All companies want to grow. The tough question is how to do it profitably and sustainably. A common approach for many manufacturers is to expand the number of channels through which their products are available to reach customers who otherwise might not try them. However, if that is not done with a proper understanding of segmentation (which customer segments buy in which channels), growth can be fleeting and potentially profit-killing in the long term.
Some recent moves by Under Armour will provide an interesting case study. Under Armour grew from nothing to a sports apparel powerhouse in little more than 20 years. They introduced innovative designs, reached critical deals for placements in movies and with professional leagues, and signed young budding superstars to endorsement deals in many sports. Their products became popular quickly and have been sold at premium prices in pro shops and high-quality sporting goods stores. In recent years their growth began to slow and UA’s answer has been to add new sales channels. That decision is likely to cause problems.
UA’s current customers are not very price-sensitive. According to Wikipedia, Under Armour customers are relatively affluent with nearly 70% of their customers making at least $75,000 per year. They are buying in stores which tend to have relatively high prices to begin with, and in my experience UA products are priced higher than competing products from Adidas, Nike, Reebok, etc. within those stores. (I have personally purchased very few Under Armour products for that specific reason). UA’s largest channel is through Dick’s Sporting Goods who sells mostly full-price attire and controls their discounting.
To re-energize their growth, UA recently introduced their products at Kohl’s, which is a mid-market retailer. Kohl’s pricing strategy includes much more frequent sales and large attention-grabbing discounts. Although they serve the mid-market, they are targeting more price-sensitive customers, using discounts to lure them. The Kohl’s shoppers arguably comprise a different customer segment than the customers at Dick’s and pro shops. If the discounts on UA products can be contained and not spread to their other channels, the Under Armour strategy will be successful. However, there is a strong likelihood that current UA buyers will no longer be willing to pay full price when they see others buying at big discounts, and their brand premium will be eroded. In fact, Dick’s is now offering a price-matching program for UA apparel offered at discounts in other stores.
The challenge that Under Armour is facing is the exact reason most luxury brands limit their channels to high-end stores where shoppers are not price-sensitive. If the luxury brands want to target more price-sensitive customers, they develop new products or brands that do not have the same cachet or premium pricing. By doing so, they protect the reputation and pricing of existing products.
Although I am discussing a retail environment, the same problem exists in B2B. Some customers are more price-sensitive than others, and are not willing to pay high prices. If there is complete price transparency (customers can see what other customers are paying), it is very difficult to sell the same product at different prices to different customers. So, to reach more customers without damaging their existing pricing, B2B sellers offer alternative products with a de-scoped feature set, or a lower level of service for which a lower price is available. There is no magic bullet.
When I discuss these things with clients and others, I often hear the airline example where the person in the seat next to you paid a lower price. That is true, but not if they bought their ticket at the same time with the same restrictions. The ticket prices vary according to the inventory available, how long in advance the purchase is made, how quickly the return is scheduled, whether the fare is refundable, etc. In other words, there are different value components for the different prices.In the case of Under Armour, perhaps Kohl’s will limit their discounts of UA products. Or perhaps the Dick’s customers will not want to go to Kohl’s to get the lower price. It is also possible that the average discount on UA products will increase, but will be more than offset by increased volume. My bet is UA will have difficulty controlling the discounting and their profit margins will come down. And in the long-term their premium pricing will suffer. Either way, it will be a good experiment to watch and educate ourselves.