20-Discounters at the High End

A company selling exclusively high-end, Performance Leader, products offering Low-End Products with discounts sometimes exceeding 50% seems like a contradiction in terms. Sometimes it works. It has to be managed very carefully so that there is virtually no overlap between the customers of the two separate product categories. Here is how some distinctly high-end companies have pulled it off.

Posted 5/12/08

Even high-end brands can offer lower-end products. We call the high-end companies and products Performance Leaders. These companies and products offer better performance than the Standard Leader products in an industry for prices starting at least 10% over the Standard Leader product prices. Price Leader competitors are those companies who offer less performance than the Standard Leaders products for prices generally starting about 25% below those of the Standard Leader.

Even Performance Leader brands can offer Price Leader type of products. These Price Leader products are high-end products with significant discounts to the normal high-end prices. This concept developed years ago with the emergence of off-price retailers and the Performance Leaders brands’ own outlet stores. The concept has evolved today to where these stores have their own distinctive merchandise and independent lives.

In today’s stressed economy, many of the higher-end brands are putting more emphasis on their factory outlet stores in order to keep their growth going. Cole Haan, the shoe company, plans to renovate or open 40 total outlet stores over the next two years, as it seeks high-end customers looking for bargains. Other companies doing the same include Liz Claiborne and Talbots.

These companies have to walk a tightrope. They want to protect their high-end, Performance Leader, brand and at the same time offer a lower-end product to keep growing in the marketplace. Most of these companies manage that tightrope walk by limiting the number of factory stores and by ensuring that these stores are at some distance from the locations of its main branded stores.

Some companies may prefer not to walk this particular tightrope. But if competitors will walk that tightrope, you may have little choice but to follow in their footsteps or see them gain market share at your expense.

***

Update 2022:

The high-end factory outlet stores have continued to grow into 2021. Many of the high-end, Performance Leader, retailers offer outlet stores. Virtually all of these stores are located in specialty outlet retail malls. These outlet stores sell products that did not sell well or those that are being replaced by a newer version.  These are Stripper products.  They offer products that are no longer on fashion point, less Function, and with less Convenience than the original product. Stripper products are one of the two Price Leader types of product. Below is a description of Stripper products from our article Turmoil Below.  You will note here that this is a Price Leader Stripper product in a Performance Leader product category. This is really a niche within a niche of the industry but it attracts a segment of customers who either would not or could not buy the original Performance Leader product. It fulfills a specific customer need in the market. For more on how to think about segmenting customers by need go HERE.

Strippers offer a bare-bones product or service, reduced in Function, and, usually in Convenience as well. The substantial price reductions these products offer appeal to the most price sensitive consumers. Strippers, as a group, typically achieve only a modest market share -rarely as much as 30 percent and more often below 15 percent of market volume.

Competition from Strippers can appear wherever there is an opportunity to provide a basic product with cheaper components making up the functional benefits or with fewer functions or distinctly less convenience. They seem to be most common in service and distribution businesses where the industry leaders are particularly committed to their industry standard products.

JetBlue is a Stripper Product. It offers very limited choice of flights. It flies into secondary airports in large markets and serves only a small part of the domestic market.

Motel 6 is a Stripper Product. The company cut out features that the average business traveler wants, such as amenities and room service, and also built its motels outside major city centers, making them less convenient for business users. Yet what they offer, and their low price, was sufficiently attractive for senior citizens, military personnel, and others on a limited budget. Motel 6 is profitable because the company enjoys very low costs. They buy inexpensive land and can build a room for one quarter the cost of a traditional motel room. That enables Motel 6 to undercut its rivals’ rates by up to 40 percent.

Costco discount stores are also examples of Stripper products. This chain of membership warehouse stores sells high quality, primarily nationally branded, merchandise at very low prices to businesses and individuals. However, the product choice it offers is a very small fraction of that of Wal-Mart or even of the average grocery store.

***

Update 9/25

Factory outlet stores, once accompanied by a “bargain bin” reputation have become a retail phenomenon on their own. 90% of these stores reside in factory outlet retail malls. They are highly successful retail innovation generating high sales per square foot and very attractive investment returns. Performance Leader companies who sell through their own factory outlet stores are careful to appeal to the right customer with products and pricing fit for that customer. They earn their good returns uniquely low costs for these stores. Here is some more detail on how they have succeeded.

Customers

These stores appeal to a customer that the branded store would view as a Medium or Small customer. Most of these customers would not frequent the branded stores. They are often tourists, aspirational customers or young buyers in search of brand quality. They have very little overlap with the customers of the branded store and thus serve as potential introductory customers for the branded store.  These customers have become an important source of growth as the factory outlet concept has grown quickly even while department stores suffer sales declines.

Products

The branded companies are careful to distinguish the products in the factory outlets from those in their regular stores. These factory outlet stores offer products with distinctly lower Function, Reliability and Convenience than their regular stores. Function differences begin with the “off-season”, clearance products and unsold merchandise traditional with factory outlet stores. That is the minority of product offerings. Most of these stores these stores are products specifically made for the factory outlet. Their Function differences include less costly materials, simpler designs and lower cost finishes as well as less product selection. In a Reliability difference, some of the products may carry different brand names as well. The factory outlet stores offer lower Convenience due to their location at some distance from the branded stores.

Pricing

The factory outlet stores must offer a significant value advantage to these Small and Medium nontraditional customers. They offer item pricing at 30% to 70% below the prices common in the branded stores. They rely on their uniquely low cost structure to maintain profitability despite these very low prices.

Costs

The factory outlet cost structure is notably lower than that of a branded store. As noted above, the products themselves carry much lower costs. These lower cost products avoid markdowns on their unsold or unsalable merchandise. The factory outlet stores usually avoid returns and restocking costs by setting much stricter return policies, usually not allowing returns at all. Finally, the location costs of factory outlet stores are much lower than those carried by the branded stores. They spring up in locations with relatively low land and capital costs, in contrast to the much higher urban and suburban location costs carried by the branded stores.

***