Discount and Promotion: The Abercrombie & Fitch Case

In the third quarter of 2011, the fashion retailer Abercrombie & Fitch launched a campaign of
discounts and promotions. According to its CEO Mike Jeffries, the combination of the price cuts
and a double-digit increase in unit costs put significant pressure on their gross margins.
Because making a price increase or rescinding the discounts seemed feasible only after the
holiday shopping season, the company expected that its profit would decline through the end of
2012. During the financial crisis after 2009, Abercrombie & Fitch suffered revenue declines
because of their steadfast refusal to undertake high-profile promotions. In addition, the
company’s production capacity and its employees experience job cut due to inefficient
production, which resulted to unsold inventories. The promotions in the third quarter of 2011 did
boost revenues, but the profit margins worsened. One investment firm downgraded the stock,
and a retail analyst wrote: “We now see greater gross margin deterioration than we previously
anticipated and believe the pace of margin recovery will take longer than expected, particularly
given management’s aggressive promotional stance in the domestic channel.” Abercrombie &
Fitch’s share price fell by more than 30 % because of its price-cutting.

Answer the following questions: (4 items x 10 points)

1. What is the pricing problem present in the case?

The Pricing Problem presented in Abercrombie & Fitch case is suffered revenue declines
because of their steadfast refusal to undertake high-profile promotions. In addition, the
company’s production capacity and its employees experience job cut due to inefficient
production, which resulted to unsold inventories. So, Abercrombie & Fitch Case don have any
profit at their sales too much expenses and did not accept the proposal of other which is the
high price promotion.

2. What is the appropriate pricing model which could have helped Abercrombie & Fitch avoid
the given pricing problem?

For me the appropriate pricing model which could help the Abercrombie is the Freemium Pricing
method because as I observe in the case study in 2009 they experience a job cut due to
inefficient production and resulted to unsold inventory and in 2011 promotion also did not work
because the profit margin worsened, and 2012 they say that at the end of the year their profit
will declined so they need to sell the remaining product so they can even get the money
invested in that product, they can use the freemium method to attract large number of costumer
because freemium method is that costumer can either get an essential rendition for free of
charge or buy a premium product to get a basic version of product.

3. What is/are the indicator/s of crisis present in the case?

The crisis they face in this case study is the selling pressure because the they force to sell their
products even at the end of the year their profit will be decrease.
4. What is the appropriate course of action should Abercrombie & Fitch undertake based on the
concept of pricing in crisis?

the appropriate course of action should Abercrombie & Fitch undertake based on the
concept of pricing in crisis are leadership reaction, eliminate member for value differences.
Engagement, address issue with action, reward allocation, reward model behavior and
punishing bad behavior.