The Dangerous Devaluation in the New Economy (is What’s Killing Your Profits)

By | January 12, 2012


American businesses are trying to embrace any edge they can in this new economy yet in the process they are dangerously devaluing their organizations in their search for the edge over their competitors.

Without a doubt consumers are smarter than they have ever been. They are better educated about options. Technology provides them with tools to comparison shop. They have been taught to be price-focused and businesses are killing themselves trying to play this game.

Christmas purchases rarely happen unless a sale is involved (retailers giving away profits for cash flow.) Sales used to be a great way to get customers into the store, now savvy customers are target shoppers only looking at the sale items and leaving.

Price wars are killing industries.

In 2011 the fewest movie tickets were sold since 1992. Is this only a reflection on the quality of the product coming out of Hollywood? Not as much as you might think, it’s the devaluation of the product that is making the difference.

At $9.50 a ticket (or $17 per ticket for IMAX) plus a shared popcorn and drink for another $9 make the movie experience for a couple close to a $30 purchase. That price point force consumers to ask themselves, “What are the cheaper options?”

Within a couple of months of a movie’s theatrical release I can rent it at one of the thousands of movie box rentals for $1 or I can stream it at home for a low monthly fee. Microwave popcorn and any beverage I want are vastly cheaper at home.

No longer do I have to purchase the DVD for $20 to watch it. No longer are rentals roughly the price of a matinee ticket. So I can either go to a theater for the $30 experience or I can stay home for the $5 experience. In this economy which do you think is the consumer’s best option? The industry has devalued its product, so is it any wonder ticket sales are down? Consumers quickly realize they have a much cheaper option for roughly the same product. The product has been devalued.

The Loss Leader is a Lost Profit

Once upon a time using a “loss leader” was a great tool for getting customers into a store. A few years ago Subway took this to the extreme by setting the new price point for their subs at $5 for a foot long. The thought being customers will come in for the lost leader cheap sub (break even at best for the store owner) in hopes the customer would purchase the drink and chips (profit centers.)

This move created the new lunch price point at $5 forcing other fast food organizations to fight for their share of the $5 market making all of them devalue their products. Savvy shopper customers loved it! Subway went a step further with their $2 six inch sub last month creating further product devaluation. Actually a 20% devaluation – which is huge!

Consumers being as smart as they are have this game figured out. Many people I have surveyed got their cheap $2 sub and returned to their offices where they have their bag of chips and soft drinks their purchased at a much cheaper rate from Costco!

Even Subway ads are encouraging this behavior in their creepy ads with the office workers with children’s voices. Don’t eat in our store, go back to the office! Businesses have taught consumers to play the scavenger hunt for the best deals.

Across the business landscape products are on a steep devaluation. TV’s, tablets, and other technology follows the same process. People are even talking about the Freeconomy thanks to the Internet, where we get information free allowing us to no longer pay for newspapers and magazines. Free will kill an entire industry.

Organizations must realize when they are constantly reducing prices, they are devaluing their products and heading in the direction of the music industry and the print media industry which are all but gone.

Recognize consumers are intelligent buyers.

Recognize dangerous devaluation is a competition to see who bankrupts first.

Recognize there are other ways to attract consumers that require a little more innovation and creativity than just slashing prices, and your own throats in the process.

 

 

 

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