Price is a signal too

by Nigel Hollis | May 10, 2017

I believe that a brand’s greatest asset is its ability to command the price it chooses, not one that is determined by competitor or retailer pressure. Sure, you have to grow sales, but any fool knows how to do that. Just drop your price. Until that is people learn to expect your brand to be on discount. Then the trouble really starts.

Right now, there are a huge number of brands out there is a world of hurt. The business environment is harshly competitive and almost every brand is struggling to hold ground. And, unfortunately, holding ground is usually defined in terms of sales or volume market share. And that is why so many brands get lured into lowering prices – only on a temporary basis of course! Unfortunately, what starts as  temporary often ends up becoming permanent.

How does temporary become permanent? The problem is that decisions to price promote are often taken without reference to the consumer. Falling behind on a budget set as much by the need to cover capex and fixed costs as actual demand, the pressure to hit the numbers becomes irresistible. And to start with, discounts have the desired effect; people respond and sales increase, even if made at a lower margin. But there are only so many people in the market at any one time and before too long the response to price reductions lessens.

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And consumers are not dumb – they are us after all – they interpret the scale and frequency of price reductions just like you do. People may not have a totally accurate understanding of what price a brand sells at, but they do have expectations, and when reality and expectations are at odds it sends a signal. Wow! That is a huge discount for a brand like that. What’s wrong with it? Is there a better one out there? Maybe they introduced a new version? Look, it’s on sale again! They must be in trouble.

Worse still, people come to expect price reductions. And if competitors respond with price reductions things get even worse, because now all the brands start being seen as commodities and price is the only yardstick by which they are judged. End result, more people shopping on price, less response to price promotions, deeper discounts, too much inventory and – hey presto! – you have the American car industry in the run up to the Great Recession.

Of course, there is one other consequence to this little chain of cause and effect. Failing to make the numbers, marketing and research and development are cut to make the year end budget, which further undermines the company’s ability to support the brand. Solution? How about more price reductions? And the downward spiral has started because the only real combination proven to help grow sales over the longer-term is meaningful innovation supported by effective marketing.

Why do you think that companies are so quick to price promote? And why are they not more strategic about how they do so? Please share your thoughts.

4 comments

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  1. Tom Palmer, May 15, 2017

    Great post, Nigel. We've all "seen this movie" and know the ending is not a happy one when consumers learn to buy a brand or category on deal. One point in favor of price promotions is that they can snap consumers back to a brand that's fallen out of the routine, especially one with strong product performance. That said, a similar boost in salience could be provided by product news or marketing support without the risk of a pricing death spiral.

    To your question about why some marketers are so quick to price promote, I've seen two common mistakes in the use of marketing analytics. First, some of the blame goes to a fundamental misunderstanding of category dynamics. In a category like salty snacks, increased purchase can drive increased consumption leading to a virtuous cycle of growth. But for many household staples with relatively fixed usage (e.g. detergent, toothpaste, etc.) price promotions often look good in the short-run but future sales are depressed because nothing has been done to change the underlying usage pattern. The price promotion has merely loaded the pantry with "time shifted" sales, and sales will not recovered until the product is used up.

    Second, when consumers are trained to buy on deal by steady increases in the frequency and depth of price promotions, traditional marketing mix analysis will show that advertising ROI declines over time. Marketers may mistakenly interpret this ROI trend as a decline in creative quality and take the wrong actions in a misguided attempt to "fix" the advertising by firing the ad agency, abandoning long-stranding creative strategies and creative equities, etc. Tropicana fell into this trap in the 90's with a reduction in ad spend and a famously unsuccessful package redesign. In reality, the decline in advertising ROI was caused by the fact that promotions baseline" sales (i.e. product sold not on deal) from the category so that advertising had far fewer purchases available to influence. Strategically, a brand in a price spiral must take one of two corrective actions: build a complete business model to sustain a meaningful price advantage (nearly impossible to do for a grocery brand competing with private label), or stop the price wars and rebuild the brand with product and non-product news. The re-training will take a few purchase cycles and may cause short term sales declines as consumers look for a deal that isn't coming, but in time consumers will re-adjust their expectations and marketers can refocus on building brands.

    For these reasons, we advise our clients to use test their advertising regularly and to benchmark against competitive advertising, using creative quality as an *input* to marketing mix analysis rather than falsely assuming that traditional marketing mix *output* tells the whole story on creative quality.

  2. Roberto, May 13, 2017
    Very lucid assesment, NPD can in thory be one alternative to regular promotions but too often NPD is not unique or disruptive enough so it is promoted heavily from launch.  Sustainable image (eg Unilever) and unique customer experience (eg Apple) both drive differentiation, loyalty and provide opportunities for price premium.
  3. Hidden Persuader, May 11, 2017
    "The problem is that decisions to price promote are often taken without reference to the consumer" - this to me is the fundamental insight. Looking at food retailers and big supermarkets chains, they're also making the same cardinal mistakes trying to "Lidl-ize" themselves. What does it mean "Everyday low prices" anyway? Isn't it more relevant for consumers to have more hard-selling promotions in the middle of every month when their budget is not stretching anymore?
  4. Cassandra Tan, May 11, 2017
    When companies set their KPIs on short term sales, promotions are often the quick fire way to achieve that much-needed boost. Rewarding loyal customers with special privileges like discounts would be a more strategic move. It gives a sense of exclusivity, a sense of belonging and serves as a form of delight. Luxury brands often do that with their private sales for members only. It works!

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