Small improvements in average price drive large improvements in profitability.
Do the numbers.
The normal expectation in consumer markets is that volumes will increase when you promote. Usually they do, but that period is usually followed by a period of lower volume, as what you have done is pull volume forward. This gives those who would have bought at the full price a discount, and rewards those who only buy on price, but who will move on next time to the cheapest on the day.
Brand equity flattens the peaks and troughs of price driven demand, reducing the volatility of price driven volume.
A reduction in the volumes driven by price alone, and an upward to the right movement in average prices paid, act together to drive profitability.
The challenge is to be in sufficient control of your distribution to be able to manage the balance of price based promotional activity often demanded by distribution channels, and investment in brand equity held by the end consumer.
In Australia, the power of the supermarket duopoly together with poor management of that balance by weak minded and brand equity unaware management has resulted in the brand equity of most consumer brands being trashed by supermarkets. It has been replaced by cyclic price promotions, with mandatory participation if distribution is to be maintained.
One of the great missed opportunities to build and leverage brand equity (in my opinion anyway) is the use years ago of Al Pacino by Vittoria coffee.
I have no idea how long the campaign went, or how much they spent, but I clearly remember seeing the ad on TV, and on posters in coffee shops around Sydney. I still buy Vittoria coffee as my preferred coffee, but have been ‘trained’ and rarely need to buy it at the full price of close to $40/kilo, when it is ‘on promotion’ regularly at between $20 and $25. I drink a lot of coffee, so the low price is a pantry stock opportunity.
Unless I am highly unusual, Vittoria has missed out on many millions of dollars of profit over the decade. Heavens, they miss out on several hundred a year just from me!
The potential power of human emotion on the purchase choices they make is huge.
Most fail to leverage it to its fullest extent.
The campaign for Meadow Lea margarine that ran from about 1977 to the mid-eighties is another example. ‘You ought to be congratulated’ not only drove the brand to massive market share leadership at an average price that was a premium to its natural competitors, but it also drove the size of the whole market.
When the dopes who took over the brand failed to recognise the dynamics, and cut advertising, while bowing to retailer pressure, the brand shrunk like a balloon with a slow leak.
Nearly 40 years on, the ‘you ought to be congratulated’ positioning may retain enough equity to be revived. Similarly, I am sure Al Pacino still drinks coffee every day, but may now be a very expensive spokesman.
Maybe not. Worth a try?
