Price promotion is just a price subsidy to consumers, and margin subsidy to retailers in disguise. .
In consumer goods, most volume that comes from a price promotion is just bringing forward sales that would have happened anyway, just over a longer time-frame. Alternatively, it is volume taken from an opposition product by buyers who will avoid ever paying the full retail by switching products based on price. It is common in FMCG for consumers to have a basket of ‘acceptable’ products that they shop from via promotional pricing.
Over the 45 years I have spent in FMCG, I have seen the terminal erosion of most proprietary brands on supermarket shelves as a direct result.
In times of inflation, the gap in real wages and price widens. This pressure will only increase over the next year or so as retailers push for better and better price promotional deals, despite the current focus on their pricing tactics.
Now is a great time to go broke being successful at securing price driven promotional slots.
To dodge the ‘go broke’ outcome, there are a few simple to say but very difficult to implement marketing practises.
Understand the elasticity of demand for your product, and tactically market accordingly. This requires that you quantify the break-even points between the tactical volume increases you generate while on promotion, the lost margin from the discount, and the cost of the promotional slot. The strategic challenge here is that erosion of margin happens over time, as buyers from whom your product is in their ‘basket’ wait to buy on promotion, and most often only buy then.
Zig as others zag. Many, if not most suppliers will stop advertising, and direct the funds into short term price and promotional activity. This offers the opportunity for those brave enough to take it to generate a higher share of advertising voice for less. Over time. the body of research that examines the relationship between brand health and price delivers irrefutable evidence of the negative impact of price on brand health. Advertising share of voice is a leading indicator of market share. In tough times, most cut advertising investment to salvage the bottom line, as advertising is seen as an expense rather than an investment in future profitability.
Understand the reality of attribution. It is way too easy to make simplistic single source attribution of price promotion as the driver of volume. This moves the sightline from the more important ‘delivered’ margin. We now have the tools to do a much better job than has been the case in the past of separating volume and margin. However, the explosion of digital channels and tools has led to a quagmire of conflicting attribution claims, most of which are no better than marginal contributors.
As a kid, the Arnott’s red trucks delivering biscuits to supermarkets were always polished to a high level, no blemish in the polish was allowed. Even now, over 60 years later, that stays with me as an indicator of the effort put into quality which feeds into my view of the Arnott’s brand, despite the years, and ownership changes.
Resist the siren song of volume. For an SME to be successful, they need to make a whole series of tough choices. Amongst the most seductive of those choices is the perceived trade-off between price and volume. I say perceived because most see the trade-off as the traditional price/volume choice drawn as the graph they saw in Economics 101. It is grossly misleading to see it in this one-dimensional way. Consumers make their purchase choice on a whole range of ‘value-delivery’ parameters, of which price is only one. When you allow it to be the only one, it will logically dominate. As a marketer, your task is to make price a minor component of the purchase choice consumers make. While short term that may dampen volume, and even deny you distribution in a retailer, the point of being in business is to make enough to remain in business. You will not do this by giving away margin for no return.
Know your costs. This seems pretty obvious. However, the number of SME’s that do not understand the detail of their costs and the difference between marginal costs and overheads never ceases to amaze me. One of the most valuable tools, previously noted, in the SME toolbox is a sophisticated understanding of their break even. When you have this model working it enables you to add in some assessment of the impact of price and volume over time. It enables consideration of the impact of pulling forward your sales volume and delivered margin on promotion, the volume and margin delivered off promotion, and volume and margin impacts of competitive promotions.
Following are a few of the many research reports that articulate the linkages between price, volume, and brand salience. I include them to demonstrate the views expressed above are way more than just my opinion.
https://tinyurl.com/496vwphy Ehrenberg Bass. Brand health (podcast)
https://tinyurl.com/4wzkebav Ehrenberg Bass. Brand salience
https://tinyurl.com/4b5er6rc Amity University. Impact of price promotion on brand equity.
https://tinyurl.com/36fr8xwf Research Gate. Long term effects of price promotion on brand choice and purchase quantity
