VYING FOR PROMOTION

In the premier league of consumer goods, a promotion battle is fought out every day as special offers flood the shelves. And the results are good: this summer, items under promotion accounted for 20 per cent of the value of the average British

In-store, price-based promotions such as these in Sainsbury’s are growing more popular – and in doing so are also becoming a major headache for senior marketers

It was the run-up to Christmas and a “special trial offer” at Sainsbury’s meant you could buy a pack of 12 “Xtra active” Duracell batteries for ú6.49 – or, alternatively, a “buy two, get one free” offer from rival Energizer would give you three four-packs for ú6.38.

Duracell and Energizer’s brand managers were, of course, faced with a painful dilemma. Christmas is battery selling time, and Sainsbury’s a major outlet. If one brand were to refuse to take part in the special offer, its sales and market share would be decimated. But when taking part, while consumers get an excellent deal and the retailer’s quest for extra pre-Christmas custom is given a boost, the manufacturers’ chances of expanding their market shares profitably are about as small as a snowman on Christmas day. As Sainsbury’s full page press ad boasted: “Sainsbury’s. Where good brands cost less … and less … and less … and less”.

Similar little cameos are being played out every day in UK consumer goods. In-store, price-based promotions such as “20 per cent extra free”, “buy two, get one free”, “ten per cent off”, have always been a part of the marketing armoury, but they’re growing more popular – and in doing so they are also becoming a major headache for senior marketers. So much so that some are saying they’re a bit like the plague: infectious and dangerous, to be avoided if at all possible.

Conventional wisdom has it that in-store price promotions pay for themselves, not only through the short-term sales blips they generate (they can be massive), but over a longer period because of the brand trialling and switching they encourage. But over the past few years, this happy assumption has come under increasing pressure. And when consumer and trade promotions command as much as 75 per cent of total marketing budgets, as one recent US estimate put it, getting it right becomes a major strategic issue.

Critics of price-based promotions point to research by people like Andrew Ehrenberg, whose projects (the latest reported in the Journal of Advertising Research, analysing promotions for 25 products in the UK, US, Germany and Japan) produce no evidence of either improved base-line sales, the incidence of repeat buying, or their ability to attract new customers: 93 per cent of all buyers had purchased the brand in question in the previous two-and-a-half years. With the important exception of new product launches, which do need price offers to secure trialling, this type of promotion does nothing to build brands, Ehrenberg argues.

Indeed, say the critics, the costs of such promotions can far outweigh their benefits. The bunching of large volumes of sales in small periods often creates supply inefficiencies, and the cost to manufacturers in terms of promotional materials, changes to packaging and personnel time can be very large.

Before it introduced its policy of Every Day Low Pricing (EDLP), Procter & Gamble estimated that 25 per cent of its US salespeople’s time, and 30 per cent of brand managers’ time, was spent designing, implementing and overseeing promotions. “For many promotions the cost of selling an incremental dollar of sales was greater than one dollar,” reported researchers Magid Abraham of IRI and marketing professor Leonard Lodish in the Harvard Business

Review.

There’s more. All too often, increased promotional spend comes at the expense of traditional brand-building activity such as advertising. And, because promotions have such an immediate effect on sales, they fuel the flames of competitive retaliation far more than other activities – creating a vicious circle where manufacturers pay and retailers benefit. Walkers marketing director Martin Glenn says: “We see price-related promotions as a form of discounting, where the offer is seen as coming from the retailer not the brand.” Further, because the negotiations surrounding such promotions encourage game-playing and power-playing, they actually generate an enormous amount of mistrust in channels of distribution, say the critics.

In short, they create the “double jeopardy of disastrous short and long-term costs”, says former JWT executive John Philip Jones. Yet, adds Simon Broadbent, of the Leo Burnett Brand Consultancy: “It’s like the nuclear arms race – the prisoner’s dilemma. Nobody will do the sensible thing [that is, stop] because if they do it alone, they will suffer.”

But if the case against the in-store price promotion is so clear and overwhelming, why is it still gaining ground? According to Nielsen research, this summer, items under promotion accounted for 20.3 per cent of the value of the average British shopping basket (excluding fresh foods), That’s up 1.6 per cent on last year.

Sophisticated marketers are already pulling back. P&G’s EDLP policy is now well established. This summer, both Kellogg and General Mills announced plans in the US to drop “buy one, get one free” promotions, while Nabisco declared it was cutting its promotional spend by 18 per cent – to place a new emphasis on brand-building.

In addition, the political dice are loaded. Brand managers and sales directors want to meet volume targets, and promotions can be invaluable. Finance directors are more willing to approve marketing spends which generate large and measurable blips in sales. Retailers, fighting their own increasingly desperate price wars, are ever keener to persuade manufacturers to make a better offer. And weak manufacturers, under fear of delisting, dare not refuse.

Third, say defenders, the in-store price promotion can have many positive benefits. A significant number are highly profitable – especially those where margins are high and there is a high elasticity of demand (if people buy more they consume more), or where their cost structures mean incremental volumes translate straight through to the bottom line. “There are plenty of manufacturers taking part in multibuys and multisaves operated by Sainsbury’s and Tesco where the additional revenues outweigh the costs,” says Barry Clarke, chairman of Clarke Hooper Communications.

Other benefits include trialling. Ehrenberg’s own evidence – that 30 per cent of consumers had not purchased the brand in the previous half-year – means the promotions concerned “did some very useful things”, argues Alan Toop from The Sales Machine. He’s backed by a recent Nielsen Homescan Household Survey, which shows 44 per cent of consumers agree with the statement, “I will buy a brand I normally don’t if it’s on offer.” Only 30 per cent disagreed.

