Can you escape the price promotion trap?

by Nigel Hollis | June 29, 2016

I cannot help but believe that many companies fall into the price promotion trap – and have no doubt, it is a trap – inadvertently. If you are a packaged goods brand you generally have little choice but to play the promotion game, but the question then comes down to how much do you play; and, if things go too far, how do you pull back?

I was reflecting on this topic after being asked whether a client brand should invest in promotional advertising in a category where the majority of sales are already made on deal. My theoretical answer would be just don’t do it. Not only is the client likely not making much (if any) money on the promoted sales, now they are going to pay to advertise the fact that the brand is on promotion? That should guarantee they make a loss.

However, there is a huge gap between theory and practice. It is not just consumers that become used to buying brands on deal, but retailers do as well. You have to wonder what percentage of those people buying a brand on deal would have bought it anyway. For the majority of consumers in many categories simply making the brand as obvious as possible will likely have a bigger effect than a discount. Retailers on the other hand will notice and may penalize the brand as a result.

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Back in 1991, Procter & Gamble tried to break the boom and bust cycle produced by price promotions by moving to an everyday low price strategy. That move was designed not just to impact consumers, but also retailers, seeking to reduce their over-stocking or promotional items and cutting the discounts used to persuade stores to stock up on product. Needless to say, retailers were not enthused and cut back purchases to sell off existing inventory, causing P&G to cut ad budgets to make good on the profit shortfall

As I noted in this post about Abercrombie & Fitch, the big problem when trying to wean a brand off price promotion is that there will be a topline shortfall as the price sensitive shoppers look elsewhere for their bargains. Unless there is unanimous agreement that this is in the best long-term interests of the brand it is likely that the decision not to promote will be reversed.

So how to build that consensus? A good starting point would be to do some research to find out what proportion of people in the category are active discount/deal seekers, and what proportion actually have a real preference for a specific brand. A lot of the short-term sales volume derived from promotions will come from people who do not care about the brand; they just want to get a cheap price. Other people may not worry so much about the price, and usually buy the same brand but benefit every time it is on deal. Once you have that information you can start to analyze how much volume might be lost if the brand stopped promoting versus how much profit would be gained.

So what other brands can you think of that tried to wean themselves off promotions? Were they successful or not? Please share your thoughts.

2 comments

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  1. Nigel, February 25, 2017
    Hi Haresh, could it be that in a crowded market Borges Leonardo Brothers just not seen as meaningful and different enough to justify its price point? Therefore it has to rely on behavioral economics to trigger a purchase, i.e. it's expensive but on sale so I am getting a deal?
  2. Haresh Udeshi, July 02, 2016
    Hi Nigel, The Olive Oil brand Borges Leonardo Others. The product is always highly priced and it necessarily has to have a deal or it just remains on the retail shelf. Thanks

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