We all have favourite brands. companies that we feel are more innovative, offer better products, or say something about us that we would like to say to the outside world. Getting our hands on these products is something that, if we’re honest we all love. even better if they are at a reduced price, right? Well i am no longer so sure.
In the short term getting something for free is great, but I consider a recent example of the perception of value that goes with it.
Yesterday in a phone conversation, a friend told me that her secretary had given her an iPod Touch. Now, that is a nice present, and really generous. The Secretary refused to take any payment for it, or anything else for that matter. The reason – well she had just got an iPhone as a free upgrade on her telephone contract. What this had told her is that the iPod can’t be that valuable as the iPhone (a more expensive product) is given away for ‘free’. Now, I don’t for a minute, think that this thought was even that developed, nor that this really effects Apples sales, but with other, less established brands it could.
Coming back to bikes, what is an XT rear mech worth? MSRP is listed as £74.99. Yet you can easily find it at £54.99. So the product is worth £54.99, right? Correct, bargain. Only Shimano priced it at £74.99 for a reason. That £54.99 price makes Shimano unattractive to your local bike shop, except they have to stock it, as a dealership is a business. If 80% of bikes come with Shimano, all shops will stock some Shimano. However, because of the prices of Shimano on the internet, the margin that a dealer could make will be cut. For example, say something is online for 20% less than MSRP then the LBS will be pressured into selling it for that too. This could cut their margin in half. Ask any average dealer about carrying Shimano, most will say there is no money in it. That is because of the above senario.
Now because Shimano is ubiquitous, all bike shops will carry some. If you didn’t, you wouldn’t be able to serve the majority of the customer base. Now another smaller brand on the other hand, is not being used by such a widespread customer base. Its position in the market isn’t secure and the reason for this in many ways, ironically is prices being undercut and MSRPs not respected. From the consumer side this is good on the face of it, because they profit, but the availability problems is bad for the brand, and in turn this comes back to the consumer.
What happens here is that a dealer buys in an expensive part from a small brand. Demand for it is low and it sits on the shelf four times as long as the competitors product which may not be as good, but are better known, or at a cheaper price point. When it comes to the time to sell this product from the small brand though, a consumer comes in and asks him to price match an internet retailer discounting the product by 25%. Now matching this price is an option they can take to free up their money tied up in inventory. They have now only made perhaps 15% on a product that they have had in stock for say six months. In that position, would you buy any more in?
The reason for the low demand for the product originally, is that a product isn’t well known. It not being in your local bike shop on stock, compounds this.
Now all of this is okay if, as a brand, you don’t care about your customer or your brand. The thing is that dealers are important to repair bikes and serve ‘normal’ consumers. If you can’t get dealers to stock your product, because it is available at a discount online, then customer service is going to suffer, as is the ‘normal user’. What’s more, if you can’t get dealers to sell your product, and it is only available online at a discount, then the brand equity, that illusive magic that your marketing, your engineering and your pricing creates to instill ‘desire’ in the consumer, and makes it aspiration, is slowly eroded. Part of this magic is exclusivity and high price. The LBS is important. What a shop says is good, for the masses, holds a lot of water. What a shop says makes sense, holds a lot of water. You might argue ultimately the consumer benefits from cheaper prices. This is only short-term however. In the long term, the discounted price becomes the expected price. The online retailers (who are now serving much of your market) have no differentiation (99% of online retailers only differentiate through price, which doesn’t make them good for the image of a brand) and therefore cannot shift the product without further discounting. Worse, because they aren’t moving enough of the product as the customer base is now so small, they drop it.
For a brand this can go further. If the sales dry up in one market, and cross border price comparisons drive down the price in all countries, ultimately the brand will die. There will not be enough money to cover R&D expense, salaries, distribution and advertising. Brands then disappear.
Now I am not saying that this is what will happen to all brands where you can buy stuff at a reduced price, but it will certainly be of concern to them.
What is (short term) bad for the consumer is that you might only be able to afford a lower level product, and not top of the line. What is (long term) good for the consumer is that in five years time, they (or the person who bought their bike from them) will be able to service and continue to use the fully functioning products. What’s more, there will be enough money in the industry to make it appealing for new brands and engineers to bring innovation to us all.
It isn’t all about money grabbing greed – in fact, working in the industry, I have met precisely no one who is in to that. The people who head the brands are usually hugely intelligent and enthusiastic cyclists. If they wanted to make stacks of cash, they would be in banking or porn!
Now I don’t always practice what I preach, and I couldn’t see this, nor understand it until I was on the other side of the fence. I do believe though that brands have a right to expect MSRP is respected, for at least two years after a new product is brought to the market. The European Competition Laws, however for the large part, do not.