Do price promotions put brands on the road to nowhere?

In an excellent article, ‘The 13 bad marketing habits to break in 2013’, Marketing magazine includes price promotions at number six. The article quotes Thierry Billot, the managing director of brands at Pernod Ricard, as saying: “If you follow the road of price promotions, you will quickly realise it’s a dead end, with no profits.” 

The article says that price promotion “is not a sustainable marketing strategy” and that brands have sacrificed long-term brand equity at the altar of short-term profits, but is it really as black and white as that?

Some brands in some categories have far more leeway than others to hold their price positions and stay out of the price promotion trap. When researching price promotion risk we have found that the most important factor is the degree of substitutability in the category and how prepared consumers are to switch between brands. This is itself related to the extent to which brands are perceived to be different and to offer different things.

An example of a category with very high substitutability is mainstream lager. Consumers are very willing to switch between brands based on the best price deal. We may see differences in brand preference and rating but crucially we see low scores on differentiation and uniqueness. Unsurprisingly, it is a very heavily promoted category. Picking the brand on promotion that week amongst a small number of acceptable brands is the key heuristic shopping behaviour across a lot of categories (shower gel, baby wipes etc.).

On the other hand, in categories where products really offer different things or where one product has created a stand-out position, companies can avoid using promotions altogether or instead use it more tactically to encourage consumers to sample different brands. In categories where there is no discernable brand leader or product differentiation, consumers are more likely to simply shop around for the best available offer. 

Some of the research implications of this are interesting:

1. One of the reasons that difference/uniqueness is important for new products is that, long-term, it enables price points to be maintained which will impact on likely success

2. When researching in-market pricing strategies (such as via conjoint) it is vital to understand the degree of difference across the choices.  This is because in research, consumers will claim they are more responsive to price than they actually would be when substitutability is low. On the other hand, in markets that tend towards commodity e.g. mainstream lager, the research response is often very close to observed reality.