April 28, 2009

Saks and the City: How to Lower Your Standards for Fun and Profit

"That's when he said he was a marketer! Imagine that? A marketer expecting to date me?"

"That's when he said he was a marketer! Imagine that? A marketer expecting to date me?"

You’ve all seen the standard romantic comedy: the lead character pines for a fantasy ideal — a millionaire, supermodel, quarterback, cheerleader, prince or princess — but in the end, our hopeless romantic finds true love with a best friend, worst enemy, nerd, prostitute, maid or bodyguard. Delusions dispelled, the true lovers lock lips and live happily ever after. Or until Hollywood makes a sequel.

Today, thanks to the recession, many businesses are undergoing the same head-spinning realignment of expectations. Their dream consumers — namely, the filthy rich — are suddenly coming up short. Damn them. So these once discriminating businesses must now pursue less profitable paramours: potential mates who were once considered “beneath them.” Some businesses even undergo extreme makeovers to appeal to the masses. And you know where that could lead…

Saks without the Commitment

Once upon a time, Saks Fifth Avenue was the talk of the town, hanging out with the Neimans and Barneys of society. You’d find Saks decked out in $4000 dresses, $900 pumps or — on casual days — $600 T-shirts. Swinging with the upper crust was good.

Then hard times hit, and suddenly all those lovers who said they’d be with Saks forever stopped coming around. Whatever happened to commitment? Saks even suspected that some former admirers were now stooping to Macys and Bloomingdales, who’d put out for so much less. What was a high society department store to do?

To the horror of the Neimans and Barneys (who, of course, were as much rivals as friends), Saks decided to stoop as well.

Now, a little loosening of the standards is to be expected when one is unexpectedly spurned and lonesome. The Neimans and Barneys have pulled a few “specials” of their own. But they never expected Saks to go so low — as low as 75% off! What was that hussy thinking?

Oh, the Pressure to Pander…

To be fair, Saks isn’t alone. Or even the first.

Other luxury brands have shed their pretensions of exclusivity to score more customers. Many, like Saks, had no choice: they had given up their independence to these meddlesome manipulators called “investors.” And these investors demanded something called “growth.” It wasn’t enough that a luxury brand like Saks commanded massive margins — this is capitalism, dammit, and that means grow or die.

Take Saks’ frenemy, Neiman Marcus, who did more than stoop in 1993. Upon the advice of consultants, Neiman adopted the “Much Better” strategy of carrying cheaper merchandise to expand its customer base. How did that turn out?

Well, you probably guessed from that horrid expression, “upon the advice of consultants.” Indeed, Neiman’s stock price plunged as old customers fled and new customers failed to materialize. What’s more embarrassing than lowering your standards? Try lowering your standards and having no one show up.

Fortunately, a new CEO was appointed and refocused on Neiman’s core luxury customer.

So Saks might be stooping now, but it was hardly the first in its category to do so. Considering Neiman’s sordid past, perhaps there should be a little understanding between rivals.

Then again, this is the fashion industry.

Strategic Stooping: The Porsche Example

Let’s try a different industry on for size.

And let’s flash back to 1996 and the first Dotcom Bubble, when many a geek pulled in six figures because he knew something called HTML. These alpha geeks quickly realized that owning a fancy ride was the key to finally shedding their virginity, so they began to cash in their stock options to snap up sports cars.

Watching all this action from a lofty perch was Porsche. Yes, a few $100,000 Porsche 911’s were in the sales mix, but not enough geeks were heeding Porsche’s slogan that “there is no substitute.” These nouveau riche nerd princes were hooking up with Porsche’s German cousin BMW and — sniff — their low-class American rival, Corvette.

Corvette? Ach! Do these boys have no taste?

Porsche had to act, and not just to tap into the sales boom. There was something even more valuable at risk: the lifetime value of those customers. Porsche knew that brand loyalties are often forged early — once a Porsche man, always a Porsche man — and these geeks could quickly go from earning six figures to earning seven or eight or even ten. And like any good marketer, Porsche didn’t want to see these future millionaires get hooked on those rat bastards at BMW. They had to get them into a Porsche pronto.

Parking so close to the water's edge seemed so, well, edgy, until he tried to get out of the car.

Parking so close to the water's edge seemed so, well, edgy, until he tried to get out of the car.

Rather than degrade the 911 by lowering its price to BMW 3-series level, Porsche did the savvy thing by creating a flanker model: the Boxster. Priced at $40,000, this entry-level Porsche was hyped in a January 1997 Super Bowl ad. The fact that the words “entry level” and “Porsche” were used in the same sentence galled many Porsche aficionados. The fact that Porsche was also doing the mass market Super Bowl thing was more jarring than a pothole on the Autobahn.

But it all worked, at least from a financial perspective. Nearly 7,000 Boxsters were sold in North America in 1997 — more than the 911 had ever sold in a single year. The next year, 9,700 were sold. Then 12,700 in 1999, and peaking at 13,300 in 2000. Then that damn Dotcom Bubble burst and the geeks began to take trains again.

But it was fun while it lasted. The Boxster also attracted a lot of American women to the Porsche brand, and that got the folks back in Germany thinking. Hmmm… could there be a soccer mom mobile in our future — perhaps an SUV…?

But we won’t touch that atrocity here.

Unassuming the Position: It’s All the Rage

Everyone seems to be doing it these days.

  • Wolfgang Puck has a fast food — ahem — “casual dining” chain called Wolfgang Puck Express.
  • Starbucks, that progenitor of coffee snobbery, now offers $3.95 breakfast specials.
  • Even elitist Apple has been seen hanging out at Wal-Mart.

In the short term, such stepping down can lead to big profits. In the long term, it can lead to big problems.

In marketing, a brand’s “position” is where it stands relative to its competitors in the minds of consumers. It’s not easy to improve one’s position: it often takes years and millions of dollars in advertising. And sometimes not even that will work. Just ask Wal-Mart, which spent millions in a futile attempt to become fashionable. Or Microsoft, which hired Jerry Seinfeld to make it seem cool.

But just like a person’s reputation, it takes almost nothing to lose a valued position: a few bad products, poor customer service, a scandal, partnering with a mismatched brand, or even something as seemingly benevolent as having too low of a price.

Now, low prices are a good thing because that’s being nice to consumers, right?

It was utterly romantic -- but that's when she noticed other people wearing her outfit. And so the killings began...

It was utterly romantic -- but that's when she noticed other people wearing her outfit. And so the killings began...

Not if those consumers are hoping to buy status.
Not if those consumers associate price with quality.
Not if those consumers don’t want to own the same thing as everyone else in the market.

There is a way to serve a broader, lower-priced market without drastically changing one’s position, and that’s by creating or purchasing a dedicated mass market brand. For example, Nike bought Converse and Starter to feed the big box appetites. Toyota created Scion to excite the youth market. Starbucks purchased Seattle’s Best Coffee to… well, that’s not exactly clear. Granted, those new dedicated brands don’t carry as much cachet as the original, but if they fail, the collateral damage is less likely to affect the parent brand. In addition, their very existence helps underscore the higher status of that parent brand.

So, Yes, There are Ways to Bend without Breaking

A luxury brand can tap into mass market millions without undermining its own position. It takes creativity, strategy, and sometimes the launching of a whole new sub-brand. Anything less could quickly turn a romantic comedy into a horror flick.

What will the Saks story turn out to be? Will snooty shoppers be turned off? Will touchy designers refuse to flaunt their fashions in a store without standards?

It’s like some wild HBO series — we’ll just have to keep tuning in to find out.

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

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