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Long-term Implications of Promotional Deals

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Les Binet and Sarah Carter get a little bit angry about some of the nonsense they hear around them… like the idea that price promotions are a good way to build sales.

Well, one industry at least has had a bumper recession. The promotions and incentives market has exploded. We’ve all been deluged by straight discounts, two for one deals and the like. And the rise of websites such as VoucherCodes means we’re all well versed now in the game of never paying full price. Will we ever need to pay for both pizzas in a restaurant again?

But actually this is a trend that pre-dates the economic problems we’ve experienced over the past couple of years. We were alarmed to see recently a chart showing an unrelenting increase in the share of communications budgets going to price-related promotions over many years – not just in recent history. In many sectors that we come across now, trade spend dwarfs other communications spend.

Of course, there’s a very seductive charm in all these price offers. But there are dangers that lurk beneath the superficial allure of short-term sales increases. And people tend not to stop to analyze or think much about these.

So let’s start with the short-term good-looking news. Analysis of EPOS data often suggests price- related promotions increase short terms sales by 30%-70%. That sounds very impressive. But the true effects may well be much smaller than this. Many of these apparently “incremental” sales are not. Some may be cannibalised from other pack sizes of the same brand. Others may well be diverted from stores where the brand is not on promotion. And others could be just future sales that have been brought forward by the offer. In fact, an analysis by IRI suggests that 84% of promotions are unprofitable in even the short term.

Things start to look even worse when we look just beyond the immediate effect. Because promotions tend to encourage people to stockpile (buying one pack for now and one for the freezer is typical supermarket promotional behaviour), sales often slump once the promotion ends. Once this is taken into account, the net effect on sales over the short term is often close to zero.

But what about the longer term? Surely brands do all this to encourage new users to give them a try, or to keep users buying again and again? Well actually, research has failed to find much evidence of any long-term benefit of price promoting either. Promotions do little to encourage trial (most people who buy on promotion have already tried the brand) or our old friend, “loyalty” (people who buy on promotion tend to be less brand loyal – they buy by the voucher not the brand). In fact, promotions are a pretty inefficient way to make contact with potential new buyers overall – only 5% of potential buyers are likely to be exposed to any promotional offer in any one week.

The result of all this? Evidence suggests that promotions can be damaging in the long run, tarnishing a brand’s image, increasing price sensitivity, and reducing brand loyalty. This explains why brands and companies that rely heavily on promotions tend to be less profitable than those that choose an advertising-led approach. This is particularly true for big brands in mature markets.

And it gets worse! Despite their negative effect on profits, promotions have a tendency to escalate. When the “high” of one promotion ends, and sales slump, it is always tempting to go for one more promotional “fix”. But promotions are easily copied, so competitors often follow suit, leading to promotional “wars”. As promotional activity escalates, people become less responsive to it, so deals must become ever more generous to be effective.

Left unchecked, this kind of runaway promotional warfare can commoditize the whole category. People stop buying by brand, instead buying solely on the basis of prices and offers. The only beneficiary of this then is retailers’ own brands.

Of course not all promotions are a bad thing. They can be useful in some contexts like encouraging trial for new products or categories. There is also evidence that they work well for indulgent impulse buys, like chocolate or crisps, where they really can help to increase consumption (whether that’s a socially useful thing is another matter).

And different promotional mechanics also have different benefits. Price promotions are only suitable for price sensitive items where variable costs are low. Well thought out promotions may have better effects, especially if they are used in a way that helps to build brand equity, e.g. PG Tips current “Show Me The Monkey” cash prize promotion – where you can also win knitted monkeys and monkey mugs.

But, for most brand owners, BOGOFs and discounts are just a good way of handing your profits straight back to the customer. So enjoy those free pizzas. They may not be around for long.

Les BinetEuropean DirectorDDB Matrix

Sarah CarterStrategy DirectorDDB UK

Guest Author DDB Worldwide

Posted December 5, 2011 at 4:19pm

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