Discounting challenges
Back in April, the IPA’s Bellwether Report showed UK marketing budgets were in growth. However, most of the increase in marketing spend was for sales promotions, a tactic that puts profits at risk in the long term.
We’re in a cost-of-living crisis, consumers are more price sensitive, and so discounting is understandable. Commercially, promotions generate a short spike in sales, often with a very good ROI, because the campaigns are relatively cheap to execute. Stick a big discount roundel on things, the sales go up and everyone at the board meeting is happy. But work by Les Binet, co-author of The Long and the Short of it, and by Nielsen, show that the hidden costs are often considerable.
Short-term gains not long-term growth
First off, any consumers who were going to buy from you anyway, now get your product/service at a discounted price. This reduces the profit you would have naturally made on those transactions.
More profit is lost in future sales. Only a small percentage of people are in the market to buy at any given time; the rest are ready to buy in the future. Price promotions activate these future consumers prematurely, dragging forward sales you would have otherwise made at full price.
It’s perhaps not surprising to learn that a price reduction in one channel also cannibalises sales in another channel where the promotion doesn’t run. Once again, the sales uplift is not all it seems.
In fact, Nielsen found that the incremental gains from sales promotion activity represents only a small amount of the sales increase. As such, the data firm estimates 84% of price promotions are unprofitable.
Doing price promotions regularly does even more damage, as consumers become more price sensitive to a brand that is gradually devalued. Worse still, you risk training your audience to simply wait for promotions to run.
Are there scenarios where a price promotion is sensible? Yes, but not many. Perhaps your product is new or largely unknown. A promotion can increase trial, quickly. There are no sales to bring forward and there wouldn’t be an existing customer base buying at full price.
Another scenario might be that you’re carrying excess stock that you can’t shift. Freeing up the money tied up in your inventory is important, particularly if it’s impacting cash flow.
There are some industries where sales promotions act as a constant land grab. Going on promotion is seen as a necessary evil. Here the consumers have been trained to wait for promotions and the other points above remain true. This happens when there is little differentiation between products and brands. As a result, marketers have (perhaps unconsciously) adopted the position of simply being the cheapest. This isn’t simply a communications challenge. There are four Ps in the marketing mix and so it may be necessary to reappraise where the brand is sold or the product and service offering itself.
Stella Artois – changing the game
Beer is a heavily discounted fixture in the supermarket. In 2008, lager brand Stella Atrios was constantly on promotion to drive volume. It became a firm favourite among heavy lager drinkers and earned itself the disastrous nickname ‘wifebeater’, all while still sporting the increasingly ironic line ‘reassuringly expensive’.
To resolve the issue, owner AB InBev decided to double down on a premium positioning and stopped running price promotions. They asked the on-trade to call the brand by its full name (rather than just, ‘Stella’). They also began serving it in a chalice glass, to put off heavy-drinking young men who would consider it too ‘feminine’. Today, Mintel data shows clear water between Stella Atrios and heavily discounted brands such as Carlsberg, Carling and Fosters. It has the highest off-trade sales value in the category, with brand associations of ‘consistently high quality’ and ‘proud to be associated with’. Escaping the promotions rat race isn’t easy, but it can be done.
