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Businesses always had to deal with one constant: inflation. Things always cost more tomorrow than today, more next year than last year. Getting price increases to offset inflation in costs (wages, commodities, goods, and services) has been a typical problem – but not lately.
The new normal: Price increases are rare and price decreases are common
Deflation is an extremely dangerous phenomenon. It crippled the Japanese economy for more than a decade. Deflation is when the rate of inflation goes negative – less money will buy more value – and buyers wait to buy, expecting that the longer they wait, the lower the price goes. This mindset is now prevalent in consumers. While the collapse in demand in 2008 and 2009 was mostly based on massive over-capacity, in 2010 we’re dealing with adequate capacity combined with a collapse in demand. The problem is, this cause feeds on itself. People are expecting prices to be lower in the future, causing postponement in purchases and constantly fueling the collapse in demand.
It gets worse: The deal society
The Social Web has many benefits but one big disadvantage: It feeds into the vicious deflation cycle: Groupon, LivingSocial, Yelp, BlackboardEats – I could fill pages with names of old and new companies trying to tap into that deflationary mindset. Why spend full price when there’s a deal on the horizon? It happened to me this week: I’m planning a trip to Europe in a few weeks. When the State Department issued a rare travel alert for all of Europe, my first thought wasn’t about my safety. My first thought was: I’m sure the airlines are offering deals very soon. Delaying my purchase by a week or so, leaving money in my pocket that one airline could have used already to invest in new ventures. The inflation of deal sites causes a deflationary mindset: Let me wait for the deal.
My advice: Use deals sparingly. And be innovative.
Don’t fall for the 50% off trap. According to a Rice University study, nearly a third (32%) of businesses say that the Groupon campaigns they ran were very unprofitable. Most consumers don’t spend much beyond the offered deal and very few were converted into regular customers. Don’t hope to convert people looking for deals into loyal customers. Instead, plan diligently:
· Many businesses are seasonal. It’s fun to be in a Hot Air Balloon in New Mexico in the summer, not so much in the winter. Deals during the off-season are expected, no matter if we live in inflationary or deflationary times. Make the deal special so people will find a reason to come back during the season. And pay full price.
· Make the deal more innovative. As a restaurant, offer a special for a bottle of wine, don’t give away the food, the main reason why people should return. Offer something unique: a tasting menu that you can’t purchase normally. A loyalty card that ensures return visits. An added value that delights people.
· And, most importantly: Don’t dilute your daily product. Imagine going to your favorite restaurant, just to encounter long lines, horrendous service and cold food due to the onslaught of Groupons. Most of the deal seekers won’t come back. And your loyal customer won’t return either. A lose-lose situation you need to plan for.
· Last, but not least: Before you go for the Groupon drug, rather innovate your business. Stay firm on your price and the value of your product. But, make the product more valuable, more delightful, more of something people want to talk about. Think more like Apple and less like Wal-Mart.