I sat down recently with a long-time friend who is the president of a highly respected clothing manufacturer. Their goods are made in Italy and sold at the finest stores in the country like Saks Fifth Avenue, Neiman Marcus, etc.
He was explaining to me how tough business was and the lengths retailers are going to in order to keep their inventory fluid and cash flow turning. He then noted the risks he sees in terms of setting "dangerous" expectations in the minds of consumers in terms of always expecting such deep discounts and the fact that it may be very difficult for these companies to ever realize true retail margins in the future. He was referring specifically to a sale that Saks ran around the Thanksgiving holiday where they offered a steep discount on top of already marked down prices. What happened took a lot of people by surprise.
The plan was for the additional discount to be limited to a single day, and then depending upon how things went, extend it. It wasn't advertised outside of the stores. What wound up happening is that news of the additional price reductions began to spread like wildfire on the Internet. Things got so crazy at the Saks store in Los Angeles that the fire department was called in to help cordon off an area for shoppers to wait in line for the opportunity to enter the store.
As I was listening to the story, several thoughts crossed my mind. The first was that this is a perfect example of how traditional businesses can see a tremendous impact in their physical locations through online (in this case viral) marketing. A second observation is that pricing transparency has made its way full circle. If you remember, in the earliest days of ecommerce manufacturers were very concerned that they would anger and alienate their largest retail clients by selling direct online, or through online (only) retailers. As a result, many traditional brick and mortar companies were buffered from the realities of competition in the Internet era early on, but they are much further behind on the ecommerce learning curve today.
With respect to transparency contributing to lower margins, the goal ought to be to improve ROI through better efficiencies in the sales and marketing processes, as it is no longer viable to assume that anything (extra discounts in this case) can be hidden within a store.
