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Do Price Promotions Benefit Brands?

Todd Bergey
Todd Bergey President

Not so much.

In the CPG world, we all know the constant pressure that is placed on brands to deliver trade programs that retailers will like and in many cases – what retailers are dictating.

There’s no doubt that these trade promotions help drive velocity and sales that produce results for the consumer and the retailer. But the real question is what net effect does it have on your brand?

All too often, if your brand is in a heavily promoted product category, you’re forced to “pay-to-play” the same game, with heavy promotion throughout the year. Even if your product is in a category that isn’t heavily promoted, brands can fall into the trap of executing heavy promotions, because they know that if sales velocity doesn’t hit or exceed the buy rate that was given in the sales pitch, the fear of being de-listed is a very real problem.

So the real question is, do you look at the investment in the promotion (loss of margin that you are giving away) the same way as you look at the investment in your brand with advertising?

Your answer will most likely be derived from how sales and marketing work together in your organization. Too often, we see that the sales team believes that the money attributed to advertising is a cost, not an investment in the brand. Meanwhile, trade promotions are not seen as a cost, but an investment in the brand.

Who is right? We believe both are investments into your brand. Where we may have a healthy debate (or even disagreement) is what net effect the trade promotions and advertising will have on the short and long-term growth of your brand.

We know that short-term price cuts drive volume—but at what cost? How are the price promotions actually benefiting your brand? Or might the lost revenues to execute the trade promotion (this is an expense to the brand) be put to better use with advertising? Advertising that attracts new customers and builds recognition and value for your brand!

To find out, let’s have a quick look at the types of customers that price promotions attract. First up are “on-deal”– shoppers who take advantage of the promotion to buy your brand because it is on sale. They don’t place much value in paying a higher cost for your brand or quality – when the price cuts go away, so will they.

What about infrequent buyers? Will this promotion reinforce buying your brand later, bringing them back to buy again? In a word, no: they’ve bought your brand before (both on sale and not). They’ve bought your competitor’s brands before (on sale and not). And since it’s their normal routine, your price promotion won’t budge the loyalty needle a bit. They’ll go right back to their normal behavior after the promotion, forgetting your brand and taking your margins with them.

How about heavy buyers? Well, they are most likely already buying your brand in their normal shopping routine, as a habit – but at full price. So, sales volume must increase enough to cover those lost margins. What’s more, you’re dealing with the fact they probably won’t eat your product more frequently (they’re just stocking up to eat later at their normal pace). Viewed over time, you haven’t increased overall sales frequency with this group either, because your sales spike will be followed by a slump.

So: what have we learned?

Although in-store price promotions deliver an immediate short-term increase in trial and sales, (and there is a need to promote your brand this way), there’s evidence it does little to help build value in your brand over the long run. Given the expense (the deeper the price cut, the less profit) and minimal reach (consumers in that store, that week, purchasing in your category), brands need to carefully consider their long-term goals. This will help them allocate investments in trade spend and advertising before shifting marketing dollars from proven frequency and reach programs to discount promotions that placate retailers at the expense of the brand.

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