Pricing right becomes ever more challenging - Nigel Hollis

trendwatching.com is calling for “total price pandemonium” in the coming year.

It expects the pressure to discount brands will become ever stronger boosted by new technologies and sites likeGroupon. If the seers are right, then 2011 will test the mettle of premium brand marketers as never before.

The pressure on brands to price right has been growing for a while. As I noted in a post in July 2007, internet technologies have made it very easy for consumers to check the prices to find the best deal.

On that occasion, I saved myself almost $1,000 on a flight to China simply by price shopping using ITA Software’s Matrix search engine (ITA Software was acquired by Google last year). But the latest developments have upped the ante big time.

trendwatching.com expects an increase in group buying, member sales, flash sales and dynamic pricing in 2011. Of these, the one that is attracting the most attention right now is group buying. Perhaps the best known of the group buying sites is Groupon (notoriety helped because this site refused a $6 billion offer from Google).

Here is what Groupon has to say about itself:

Groupon negotiates huge discounts—usually 50-90% off—with popular businesses. We send the deals to thousands of subscribers in our free daily email, and we send the businesses a ton of new customers. That's the Groupon magic.

And it is magic for the site’s users too. That is why more than 50 million people have signed up and other companies are trying to jump on the group-buying bandwagon.

But what about those “popular businesses” that are offering the discounts? Can a ton of new customers make up for the huge discounts Groupon aims to negotiate? Unless those companies have a great plan for satisfying, cross-selling or up-selling the additional consumers, then I suspect they will lose far more than they gain.

As trendwatching.com acknowledges, consumers have always looked for the best deal on the brand they want. Technology is making that easier. But the real threat is that people become less concerned with getting the right brand than getting the right price.

Can you envisage a day when people eagerly buy stuff on discount simply to rack up more buying points? Think social gaming meets discount shopping and you might agree that it would be easy for people to lose sight of the intrinsic value of a brand, in favor of saving more than their friends or becoming “the all-time BIGGEST saver!”

Faced with existing competition and the growing hype around collective buying services, it will be tough for marketers to avoid getting drawn into the pricing whirlpool. But once they enter the maelstrom, the chances are their brands will get sucked down into an ever growing spiral of discounts.

As soon as consumers start to regard discounts as a given rather than a pleasant surprise, it is the beginning of the end. The death spiral begins as lower prices drive down margins resulting in less funding for innovation and marketing, making the brand more reliant on discounts. And so on.

So what do you think? Is group buying here to stay? Which brands are most vulnerable? Please share your thoughts.