In marketing, we often, erroneously, think of “our customers” and “their customers.” The whole idea of segmentation is based on this concept – we serve this segment, they serve that segment. The reality is, particularly in frequently purchased products, that we share customers with our competitors. For example, an analysis conducted using TNS Impulse Panel data showed that 72% of the people who bought Pepsi in a given period also bought Coke during the same period. (Check out this video with four common false marketing assumptions)
Again using the TNS panel data; we find that across a number of categories such as yogurt, potato chips, breakfast cereal and deodorants, only 13% of consumers, on average, were 100% loyal in a one-year span. Larger brands have slightly higher loyalty and less frequently purchased categories also have slightly higher loyal.
So, what does this mean for price discounting? Often the rational for discounting is to attract some of “their customers” to try our product. Maybe they will like us better and buy our product more often. However, the chances are excellent that “their customer” has already purchased our product sometime in the not too distant past. Ehrenberg, Hammond and Goodhardt (1994) found that almost everyone who bought a brand during a price discount had bought that brand previously. So, price promotions don’t attract new customers.
What do we really know about price promotions?
There is no disputing the fact that price promotions have an immediate positive impact on sales. But these effects do not last and do not alter the underlying inclination to buy the brand in the future. Additionally, many price promotions, while spiking short-term sales do not deliver extra profit because the margin given away on the sales would have been made anyway, at full price. But, there is so much pressure for short-term sales, and discount sale spikes are easy to demonstrate. The “look at this week’s sales figures” is a seductive opening line to any marketer’s presentation. There may be other reasons to discount like overstocked inventory, competitive activity, the need to placate a retailer, or bonuses related to sales targets. Whatever the reason for the discount the question of the long-term value remains.
Did you throw the brand under the bus for sales goals?
So, on top of the somewhat questionable value of discounting, what effect does this have on on the long-term image of the brand?
This is important because brand image exists in the mind of the consumer and is subjective and not as solid as marketers would like. On the other hand, prices are very concrete. So the issued is really one of value –does what the consumer believes and feels about the brand outweigh the price? Additionally, price is one of the cues consumers use to help form the brand image. Research conducted by Villarejo-Ramos and Sanchez-Franco (2005) showed that discounted prices negatively affect the perceived quality of a product since the benefits gained through price promotion are not enduring and do not transmit the security or the confidence that a brand should inspire with regard to its expected utility.
If the perception of quality is diminished over time because of frequent discounting, it becomes difficult for the brand to charge its normal price because the value equation has changed for customers.
So, brands should think hard before getting into a cycle of discounting. Discounts can increase sales but whether they are profitable depends on the size of the brand, the amount of the discount and the relation to competitor’s prices before and after the price cut. Evidence indicates there is no long-term increase in sales as a result of the spike in sales during a promotional period and buyers return to their pre-promotional buying patterns and sales return to pre-promotion levels – no penetration gains, no frequency gains and perhaps a damaged brand image. If this is the end result, why bother?