How Obsession With Price Kills Innovation

Be careful what you wish for when it comes to winning over new customers and building a loyal fan base. You may attract consumers to your brand with the powerful tool of promotional pricing, but without delivering value in other ways — primarily with quality and unparalleled service — using price as the main lever for purchase can trap you in an endless cycle of discounts and promotions. By continuously slashing prices to compete, brands lose sight of the true value proposition.

All consumers, no matter where they shop, care deeply about the best value for their money. However, it's important to note that their definition of value varies, depending on individual tastes and expectations. This means how retailers differentiate their products to define value also varies. The three main elements in this value equation are price, quality and service — and many retailers pull the lever on price. Dependence on promotion shifts the equation to factor price above all else, which leaves less investment in and time for innovation.

After years of offering lower prices, many retailers have trained their client base to respond to discounts rather than discover the inherent value of their shopping experience. This focus may prevent a brand's ability to shift gears, either from lack of skill, courage or financial obligations. Does this sound familiar?

We all start at the same place, because all roads in retail lead to sales. However, the intersection between pricing promotions and innovation charts your course. And this is why many retailers need to tread carefully before making a solid commitment to flash sales, promotions and discounts. Taking this route costs money, and it comes at the expense of creating (and sustaining) demand through innovation.

Striking a balance between effective pricing and demand is critical in prestige beauty. We see how many retailers responded to pricing pressures with round-the-clock promotions, and this barrage of hype redefines consumer behavior. If we learned anything from the past few years, it's that constant promos create an irreversible trend that will have a dramatic, lasting impact.

I call this "buying demand," or using price as the main factor to entice your customer to buy. This creates a domino effect, as more brands and retailers shift to this strategy to compete. In turn, this slows overall growth and supports lower margins, which can derail experiential retail and innovation investment — ultimately a death spiral.

The other way to drive sales is to “create demand” — selling the product's key attributes and delivering a bespoke experience. Retail innovation (digital, experiential and customized services), when paired with unique products, creates an environment where customers can explore, discover, try and then buy. Much of what Sephora does — from beauty services, classes and events in stores to our digital apps and online classes — is geared toward making shopping memorable, shareable and repeatable. 

This is not a manifesto that calls for retailers to slash discount activity. Promotions have their place, but look at how apparel retailers offer discounts now. No longer content to advertise end-of-season promotions to reduce inventory, retailers hold sales nearly all the time, and shoppers now expect deep discounts. At Sephora, our promotions introduce exclusive products to create the ideal "need versus want" scenario, which in the long run is more sustainable than demand driven by pricing. We also use promotions to acquire new clients and reward our most loyal beauty enthusiasts.

We are not immune to price pressures, but chasing sales by lowering prices derails long-term goals. Beauty retailers know this trap all too well, and learned just how obsession with promotion kills innovation. Perfume is the perfect example. Fragrance is available everywhere, from malls and outlet stores to duty-free shops and pharmacies, and it's largely on sale. Clients sniff out the best deals, unless they want a niche scent or an exclusive bottle.

To revitalize Sephora's fragrance business, we invested in innovation to create a more refined experience. Not only did we develop exclusive products and a robust sampling program, but we also created an interactive olfactory experience, Fragrance iQ. This all-in-one service helps clients discover a signature scent. After answering a few simple questions, they receive personalized recommendations based on their individual tastes. Clients also learn what a perfumer's nose knows best, distinguishing between fragrance notes and scent families.

It took time and a strong commitment to our vision before our fragrance business started growing above benchmarks. We now know we can innovate within a heavily distributed, heavily discounted category and bet on the future. We gained market share by recalibrating our clients' perception of value, and by offering personalized service with high-quality, niche fragrances, we reset our value equation. By placing less emphasis on buying demand and thinking beyond the next financial statement, the retail industry can do the same.