Private label market share jumped 13% between 2003 and 2005 suggesting that consumers would rather buy a generic product than its pricier big-brand counter-part. In response to this trend, big-brands are using price promotions. As a result, customers stock up during sales and wait for the next deal: Deeper discounts for shoppers – shrinking profits for big brand company. Article discusses how to protect brand equity. Track purchasing trends – if promotions results in increased sales volume, customers are unwilling to pay the normal premiums, however, if they are backfiring utilize advertising, new-product development, and new distribution strategies. Important to focus on strategies that enhance short and long term sales.
- Companies focus on their ability to price and sell in real time even though this focus can weaken their overall brand performance. Short term data is more readily available than long term data. With the introduction of store scanners, real time sales data can be immediately linked for managers to compare spike in sales to a current price promotion. This spike in sales makes promotions look highly profitable, but ultimately resulted in the erosion of their brand in the long –term. The comparison needs to include the sales made at a discounted price with those that would have occurred without the promotion to get a more accurate picture of the promotions impact on long term brand equity.
- Baseline Sales. Developed to help managers predict the level of sales in the absence of a discount, and thus to assess the immediate profitability of promotions. They are ESTIMATES generated by extrapolating from periods when there are no price reductions. Since promotions result in a boost in sales, this is known as a lift over baseline and is generally short lived. Baselines and lifts change in response to marketing strategy and those changes signal a long-term shift in brand performance. High baseline sales mean that consumers are buying more of a product when it is at full price. Subsequently, smaller lifts reflect greater customer loyalty because customers are buying regardless of promotions or discounts.
- Consequences of Short Term Sales Approaches. Changes in consumer behaviour – more people are making purchasing decisions based solely on price which results in decreased sales when the product is not on sale. Baseline sales fall and lift increases. This lift makes the promotion look profitable in the short run and so discounts continue and profit margins eventually decrease. Stockpiling can also increase the immediate effect of a promotion without increasing overall sales since consumers take time to go through the inventory they just purchased at a discounted rate. Diluted brand equity – promotions can appear less differentiated as they focus on price instead of quality. Competitive response – one firm uses promotion enables competing firms to follow suit, resulting in lower margins for everyone.
- Long-term effects are harder to measure. Studies have shown that increased product line variety and distribution in leading retailers reduce consumer’s sensitivity to price suggesting that this raises sales and prices in the long run. But ability to attract this data from a firm level is more difficult than short term sales data. Wall street also exacerbates short-term perspective since they focus on quarterly figures for their valuation of firms. Brand managers are also short lived positions, so the work done for marketing strategy that pertains to new-product development, or distribution will more often than not help their successors rather than themselves in the role.
- Utilize a Long-Term Dashboard View. Managers can monitor long term effects each quarter by watching some dashboard metrics, including: Baseline sales; Changes in baseline sales over months, quarters, and years and the significance of those changes; Estimated response to regular price promotions; Changes in response to regular and discounted prices over months, quarters and years and their significances. Doing these things will help brand managers to steer clear of the temptation to discount for a spike in sales that is inevitably short-lived. Refocusing their attention to basic principles will keep them from eroding their brands performance and ability to compete in the marketplace.