Despite the fact that price promotions tend to be short-term, they can ultimately have long-term ramifications. Management needs to consider both time frames -from the outset.
Price promotions – such as consumer rebates, feature pricing, coupons, co-op advertising, and off-invoice trade deals – are pricing strategies typically used by manufacturers to attract new customers and stimulate the volume of demand. These are the short-term goals. Longer term, companies want to retain profitable customers.
In order to effectively measure the total impact of any price promotion, the management team responsible for its creation must set clearly defined objectives for the promotion as well as establish firm criteria for determining its success. Only after careful measurement can the decision be made to repeat the promotion.
The Short Term
In the planning process, managers usually set volume objectives to be achieved within a relatively brief period; for consumer goods the time frame may be anywhere from six weeks to six months.
A better-defined set of objectives might be to forecast and measure the impact of sales volume by SKU, by channel, in order to understand where the promotion has been most effective. Clearly some promotions work better in some channels than in others and, likewise, some SKU’s are more susceptible to promotional incentives.
On the surface, meeting goals for sales volume would appear to be an affirmation of the promotion’s success. It’s important, however, to examine all the stimulants of that volume increase. Increased volume can have a number of causes. Higher category demand (the demand for all brands in a product category), for example, can be attributable to an increase in advertising or general product awareness, or to environmental or seasonal changes. If other causes are at play during a price promotion, the increase in volume for a given product cannot be solely attributed to the price promotion. If total category demand has not significantly changed, however, the increase in specific product demand is likely the result of “winning over’ consumers of substitute brands.
Profit margin, even in the short term, requires examination. Once an incremental volume lift has been verified, managers need to assess the volume from customers who would have paid full price for the product. Lost opportunity has to be factored into the resulting margin. Consider a case where increased volume could have been achieved without a price promotion owing to increased advertising by the manufacturer or by its competitors. In such a case it is possible that a similar volume could have been sold at a higher price providing a greater profit margin.
This type of analysis requires stringent data collection not only to determine sales volume, but also to confirm wholesale and retail prices, customer elasticity, and operating cost estimates for the promotional period.
“Thus well-intentioned price promotions that may have had positive short-term effects will, in the long-term, induce customer disloyalty and other undesirable behavior such as forward and delayed purchasing habits, resulting in inventory and manufacturing forecasting difficulties.”
Just as critical, management must evaluate the long-term effects of price promotions, and there are a number of these with far-reaching ramifications. Strategically executed price promotions should garner a long-term, desirable change in consumer behavior. Sustained brand switching and repeat purchasing of the brand occurs when, as a result of the promotion, a customer is induced to try the product, has a positive experience, and continues to purchase that product in the future at its regular price. Repeat purchase patterns are often very difficult to achieve over the long-term when the product in question has competitive substitutes of similar quality at similar prices.
In fact, in a market where excessive price promotions are the norm, individual companies and the industry as a whole can suffer. Over time, customers do not distinguish promotional prices from regular prices; they simply develop views of -fair” and -unfair” prices. As competitors respond with more aggressive price promotions, consumers begin to expect lower and lower prices for higher and higher quality products on a regular basis. As a result of such behavior, the price ceiling begins to fall for the entire industry – a difficult trend to reverse. Thus well-intentioned price promotions that may have had positive short-term effects will, in the long-term, induce customer disloyalty and other undesirable behavior such as forward and delayed purchasing habits, resulting in inventory and manufacturing forecasting difficulties.
Despite the long-term risks, price promotions can be an effective pricing tactic for organizations that manage them effectively. Management teams that are committed during the planning process to defining realistic objectives, forecasting the short and long-term impacts, and defining and documenting the measurement criteria ultimately determine the success of the promotion.