PRICING AND SALES PROMOTION:PRICE AND SALES PROMOTIONS

7. PRICE AND SALES PROMOTIONS

Price promotions consist of tactics designed to achieve specific objectives in a limited time in a target market. Price promotions are directed at two primary audiences: consumers and the trade. Some commonly used promotion tactics are summarized next.

Aimed at both consumers and distributors, price-off promotions involve temporary price reduc- tions to retailers with the intent that savings will be passed along to consumers. In an immediate price-off promotion, the marketer usually affixes a special label to the product’s package to indicate the percentage or cash savings, which the retailer then honors. In a delayed price-off promotion, the consumer has to pay the normal price but can send the marketer a proof-of-purchase label to claim a cash rebate (refund).

Coupons offer buyers price reductions at the point of sale (most often at a retail checkout counter). Coupons are made available to consumers in a variety of ways. Some can be clipped from daily newspaper ads for supermarkets; some come as colorful freestanding inserts in Sunday newspapers; and some are distributed as fliers to homes within a store’s immediate vicinity. Coupons are also mailed directly to consumers, often in booklets or packets assembled by distributors or companies specializing in such promotions. Finally, in-pack and on-pack coupons may be affixed to the product and allow savings on the current or a future purchase.

Price Promotion as Price Segmentation

As mentioned earlier, manufacturers and retailers have made increasing use of coupons, rebates and refunds, and short-term price reductions to stimulate short-term demand for their products and ser- vices. However, despite the popularity of these price deals, it is not at all clear that a majority of these deals are profitable. Simply offering a coupon, rebate, or price-off deal to current buyers in the hope of stimulating a substantial increase in unit sales likely will reduce profits unless mostly new buyers take advantage of the deal. Thus, the underlying objective of a price promotion to final customers should be to focus on a price-market segment that is more price sensitive or deal responsive than existing buyers. Essentially, then, price promotions to final customers simply becomes an aspect of segment pricing.

Not all buyers of a product on price promotion take advantage of the promotion. Redemption rates for coupons and rebates indicate that many buyers do not redeem coupons, nor do they follow through and take the rebate that is offered. One reason for this lack of redemption or follow-through is that the perceived cost of redeeming coupons or qualifying for the rebate is larger than the perceived value of the coupon or rebate. Thus, buyers who do not take advantage of the price promotion pay the regular price. Therefore, by offering a coupon or rebate, the seller has effectively segmented the market into two price segments.

For this type of segmented pricing to be profitable, some additional conditions must prevail. First, the segments must be separable to some degree. This separation must either be due to some natural separation, such as geographic region or location, time of purchase, or category of buyer, e.g., business buyer vs. consumer. Second, these segments must have different degrees of price sensitivity and / or different variable purchasing costs. Third, the variable costs of selling to these segments must not be so different that the effect of the lower price is not canceled by increased selling costs.

Price Promotion Decision Variables

To understand the complexity of developing a price promotion policy, it is useful to review the types of decisions that need to be made before a promotion can be implemented. The decisions outlined below indicate there is a need to plan this activity carefully.

1. Should a price promotion be offered? The first decision is simply whether the seller should offer a coupon, rebate, cents-off deal, or promotional discount.

2. To whom should the deal be offered: dealers or final customers? Offering a price promotion to dealers or distributors in anticipation that the deal will be offered to final customers is not the same as offering it directly to final customers. Dealers may choose to reduce their prices in the full amount or less, or not at all. Further, they may buy excess amounts of the deal merchandise, relative to actual demand, and sell some units at full price after the deal period is over.

3. When should the promotion be offered? This question refers not only to the specific time of the year but also to whether to offer the deal during peak or slack selling seasons. For example, should ketchup manufacturers offer price promotions during the peak outdoor cooking season (May–September) or during the winter months?

4. How frequently should a promotion be run? If a product is offered frequently on some form of a price deal, customers may come to expect the deal and only buy on deal. The effect is that the product is rarely sold at full list price and the advantage of price segmentation is lost.

5. How long should the promotion be run? This decision is related to the issue of promotion frequency, peak vs. slack selling periods, and the length of buyers’ repurchase periods. Some consumer coupons do not have an expiration date, thereby extending the promotion period indefinitely and making it difficult to measure the effectiveness of the coupon promotion.

6. How many units should be covered by the promotion? When deals are offered to the trade, there often is a restriction on the amount that a dealer can order on deal. This restriction may be related to the dealer’s usual order size for the length of the promotion period.

7. What products and / or sizes should be promoted? Should a coffee producer offer a coupon on all package sizes of coffee, or only the 13 oz. size? Should a luggage manufacturer feature all of its luggage in the promotion, or only certain models?

