Offering price discounts on consumer goods seems to be a quick answer to tough competition and to consumers who are more demanding and price sensitive these days. Many times our clients ask us which promotion strategy is most effective in driving share. However, the answer for short term sales boost is different from the one that maintains your brand’s financial health. Let us explain in this article what type of promotion offers the best long term effect.
To set the scene; we are talking about products that consumers buy regularly, such as food, non-food, typical supermarket items, healthcare products, etc. And, we are looking at two types of promotion:
- Explicit discount on a product as a percentage (e.g. 15% off) or a direct monetary price reduction (e.g. €2 off)
- An offer of a larger ‘value’ pack, or as an example a ‘buy 3, pay 2’ promotion
In our recent studies, we analyzed the short term and long term effect of these two types of promotion. The results are evident; the discount strategy works well if you look at short term effect. Yes, when products are offered with an explicit discount, you will get the highest share boost, and yes it’s good for your cash-flow. However, in the longer term you are worse off. Why?
Try to avoid a price war
When offering price discounts, you are educating your buyer to focus on the lower price of your product, negatively impacting the perceived value. Consumers become more price sensitive or conscious. They no longer look at the brand they are buying; they mostly look at which product is cheapest. This will eventually lead to a form of price war, and that is something all producers want to avoid.
Trial and repeat, does it work?
One of the main drivers of offering a discount is to gain market share. We plan for ‘trial and repeat’. In other words, we hope that consumers who try, will return at the full price when the promotion is over. In reality this is not the case, because many times the people who try are not returning, they move on to the next offer of any other brand. They go for the lowest price at all times.
What about the loyal consumer?
Price promotions will encourage consumers to buy stock (to stock pile), whether this is a new user or an existing loyal user of your product. The effect of a price promotion in this scenario is that the producer is missing out on future revenues from the loyal customer. This loyal customer is already prepared to pay full price anyhow.
So, if your brand is losing market share or if you enter a new market to gain market share, don’t panic. Instead think about the great effects of ‘larger packs’ promotions. Larger packs, or buy 3, pay 2 promotions will lead to more consumption, without devaluing your product since the promotion is implemented indirectly. But mostly, when adding more to your product (whether 4 more dishwasher tablets or 50ml extra shower gel), consumers will stock pile. And because they buy more they have more time to become loyal to your brand. They remember the brand name and the chance of a repeat purchase is bigger.
In today’s fight for shelf space it’s tempting to lower your product price, but you might want to rethink your strategy. Does it really help you to build your brand?