Breaking the cycle of price-promotion addiction.
By Amber Hudson
For the uninitiated, Black Mirror is a highly addictive Netflix series set in a dystopian future that blasts a warning siren of what could happen if society continues on its current path.
With this scary view of the future, a discussion broke out about the highly addictive nature of price promotions. If sugar is the average person’s cocaine, price promotions are a marketer’s drug of choice. The quick hit of sales, a crash to reality followed by the desire for another hit is a viscous cycle that’s hard to break. But the long term effect of price promotions is the destructive erosion of a brand’s equity and margin.
For example, a study by the University of Texas analyzed Nielsen scanner data to understand the impact of price promotions on canned tuna purchase behaviour. What they found was although some customers switched brands to take advantage of a sale, loyal customers stock piled their tuna. The conclusion was, not surprisingly, that price promotions can hurt large-share brand profits in the long run: an increase in sales at a lower price frequently came at the expense of future sales at the full price. Another study by McKinsey found for the average S&P 1500 company, volume sales would need to rise by 18% in order to offset the profit impact of a 5% price decrease. Given few product categories are that elastic most price promotion has no positive, long-term effect on sales.
Furthermore, brands that are often on sale face an existential crisis: if I am often sold at a cheap price, am I then a cheap brand?
Tuna is the least of our concerns. Roll backs, price slashing, Black Friday month, discount retailers, FMCPG on sale every week…as a society we’ve been conditioned to expect frequent price discounts. It’s resulted in a distorted reality where many don’t even believe the regular price is real.
So what’s a brand to do? Well, there’s no need to go cold turkey. Price promotions are still a highly effective way to meet a specific strategy. But the key is to do them with purpose. Better yet, find another way to add value to your consumer beyond price discounts: in / near case items, instant wins, prize draws, loyalty programs. Because if brands keep feeding this cycle, what does the dystopian future of price promotions look like? AI assistants that automatically place an order when a product hits a low price threshold? People building underground bunkers to stockpile sale-priced items?
Tell us what you think the future looks like if the addiction of promotional cocaine continues.