8. How much should the price be reduced? What should be the amount of the rebate? What should be the value of the coupon? As discussed earlier, the degree of buyer sensitivity to the price reduction, or the degree that buyers perceive additional transaction value, will have an impact on the success of the promotion. The important issue here is how much of a price difference (reduction) is necessary to induce buyers to take advantage of the offer.

Some Perspectives on Price and Sales Promotions

Promotions comprise a significant portion of the marketing communications budget. With this in- creased managerial importance of price and sales promotions has come considerable research on how promotions affect sales. However, much of this new research information is still quite recent, and the evidence on how promotions affect sales is still emerging. In this section we will look at three different time frames to consider these effects (Blattberg and Neslin 1989): (1) the week or weeks in which the promotion occurs (immediate); (2) the weeks or months following the promotion (in- termediate); and (3) the months or years following the implementation of several promotions (long term).

Immediate Effects of Price and Sales Promotions

Promotions seem to have a substantial immediate impact on brand sales. For example, price cuts for bathroom tissue are accompanied by immediate increases in brand sales. When such price promotions are coordinated with special point-of-purchase displays and local feature advertising, sales might increase as much as 10 times normal sales levels. Because of such observable immediate sales impact, many brands of packaged consumer goods are frequently promoted.

A large proportion of this immediate increase in sales is due to nonloyal buyers (brand switchers). For example, one study showed that 84% of the increase in coffee brand sales generated by pro- motions came from brand-switching consumers (Gupta 1988). However, not all brands have the same capability of inducing consumers to switch brands with a promotional activity.

The effect of brand A’s promotions on brand B’s sales likely is different than the effect of brand B’s promotions on brand A’s sales. This asymmetry of the promotion cross-elasticities is a very important managerial finding. That is, a strong brand, say brand A, may be more successful in inducing buyers of brand B to switch to brand A with a promotion than the weaker brand B would be in using a similar promotion to induce buyers of brand A to switch to brand B. This finding implies that when there are simultaneous promotions by both brands, brand A likely will experience a more positive sales impact than will brand B.

Another important finding is that different forms of price and sales promotions have separate effects on sales. Further, when several forms are used together, the total impact may be greater than the sum of the effects due to each form.

An important reason for the immediate sales effect is purchase acceleration, which occurs because loyal consumers buy larger quantities when the brand is promoted and / or purchase the brand sooner than normal. The issue of purchase acceleration is very important when we try to determine whether a promotion has been profitable. Indeed, if buyers do not change their rate of consumption of the product, then larger purchase quantities or earlier purchases means that there will be fewer sales later at the regular price.

Intermediate Effects of Price and Sales Promotions

Usually, promotions have been considered short-term tactics to provide for an immediate increase in sales. However, as in advertising, there are effects that occur even after a particular promotion cam- paign has expired. For example, if a consumer purchases brand A for the first time when A is being promoted, will that consumer buy brand A on the next purchase occasion (repeat purchase)? Or will

the consumer develop a loyalty to the deal and look for another promoted brand on the next purchase occasion? The managerial implications of a promotion extend beyond the immediate sales effect of that promotion.

While there has been considerable research on whether brand purchasing enhances repeat brand purchases, such research provides conflicting results. There is some evidence that a prior brand purchase may increase the likelihood of buying that brand again. However, given the increasing use of promotions, other research shows no evidence that promotions enhance repeat brand purchases.

A reason why promotions may not enhance repeat brand purchases involves the question of why consumers may decide to buy the brand initially. It has been suggested that people may attribute their purchase to the deal that was available and not to the brand itself being attractive (Scott and Yalch 1980). If consumers indicate a negative reason for a purchase decision, there is a smaller likelihood that the experience will be a positive learning experience relative to the brand itself. If a brand is promoted quite frequently, then the learning to buy the brand occurs because of the reward of the deal, not the positive experience of using the brand itself.

Long-Term Effects of Price and Sales Promotions

In the long run, the relevant issue is the ability of the brand to develop a loyal following among its customers (Jones 1990). The important objective is to develop favorable brand attitudes of the cus- tomers such that they request that the retailer carry the brand and are unwilling to buy a substitute. As we observed above, many marketing practitioners fear that too-frequent promotional activity leads to loyalty to the deal, thereby undermining the brand’s franchise. And if buyers come to expect that the brand will often be on some form of a deal, they will not be willing to pay a regular price and will be less likely to buy because they do not believe that the brand provides benefits beyond a lower price.

A second problem develops if consumers begin to associate a frequently promoted brand with lower product quality. That is, if consumers believe that higher-priced products are also of higher quality, then a brand that is frequently sold at a reduced price may become associated with a lower perceived quality level. Thus, the result may be that buyers form a lower reference price for the product. Products that are perceived to be of relatively lower quality have a more difficult time trying to achieve market acceptance.