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Aug 5 2008 1:11PM EDT

The Economics of Discounting

"Discounting smacks of desperation," says Liz Gunnison. "That's why brands like Louis Vuitton and Apple don't do it."

Is this a common strategy, or is it a very tough one?

All department stores have sales, no matter how high-end they might be; I'm quite sure that a number of LVMH retail brands do as well, even if Louis Vuitton stores specifically do not. Sales are a great way of moving inventory which otherwise wouldn't sell, and of broadening a retailer's customer base. And even Apple strategically drops its prices; it just does so on a permanent rather than temporary basis.

My feeling is that a no-discounting policy is something which can work in rarefied circumstances, but that it isn't necessarily a model to be emulated. What's more, when it does work, it can work at the low end (Wal-Mart, I think, has the same policy) as easily as at the high end. If Starbucks can make money by selling cheaper coffee in the afternoons, they should. Right now, they need any boost to profits they can get.

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