Promotions can also be used to help manage supply peaks or shifts in raw material or other prices; to generate excitement and attract consumers’ attention in-store; and to attract the attention of both supermarket buyers and the company’s own sales force (which often tend to ignore their smaller brands); and to help ease trade marketing/retailer negotiations over margins, facings and promotional activity, argues Nielsen’s analytical services consultant Richard Cook. “If you are able to divert some of the funds that would have gone to simply reducing margins into promotions then you generally get more volume from the same budgets.”

They can even start adding to the brand’s personality, adds former sales promotion man John Hooper, now director general of ISBA. Argos Premier Points has, arguably, become a core part of the Mobil offer, Air Miles a part of the BA offer. In this way, they are strategic, and not purely tactical tools. At worst, says Toop, for many lesser brands they are simply “a cost of doing business” in the modern commercial environment.

The danger, Toop admits, is that it is a very slippery slope. As consumers and retailers grow to expect special offers from a brand, more and more of their budgets are quickly gobbled up in sales firefighting and buying shelf space, rather than brand-building. “It’s like drug dependency”, says once senior fmcg marketing director, who asks not to be named. “Competitive reasons might force you to do it. But it’s a pretty rocky road once you do.”

So which way forward? P&G is already pioneering one: EDLP. B

So which way forward? P&G is already pioneering one: EDLP. But not all brands are strong enough to take this route. Ehrenberg suggests a halfway house: instead of automatically increasing promotions budgets by five per cent every year, companies should make annual cuts, and signal the fact as widely as possible. Most competitors will be relieved to have the chance to scale down their own tit-for-tat initiatives, he suggests.

Robert Brown, a US price promotion guru, takes another tack. Bald brand share data are often dangerously misleading, he suggests. Too often, the headline figure hides the fact that a particular brand has promoted madly to get that share. Brand shares should be divided in two: full-price brand share, and share of incremental volume sold to value buyers during promotions. The new numbers often stop marketers in their tracks.

Toop goes even further. Transform the entire budget-setting process, he says. The modern marketing budget allows brand managers on mediocre brands to kid themselves that if it weren’t for price promotions they would be able to spend the money on advertising. But most of the money supposedly “spent” by marketers in this way is not marketing expenditure at all: it is simply a reduction in revenues. If the cost of price-related promotions were taken out of the marketing budget, “you would be setting the price at what you get for it in practice, and marketing departments would realise they haven’t got as big a marketing budget. This clarifies thinking enormously.”

Meanwhile, the quest is on to find out what works at what cost, what doesn’t, and why. Probably more than any other marketing activity, the success of in-store promotions depends largely on the detail: on what vehicle is being used, the strength of the brand, the category, and the consumer profile.

If a brand has a high proportion of sole users (that is, who buy only that brand) then most price-based promotions are a waste of money. On the other hand, semi-sole and “repertoire” users, who waver between two or more brands, could be very responsive to promotional activity and yield genuine sales increments. In a comparison conducted by Nielsen’s Cook, one product (a staple) offering a ten per cent price cut plus a gondola end display achieved a sales rise of just 15 per cent. Another impulse product turned in 115 per cent uplift with the same offer.

Companies such as Nielsen and IRI are racing to develop sophisticated software to disentangle the effect of different types of promotion from baseline sales. Brown says: “With scanner data at the chain level [as is now becoming available in the UK], and the ability of manufacturers to integrate ex-factory sales, the impact on profitability of promotional programmes will be known and many unprofitable promotions will be identified and eliminated.”

Or will they? For many a marketer the in-store promotion is the least sexy part of the job. Yet it represents several things: the struggle for power between manufacturers and retailers; the setting and deployment of marketing budgets (and the consequent arguments between accountant and marketer); the trade-off (if there is one) between long-term brand-building and short-term selling; the use of information and IT.

Clarity of purpose and rigour of analysis are vital: a company’s approach to this increasingly crucial issue is a sure sign of its marketing sophistication. Unfortunately, there are many marketers who seem to think humbug like “we are doing it to reward our loyal customers” can still pass muster. They are, of course, simply digging their own grave.

SBHD: In the premier league of consumer goods, a promotion battle is fought out every day as special offers flood the shelves. And the results are good: this summer, items under promotion accounted for 20 per cent of the value of the average British shopping basket. Yet critics say the cost of such schemes can far outweigh their benefits. So what does it take to get it right?

Latest from Marketing Week

NOT REGISTERED? IT'S FREE, QUICK AND EASY!

Access Marketing Week’s wealth of insight, analysis and opinion that will help you do your job better.

Register and receive the best content from the only UK title 100% dedicated to serving marketers' needs.

We’ll ask you just a few questions about what you do and where you work. The more we know about our visitors, the better and more relevant content we can provide for them. And, yes, knowing our audience better helps us find commercial partners too. Don't worry, we won't share your information with other parties, unless you give us permission to do so.

Register now

THE BEST CONTENT

Our award winning editorial team (PPA Digital Brand of the Year) ask the big questions about the biggest issues on everything from strategy through to execution to help you navigate the fast moving modern marketing landscape.

THE BIGGEST ISSUES

From the opportunities and challenges of emerging technology to the need for greater effectiveness, from the challenge of measurement to building a marketing team fit for the future, we are your guide.

PERSONAL AND PROFESSIONAL DEVELOPMENT

Information, inspiration and advice from the marketing world and beyond that will help you develop as a marketer and as a leader.

Having problems?

Contact us on +44 (0)20 7292 3711 or email subscriptions@marketingweek.com

If you are looking for our Jobs site, please click here