According to Madison Riley and Brooks Kitchel of Kurt Salmon Associates, retailers often respond to sluggish sales by slashing prices and hoping to beat the competition on value. But there's a problem. "Contrary to the common practice of deep discounting in troubled times," they argue, "competing on compelling products is particularly important when economic downturns force consumers to trade down and cut back on discretionary purchases."

Unless your company is a retail heavyweight like Wal-Mart or, they note, your survival depends on an ability to offer a unique product, service or experience that customers can't get anywhere else, for any price. "Case in point: Apple's iPhone," say Riley and Kitchel. "Despite tough times, most consumers who have their hearts set on the $300 model are unwilling to settle for significantly cheaper garden-variety cell phones."

Companies like Aeropostale, Coach, Apple, PetSmart and Trader Joe's have experienced success with products designed and manufactured specifically for their stores.

Riley and Kitchel use the term "Act Vertical" to describe these retailers: Instead of becoming vertical, with the ownership of asset-intensive factories, they act vertical by working closely with contract manufacturers to achieve the same results.

"They offer more than private-label products in their stores and online," say the pair. "Instead, they connect intimately with their core customers to create truly breakthrough products and related services that are accessible in an engaging multichannel shopping experience."

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