point.)

2) Get to know more about the customer (even though you may know nothing to begin with). I get shocked when online retailers say that they deliberately have no information about their customer other than their user ID, name and shipping address. As a trusted seller you should try to get more information about the customer. Incentivize customers to update their profile online (such as gender, date of birth, marital status, interests, etc). The Payback program (called imint earlier) did that when they transitioned. When you know that you are dealing with a single guy who has never bought women wear before, you can stop sending him lingerie ads and coupons. Also some interesting things you can do with demographic data:

• Promote Gudi Padva to Maharastrians, and Onam to the Keralites and Eid to Muslims (irrespective of where they live)! -- if you can classify names by mother tongue and religion
• Promote kids items to families with kids

3) Send personalized recommendations/ suggestions, by putting yourself in the customer's shoes. Most e-commerce vendors are using formulaic recommendation engines which give recommendations based on the customer's last purchase. Ideally the recommendation engine should be based on the basket of goods purchased by the customer in the last 6 months.

Also, the recommendation logic needs to be altered for capital goods purchases (mobiles, electronics) vs. regular purchases (books). A mobile phone buyer does not need recommendations on what other similar mobile phones to buy! However a book buyer may appreciate recommendations on which other similar books to buy. For the mobile phone buyer, a list of accessories which go with his/her phone may be useful, but a formulaic recommendation engine may not capture that.

More later...let me know what you think!

Cold winter for Indian apparel retailers

Many Indian apparel retailers are offering discounts ranging from 40% to 60% three weeks ahead of schedule this season (newspaper article). Sales have been impacted by 20-30% due to higher excise duty taxes and higher cotton prices which have led to a 10-15% rise in product prices.

Could this situation have been foreseen by the retailers? Are they too late on the buzzer? One can only say that apparel retailers will do well to use BI and analytics better to track sales shortfalls in real time and adjust pricing before everyone else realizes that a slowdown is on.

From an analytical perspective here's what they could do:
1) Price elasticity studies and market surveys to understand the impact of 10-15% price rise on demand
2) Markdown models that advise the retailer on how much the price should be discounted if a particular sales target is not met in the early weeks/months of the season.

These are especially relevant in the Indian market since the festivals/ holiday periods occur in the middle of the season (e.g., Divali) and dates vary year by year. Retailers need to be very nimble to adjust prices quickly if festival/holiday targets are not met.

Turning around a newspaper

Apologies for not writing for so long...I had switched from the practice of writing a blog article to tweeting (or Re-tweeting) my thoughts in 140 characters. I am back now to the longer form of expression.

I had blogged a few months back(click here) saying that newspapers should examine putting a value on content.

I read a Newsweek article today (click here) that the Newport Daily in Rhode Island has started charging $345 for annual online subscription. The article also talks about the positive impact that this has had on print subscription cancelations. The newspaper is now planning to run its online division with a profit objective. Wow! Kudos to them for experimenting with pricing rather than sticking to the convention.

I am convinced more than ever that newspapers should consider charging for online content especially if:

• the content is local and no other publication would cover it (e.g. Newport Daily)
• the content is specialized and the publication is a must-read for a reader segment (e.g., Wall Street journal, Barron's, etc)

Interesting blog post on pricing

Sorry for being dormant for some time now. I have been busy for the past few days.

My friend, Sat Duggal and his colleague, Hunter Hastings, from the EMM Group, have posted an interesting blog post titled "Should you cut prices?".

I think it is a brilliant article... enjoy!

Should Abercrombie discount?....Part Deux

I had blogged a few days back on whether Abercrombie should discount its apparel (Read here). In my opinion they should consider selective discounts on slow-moving seasonal inventory so that they don't have to conduct a fire sale at the end of the season.

Looks like the Abercrombie pricing issue is attracting more attention (click here).

Abercrombie warned on Jan 8 that fourth-quarter profit would fall significantly short of forecasts after reporting December same-store sales fell 24 percent. Abercrombie is " worst sales performer in December out of 35 companies whose results are tracked by Thomson Reuters."

Morningstar analyst Brady Lemos suggested that Abercrombie should consider more promotions at its surf-inspired Hollister stores, which has more stores than the main Abercrombie & Fitch chain and caters to a younger crowd. I like the idea.

Should name brands discount prices to combat private labels in the recession economy?

The Atlanta Journal-Constitution reported yesterday that customers are increasingly buying private label store brands due to the poor economy (click here). The article quotes research from Nielsen that shows that private label sales grew 10% YTD whereas name brands grew by 3.5% only over the same period.

Earlier research from Nielsen (click here) shows that consumers increasingly think that store brands are a good alternative to name brands and have a comparable quality. Fewer people (24%) think that name brands are worth the extra price. More people now feel that store brands are not only for consumers on a tight budget.

Category managers must ask themselves: Should I discount my name brand to compete against the store private label?

The answer may be different for different product categories and even for different store formats.

The share of private label products varies across categories (click here). It is high for pet food, frozen/refrigerated food and plastic/paper products. It is very low for beverages, home care, baby food, cosmetics, snacks/ confectionery, and hygiene products.

Surprisingly price differentials between private labels and name brands are lowest in categories where the share of private labels is high (around 20%). Price differentials in some categories where store brands have low share are as high as 40%.

