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Why Premium Brands Shouldn't Be Afraid of Discounts in China2019/10/29
Double 11 is coming and with it comes back the never-ending questioning about premium brands and discounts. Should a premium brand make discounts? How big?
One should remember that when they enter the E-commerce Chinese market, brands fear that this move, which they have sometimes delayed for a long time, will put them in danger of downgrading their image.
Firstly, the environment they are about to evolve in worries them. They view the online experience, compared to the one they offer in physical retail, as below par. They think the online experience and the proximity of other brands and other stores which they don’t consider to be as premium, will have a negative impact on them. These are the main reasons which make them delay this move.
Nevertheless, one reason seems to epitomize all those concerns: the fact that they will have to make discounts. Discounts literally damage the value of a brand by visibly eroding the price of the product. Discounts are negative. Something is removed: 10% off.
In China discounts are seen in a more positive way. This is why they are expressed as the value remaining: 90% of the original value of the product.
Now let’s look at different scenarios for a premium entering e-commerce in China.
We have a tendency in the Western world to believe that value is a belief, built over time in the mind of consumer, while price is objective. It is a rock-hard number.
It is not necessarily the same in China. In China, a lot of unbranded items or copies don’t have a price printed. The price will vary according to the value perceived in the product. It will be the result of a haggle or a negotiation if you prefer. A successful negotiation will be one where both parties will come out as winners. Appearing as too harsh a negotiator in China can often be a deal breaker. This could explain the difficulty of the current trade talks between the US and China.
With this in mind, the first question a premium brand entering the e-commerce market in China should ask itself is whether the perception of its quality is fixed in the mind of its potential consumers. If it is already sold by others, it may well be. If it isn’t, it will have to find what the perceived value of the product is. Discounting is a way to do so.
As it happens everywhere else, one should nevertheless be careful about the frequency of discounts on a same product. If those are too frequent it will prompt consumers to delay their purchase when there is no discount. This is why a discount policy aimed at finding the perceived value of a product should be careful to rotate products which are discounted.
Discounting is also a way of reaching a critical mass of consumers. Discounts is a way of moving units quickly, creating momentum that will allow to reach this critical mass which will in return make the product more desirable to others. This is particularly true for categories with high profit margins where once sold the product advertises for itself. Once the product has become desirable, it will always be time to increase its price by lowering the discounts, making them less frequent or even suppressing them. Discounts from then on will only be used for the reasons they are normally used, such as clearing out inventory or benefiting from an increased traffic during a big sales moment.
During Double 11, discounts are a must regardless of who you are. You cannot participate in double 11 if you don’t make at least a 10% discount on the lowest price (after promotion) at which you have sold a product since the 16.09. To this you need also to add a 50 RMB coupon that Alibaba will give to the consumer for every 400 RMB of goods purchased. The consumer will be able to use this coupon in any store, but the brand will nevertheless have to pay for it. These costs combined are the entry ticket to be supported by Alibaba during that period, or else no traffic will be funneled to your store.
Last thing. Making discounts when you are launching your E-commerce is a must for a foreign brand. A foreign brand entering a Chinese E-commerce platform such as TMall is seen as a guest and it is common place in China, as in many other countries, to make a gift when you are invited somewhere. Not doing so would be considered rude.
The question for a premium brand moving to E-commerce in China therefore is not “to discount or not to discount” but “How can I discount in a premium way which serves my business objectives and suits the image I want to project?”