Feel That Gain?

October 21, 2009 | blog | By Mike Sullivan
green-up-arrow-and-chart-thumb797017How do you feel about your 401K these days? Amazingly, most people aren’t exactly clicking their heels over the 50 percent gain in the stock market since its March low. And most probably fill up their tanks without much thought to the relatively low and sustained mid-$2 price of gas. People seem to be taking both in stride. But think back to the ubiquitous wringing of hands and gnashing of teeth when the stock market plummeted and gas prices shot through $4 a gallon. This contrast in emotional response underscores a body of psychological research that shows people feel the pain of loss approximately five times more acutely than they feel the pleasure of gain.
The research on emotional response to loss should be instructive for marketers. During challenging economic times when consumers are scrutinizing every dollar, it’s tempting to give price concessions. And sometimes major price concessions. Discounting, it seems, is a tactic turned to strategy by many companies of late. Aside from the obvious implications for margin performance, there is a larger positioning concern for marketers who embrace discounting out of short-term desperation. Taking back the economic gain delivered to customers through a discount by raising prices as business improves can be impossibly difficult. Just ask the folks at Taco Bell. In the late 80s, Taco Bell introduced the concept of the “value menu.” Taco Bell’s version of the value menu has clearly been exposed for nothing more than a cleverly packaged aggressive discount. More than 20 years later, the name Taco Bell is still synonymous with cheap food.
The American auto industry serves as another case in point. Who’s going to pay full price for a Dodge or a Chevy? The domestic car companies have traditionally used aggressive incentives to move inventory. The tactic has conditioned buyers to wait for the discount. And consider the airlines. American Airlines outsmarted the industry and itself when it introduced the frequent flyer rewards concept, another cleverly veiled discount tactic. It was a nice gain for consumers, and all the airlines jumped on board. Today, the frequent flyer programs are a financial albatross. But imagine the outcry were an airline to discontinue its rewards program today.
It’s easy in difficult times to jump on discounting, but the context doesn’t change the old notion that the right thing to do is generally the hard thing to do. Marketers and their fellow C-suite executives are better off looking to other areas for improvement first. Maybe it’s time to close stores. Perhaps operations aren’t as tight as they should be. There are plenty of areas worth exploring for internal efficiency gains. Because if you give away too much today, you are not likely to get it back tomorrow.

Mike Sullivan

President at LOOMIS, the country’s leading challenger brand advertising agency


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