What the Nutella Riots Can Teach Your Asian Startup About Pricing
Discounts can definitely drive sales (and sometimes cause panics) but they’re usually unwise in the long-run.
PHOTO CREDIT: Getty Images
A chain of French supermarkets recently dropped the price of Nutella from 4.50 ($5.59) to 1.40 ($1.74), a discount of almost 70%. Nutella--a chocolate flavored spread--is wildly popular in Europe, so consumers rushed to purchase as many jars as possible, causing riots similar to the infamous Black Friday brouhahas in the U.S.
The manufacturers of Nutella have disavowed responsibility for both the price change and the riots, throwing the blame on Intermarch, the supermarket chain, which apparently ran the special as a loss leader/publicity stunt to get consumers into their store.
I suspect that the chain now regrets running the promotion, since photos of injured shoppers and accusations that the chain wasn't ready to handle the crowds aren't likely to do much to create brand loyalty.
As a general rule, though, discounts can be dangerous to your brand and your profit. While exceptions must be made for mildly-addictive products like Nutella, the discounted price for your product quickly becomes the real price because consumers and businessfolk will consider a return to the original price as price hike.
Take the furniture industry, for instance. Most furniture stores advertise the discount price, which is often less than half the list price. The idea is to convince customers to think they're getting a great deal. I suspect that very few are actually fooled in a world where you can comparison-shop on a phone.
In B2B sales, discounts are even more dicey. If you give one customer a discount (to close a deal, for instance), there's always a chance that the customer who got the discount will share that information with other customers, in which case they'll expect the same discount.
Freelancers and consultants are particularly vulnerable to this. I know a copyeditor who can get $1 per page but made the mistake of setting her price on Upwork at $20 an hour. A good copyeditor can edit a page a minute, so that's a 66% discount. Should her full price clients stumble across her Upwork page, she'll have to take the hit.
Similarly, startups need to be sensitive about discounting from the get-go. Offering a discounted price to capture early adopters sets the price for your product or service in concrete. That can destroy your profit, unless you have a follow-on product or service that you're selling at list price.
It's also important to keep control over your price and not let a channel partner undercut it for their own purposes.
For example, I can't imagine that Nutella is all that pleased that Intermarch has established that the product can be sold at $1.74 price point. Consumers aren't going to know or care if Intermarch was taking a loss on each sale. From this point on when consumers see a jar of Nutella, the $5.59 price will seem too high. That won't stop consumers from buying (people really love that stuff), but might feel that Nutella is price-gouging.
The overall lesson: avoid discounting even if it drives sales. Discounting generally comes back to bite you in the end.