Why price promotions are the most dangerous of all marketing addictions
An “addiction” could be defined as something that is pleasurable short term but you know is damaging long run. I think we would all concur that promotions risk being exactly that.
There is a critical problem here, for me, in how we assess promotions, even in terms of pure economics. We drop the price by let’s say 30%. How much do we need to sell to make the same profit? Simplistically that depends on our margin. If we assume the promotion volume doesn’t affect our costs (short run) and our gross margin is 50%, then we will need to sell over 2.5 times more (not 30% more!). This then makes the massive assumption that all these extra sales are incremental.
Let’s take a typical grocery category, jams and spreads. When there was a promotion, our measurement of shoppers’ own feedback told us that 16% of shoppers buying from a promotion bought the same product in the same quantity regardless of the activity. A further 24% bought more jam, but they were going to buy anyway. So, they probably just “cupboard loaded”, thus it’s possible around 40% of the incremental sales are not actually giving us a return on our investment.
That means we need to sell over 3.5 times more than usual to get a true return, in terms of bottom line profit (ignoring any retailer fees etc).
This, in turn, ignores the number of shoppers who we train to wait until the next deal before buying again denting the possibility of full price sales.
I am not saying that promotions can be avoided, and clearly, brands need to stay competitive, I just feel that in comparing price promotion to other tactics, the profit impact comparison used when evaluating the options needs to factor in the real shopper impact, not just the headline sales figure.
By the way, jam is one of the better categories in terms of getting shoppers to respond actively to deals. The worst is actually squash and cordials!