Why price promotions are an addiction that is hard to kick
Price promotions diminish and commodify a brand and create a vicious ‘spiral of doom’ cycle
Brands that become overreliant on price promotions over the longer term risk damaging their brand equity. Mark Ritson, a brand consultant, former marketing professor and Marketing Week columnist, argues that price promotion is a lazy approach taken by marketers who “either don’t believe in their brand or are too addled by revenue targets and a myopic desire to please retail partners to find less eviscerating, sustainable ways to drive demand”.
He says while promotions like competitions can — and often do — drive purchases while building brand equity, getting into a promotional cycle pulls short-term demand forward. However, once the promotion is over, demand drops. And when competitor brands respond with their own price promotions, customers will switch to the competitor brand.
Eventually, says Ritson, “brands reach a rock-bottom where promotional pricing becomes the norm. Selling at the recommended retail price becomes a minority activity.” To remain profitable, many brands then begin to cut back on quality. Kantar’s “Modern Marketing Dilemmas” report, an evidence-based guide to help marketers protect their margins, points out that marketers often resort to price promotions, even though “the very essence of marketing is to drive two crucial levers in business: create demand for products and services, but also to support pricing and margins through consumers’ willingness to pay”. Describing price promotions as a necessary evil, Kantar says discounting is an established way to maintain or increase physical availability. Being price competitive allows brands to maintain retailer listings and ideally create short-term growth which opens up new line distribution opportunities.
However, says the firm, brands need to ensure they are managing against that objective because there are downsides. Echoing Ritson’s warnings, Kantar cautions that price promotions are often a magnet for existing customers given that half of them would have bought the product anyway and at full price. Second, says Kantar, competitors will follow suit with a similar sales promotion act. “The temptation to do it again the following year just to hit your sales targets will likely land you in a price war, or a ‘spiral of doom’ cycle, and decimate your profits.”
Kantar’s research reveals that price promotions or discounting is more damaging for name-brand or national-brand products and services than for private-label or store brands. “Research has shown that share gains made by private-label brands during economic disruptions are asymmetrical: when the economy recovers, private label brands retain a good portion of their share gains, however, name brands don’t recover all the market share they lost.”
Calling price promotions the “crack cocaine of promotional activity”, Ritson says they diminish and commodify a brand and create a vicious cycle that is hard to get out of. His advice is to ignore the sales line and not to obsess over volume or unit sales but rather to focus on profitable growth.
Kantar believes that a brand’s pricing power is at least as important as demand power. What brands need to ask is whether the price being asked is too high or if it is worth more than is currently being charged. The firm’s advice is for brands to evaluate their pricing position and pricing power. A brand’s greatest strength is its ability to justify its price, it says, adding that this should be seen as the first line of defence against rising prices and inflation.
The big take-out: Price promotions diminish and commodify a brand.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.