Grinding more than coffee beans

Date Posted:3 March 2019 

Why we don't run explicit discount strategies



Grinding more than coffee beans

We often have customers contacting us asking for discounts.

"Where is my voucher code" they demand with a sense of supreme entitlement. Or we see variations upon a similar theme in emails declaring "I'm a new customer, give me a discount code", or the often familiar "have been a loyal customer, give me something for free".

This would all be great if we lived in the same wonderland as those coffee companies charging $48/kg or more for their products, but we don't.

So let me try and put this into some perspective without alienating or offending. is an everyday low price offering.

This means we have tried to work out what's our lowest price and then pray it's going to be sufficient to cover us moving forward. In reality, it's never been as dynamic as it should be - often we are run ragged roasting, packing and sending out orders and never review whether we are "tracking ok".

One thing we don't do is play pricing games with our coffees across various customer segments. It's the same price whether you buy 500g or 500 kilos - so it's different to most other companies in that regard as they run multi-price strategies depending upon who you are, what you spend and where you spend it.

Other companies may covertly exist in a happy realm of "pricing what they can get away with" for transactional customers and I see similar approaches every day in the non-coffee items we purchase for our business that are infrequent, one-off purchases.

Discounting is a marketing tool - it's not a default or obligatory part of any merchant's offering unless they are deliberately using misleading practices for their retail pricing - which is unfortunately rampant and corrupted in many industries and numerous markets across Australia (I'm not going to name and shame, but one that comes to mind is the ridiculous way bedding is sold at generally 50% most of the year!).

It's used by companies for many purposes such as clearing excess or seasonal inventory, promoting a new brand or initiative or when a brand's become tired, stale and in dire need of reinvigoration.

Depending upon the product range of the company, it's also a clever tactic to cross-promote sales in a broader portfolio, e.g. supermarkets with the $1 milk enticing you into the store on the hope (which they already know will most likely occur) you purchase additional higher margined items - call it a balancing-based pricing strategy.

Discounting may also be used to improve last minute yields - such as seats on flights, events or vacant hotel rooms or it's used to overtly attract or steal customers from competitors on the premise that longer-term revenues will flow and hopefully compensate the short-term margin pressures from discounting.

Often discounting is the primary sales strategy for contracted or lock-in arrangements such as energy or telco plans where the lifecycle spends are not insignificant and upfront incentives are easily absorbed.

The Australian retail environment has binged for a long time on discount hysteria - some estimate it to have existed more than a generation. Mass adoption of discounting by retailers can blind a customer from dissecting value or skew their perceptions for whether something is a decent deal.

Sometimes it sets an expectation (or assumption) that similar behaviours are available from every retailer if pushed, which is rarely true and risks insulting the merchant.

Just walk through any shopping centre and see if you can spot a store without a Sale sign or something to "hook you in" - it's generally only the leaders (or price makers) in a category that can escape from such practices - e.g. Apple, Dyson, etc.

Problem with this strategy is that customers outsmart retailers by only spending on the discounted items and the retailer ends up in a financial mess and blames high rents or difficult landlords (story sound familiar ?).

All our suppliers increase their prices - at least annually or some do it more often based upon economic conditions such as the price of oil, market indexes, AUD/USD currency or because it's just their standard way of doing business to cover for CPI adjustments and manage the stealth of creeping price deflation. Sometimes, there are no real justifications for the price rise, but they do it anyway.

Right now, the big supermarkets are struggling with this exact same challenge with many of their higher volume categories experiencing price deflation over the last 6 months as the reporting season's recent February 2019 Half-Year results revealed.

We have maintained our prices at competitive levels for 12 years against a landscape of energy costs tripling, rents doubling, compliance costs quadrupling, insurance doubling, labour up 30%, logistics doubling, packaging nudging +40%, risk and fraud up 300% and the painful reality of marketing up an eye-watering 600%, - yet the price of our coffees has risen less than 10% in a whole decade.

Last week, our e-commerce supplier dropped a bombshell - prices for the subscription (because nobody sells software anymore, you can only rent it) was being hiked up 350% in the next 30 days for no added features or value. Complain, argue, get upset ? you bet, but like all software vendors they end up violating their clients commercially because they can.

There is another way of expressing the above factors - consider our price stability and our below CPI price growth as a realistic discount - it's just that's not represented with explicit "markdown tags" like most other merchants or retailers.

Another big cost that goes unreported is the hole blown in our operating model from freight incidents.  Freight and shipping issues continue to rise and cause us daily problems. It's becoming more difficult to remain positive when we are caught in the middle and getting hit by customers and freight companies from either side - both parties unwilling to yield. We care about our customers and try our best to ensure they receive the products we have so proudly created.

It may not be obvious, but the pain caused by these freight incidents are resolved by us whilst the freight companies get away with murder. That's right - it's us putting our hands in our pockets again to keep customers happy - not the freight companies. That's not a budgeted item in our cost model.

We stand behind the value we offer and run programs like Secret Label at incredible discounts to the market - it's just that we are not blowing our trumpet with a "Sale" or "XX% Discount" banner, but you can take it from me those coffees are offering something pretty exceptional at just $24 - $26 per kilo - our competitors would never contemplate matching these qualities at those prices so the reward or benefit is not explicitly stated or obvious upfront.

It's a low-key approach that we think is more effective and sustainable in the longer term - delivering a trusted value proposition.

Companies that rely upon discounting as a means to stabilize their market share or act recklessly in haphazardly pursuing growth and sacrificing their fundamental operating margins are on a slippery slope to the bottom. But more alarmingly, they are unwittingly playing someone else's game.

Discounters will always look for ways to cut costs in order to preserve their margins - when faced with something that tastes nice or is cheaper, they always choose the lowest price and think nothing of sacrificing the real opportunities to achieve product excellence.

This acceptance of mediocrity sees discounters cut corners in every part of their operation, packaging, long-run production cycles where the coffee is roasted to stock and simply just not as fresh as it could or should be, sub-standard storage methods and reduced service or support. They justify their behaviour with "what do you expect at those prices ?".

Discounters are here to take your money today and don't care so much about tomorrow.

We continue to invest in the most advanced roasting plants, the best operational facilities and we carefully manage the process variables to ensure we achieve highest possible qualities - a stark contrast to the philosophies of rampant and reckless discounters.

Our input costs continue to rise faster than our selling price. This is called a simple and basic margin squeeze and inevitably there will be adjustments.