Daily Research News Online no. 1786 - 'Price Promotions lead to Brand Share Erosion'

'Price Promotions lead to Brand Share Erosion'

August 5 2002

'The majority of price promotions lead in the long-term to brand share erosion' was the summary by Thomas Bachl, Managing Director of GfK Panel Services Consumer Research, at the recent GfK Annual Conference. This result comes from a survey of 157 brands covering products in regular daily use.

According to Bachl, price promotions at the point of sale often do not generate the success hoped for by the retail trade and by manufacturers of branded goods. They often lead to unintended scatter effects, because success levels are often lower than hoped for both in the short-term and long-term. The results which are based on consumer data from the years 2000 and 2001 on 157 brands and covering products in regular daily use, contradict to some extent retail sales information which is generated from retail panels. While they show without exception that price promotions generate sales increases, an analysis of consumer data leads to a different conclusion.

In Bachl's opinion, what is critical for the strategic success of promotions, is that buyers who make use of such promotions, are drawn to the brand, and become loyal customers. Therefore it is important when doing price promotions to consider very carefully customers' buying behaviour both before and after the promotion.

In the short-term, a promotion is only successful if possible scatter effects, particularly those affecting a brand's loyal customers can be compensated for. Loyal buyers of a brand are the main beneficiaries of a promotion, and their purchases cost the manufacturer money, since they are buying the product at a price cheaper than they are willing to pay. These reduced revenues are balanced out by income from casual purchases and by buyers who are attracted to the brand by a promotion, or who change brands in the short-term due to promotions.

The analysis of 157 brands shows that around a quarter of all sales promotion activities are unsuccessful, or in the short-term create no measurable effect. 73% are successful in the short-term. Looking at it another way, 27% of organisations that undertake promotions, sell their products to their loyal customers for less than they are worth to them, while not making good the loss by attracting casual and one-off purchasers.

A price promotion will enjoy long-term success, if new customers can be attracted to the brand. Manufacturers must keep in mind those customers who have been loyal to the brand for years, but whose positive image of the brand may be undermined by the promotion, which could result in them perhaps moving over to another brand.

The survey generated the following paradoxical result: especially in the case of manufacturers' brands, two-thirds of all promotions resulted in a reduction of brand value. Surprisingly, it is the weaker brands that benefit. In fact one out of two such promotions lead to such brands improving their market situation. This opens up opportunities for them to attract new customers, and even more important, to retain them. In summary: reducing prices has a positive impact on weak brands, but is potentially more likely to damage strong brands. Price promotions can therefore lead to the erosion of brands - particularly of strong ones. They can however in certain circumstances work as a tool for increasing brand value.

Particularly during new product launch phases and during the brand's subsequent development phase, price promotions can in Thomas Bachl's opinion have a role in building brand values. However such promotional activities should be steadily wound down, as soon as a strong brand loyalty has been created.

This GfK study demonstrates that price promotions are significantly more successful with retailer brands, both short-term - in other words in creating increases in sales, and long-term - in other words in building the value of the retail brand. There is here a clear conflict of interest between retailers and manufacturers. A win-win situation for both protagonists is unlikely.

In principle though, retailers must have an interest in strong manufacturers' brands, as in general they achieve higher prices, and - as noted above - can be successfully used for promotion purposes, even with quite limited price reductions. Therefore in economic terms, increased profits can be generated by using strong brands combined with limited price reductions.

The research results described above are based on 2000-2001 data from the ConsumerScan Household Panel, covering 90 product groups and 157 brands.