During harsh economic environments, companies have to make deliberate choices on how to invest marketing budgets to optimize profits. Especially in the competitive FMCG industry promotions are often used as a tool to increase sales. However, what is the most effective type of promotion? And what are the implications of these promotions on your overall product portfolio revenues?
The effects of price promotions
Over the years, SKIM has carried out many pricing studies incorporating sales promotions (also known as ‘price promotions’), since in many product categories a large part of the volume is sold on deal. Through these studies we have gathered extensive knowledge on the effects of various types of promotion and their attractiveness to consumers. To start with, we can state that the effects of a price promotion are threefold:
- They are very effective in drawing attention
- They give the consumer the feeling of having saved money
- They relay a rational effect of a lower net price
Some of our findings suggest that drawing attention and giving the consumer the feeling of having saved money is even more important than the actual net price that consumers have to pay for the promoted product.
Different types of promotions
In addition, the way you express a promotion can lead to different results, even though the actual net price might be the same for the two promotions. For example ‘2-for-the-price-of-1’ might have a higher impact on the value for money perception than ‘50% discount’. You can’t simply replace one promotion with another and expect the effect on sales to be the same.
New ways of measuring promotions through conjoint analysis
Despite the complex nature of price promotions, conjoint analysis can be effective in helping to understand what type of promotion is more or less effective and which consumers you will attract with a promotion. However, including promotions in a conjoint pricing study is not as simple as it sounds. While it allows for determining the eventual net worth of doing a promotion, measuring long term promotion effects (like post-promotion dips and changes in promotion frequency) is a real challenge. At SKIM, we are developing new ways to also include these long term effects in our promotional analysis.
Individual purchase cycles
In order to deliver more insightful results, we are currently working on a more versatile approach in which we are able to see the effect of a promotion in the long run. This is done by simulating individual purchase cycles. These purchase cycles help us determining the choices each individual makes for a given time period. The most important choices to determine are:
- When the purchase will be made (purchase frequency)
- What product will be bought (preference depending on e.g. price, size and promotion)
- What quantity will be bought (normal volume used by individual over a given period)
- How much stock this individual has at any given point during that time period
This dynamic approach overcomes the drawbacks of conjoint analysis mentioned earlier, by ensuring that the trends in ‘post promotion dips’ are accounted for. This makes results from our promotions research more realistic and more actionable for defining next steps.