This suggests that the price sensitivity and the importance of brand is different in each category. Name brands should use pricing analytics to understand the share and volume impact of various pricing differentials in the specific category.

For some categories (e.g. bottled water), it may make sense for the name brand to focus on low unit-count packs rather than focusing on the bulk-use packs. Consumers who buy bulk-use packs are more likely to be price sensitive.

It is also important to understand that private label receptiveness is much lower in convenience stores than in grocery chains (click here). It is important for category managers to analyze price sensitivity (by share and volume)for their brand for each retail chain separately. Discounting products in a convenience store chain may yield little/ no benefit whereas it may be a good decision at a wholesale chain.

Should Abercrombie discount its wares?

The Wall Street Journal reported earlier this week that Abercrombie & Fitch is pursuing a strategy of not discounting its apparel (fashion brands targeted at young people) during the current recession (click here). The article mentions that their competitors (American Eagle Outfitters, Aeropostale, QuikSilver, Pacific Sunwear) have discounted their apparel significantly.

While competition has seen same-store sales decline by 10-11%, Abercrombie's November same-store sales fell by 28%. However Abercrombie enjoys the highest gross margins (66%) compared to competitors who have much lower margins (AEO:41%; Gap:38%; J Crew:43%, Pacific sunwear:29%). The management insists that discounting will lead to long-term erosion of brand value.

I can't help but ask myself: Should Abercrombie discount its wares?

I think there is a strong case for Abercrombie to consider pricing lower selectively. Here's why:

• Abercrombie's target population has been hit hard by the recession due to potentially reduced pocket money from parents (for younger teens) to bleaker job prospects (for recent graduates) to higher tuitions and costlier student loans (for college students). Clearly, the target customers will cut back on apparel spending, especially on premium brands.
• Abercrombie has a 66% gross margin (Yep, you read that right: their average cost of goods sold is only a third of the average price). However its fixed costs (marketing and distribution expenses) run to more than $450 MM per quarter (~54% of sales in the Nov'08 quarter). This is much higher than the comparables for most competitors.
• Assuming that marketing and distribution costs remain largely fixed, Abercrombie will make a loss if its sales decline a further 15% from Nov'08 quarter levels.
• Based on current sales and inventory numbers, Abercrombie is carrying more than 50 days of inventory. This is a fairly high level in Abercrombie's history. Inventory pile-up could force it to discount later(as winter-wear will need to be sold off before spring).
  
• Although there is a strong case for brand equity dilution, Abercrombie could consider structuring the discount selectively on products that are slow-moving. Also it can be relatively discreet about its discounts so that it does not impact brand image.

Let me know what you think....

...brick-and-mortar book stores ...: Part 2 -- The online store

As I had discussed in Part 1, Barnes & Noble and Borders need to consider three initiatives to compete against Amazon (in addition to shutting down unprofitable retail stores and reducing employee count):

• Create a more credible online option to compete against Amazon
• Use brick-and-mortar as a competitive advantage
• Align inventory to demand

In this post, I shall focus on how B&N and Borders can create a more credible online option to compete against Amazon:

• Collaborative filtering: CF algorithms produce personal recommendations by computing the similarity between your preference and that of other people. Amazon produces CF recommendations for the search history and the purchases of a user. Borders.com does not have CF recommendations whereas BN.com has CF recommendations for items in the shopping cart only. Some unique things about Amazon.com:

1. It tracks the IP address/ cookie on the computer so that a user revisiting a site instantly gets recommendations based on previous searches on the site
2. Amazon suggests what people buy after viewing a certain item. This is called sequence analysis.
   
3. It offers auto-fill for search words when a user types a search item e.g., typing "snowball" offers "snowball warren buffett" as the first auto-fill option

• Pricing of online offers: I compared the prices on a couple of bestsellers and a couple of new releases.
  

1. The pricing on Amazon is lower than that of bn.com by 5% (for BN members). The BN membership price is usually lower than the Borders.com price. In this competitive business, it goes without saying that bn.com and borders.com need to lower prices.
   
2. Also an often overlooked aspect is the presentation of 'used' book prices alongside new book prices. By doing that Amazon caters to the price-sensitive user who doesn't mind buying used books.

• Wider variety of offerings: Amazon.com has a wider variety of offerings especially for long tail titles among technical books (a simple check for SAS textbooks yielded 121 results on bn.com and 9272 results on Amazon.com) and for children's books ("Elmo" yields 492 titles on bn.com and 13,985 titles on Amazon).
  

• Online used books strategy: Clearly a part of Amazon's variety advantage is its role as an exchange of used books.BN buys used books and sells it themselves. This could be a risky strategy and may not be attractive to sellers either. BN also has an authorized seller program, which is attractive for large volume sellers. Borders has an alliance with Alibris for used books. However Borders 'Marketplace' has a separate sign-on and is not integrated with Borders.com, which is a bummer. (also sellers having to pay more to sell on Borders.com than on alibris.com, which is clearly a hindrance). Amazon's fee structure is much lower than that of Alibris for small volume sellers (<40 items). BN and Borders should take a Go/ No-Go decision based on profitability.
  

So much about online operations... My next post in this series will be about how Barnes & Noble and Borders can improve their brick& mortar operations.