Why can price promotions become dangerous?

Price promotions is a tool that marketers use across many product and service categories. However, many of us know stories where price promotions have triggered very negative business results reflected in severe not only margin but also share losses.

After a business review where results indicated that 50% of the brand portfolio sells had come from price promotions, I realized a strong need to investigate this topic in more details.

The overall conclusion to which leads academic literature on this topic can be expressed by the words of Ehrenberg, Hammond and Goodhardt (1994): “price promotions don’t affect a brand’s subsequent sales or brand loyalty”.

Definitely, successful price promotion do lead to sales increases during the promotional period, mainly driven by:

1. Brand switchers who take an advantage of the price cut.

2. Consumers stockpiling behavior in response to the reduced price.

3. Newly attracted consumers (i.e. real market expansion) (Dawes, 2004).

The research results show that among these three factors, brand switchers are the key driver of price promotions success (Dawes, 2004). This is driven by the fact that brand switchers are mainly represented by light buyers and each brand has a lot of light buyers who buy a brand only infrequently (Dawes, 2004; Scriven, Ehrenberg, 2002). This is also linked with the fact why after a price promotion there is quite often no huge negative after-effect (Ehrenberg, 2000).

Also, according to Dawes (2004): “the brand is also bought during the promotion by consumers who would have otherwise bought it at regular price”. This linked with the results of the research done by Ehrenberg, Hammond and Goodhardt (1994) who conclude that “almost 70 percent of the buyers during the average sales-peak had bought the brand already in the previous half-year, some 80 percent in the previous year, and nearly all, 93 percent, in the previous 2.5 years”.

Another type of brand switchers can be those who are usually price sensitive and always tend to buy at the lowest price option – “many will switch straight back once our price returns to its normal level and will also switch if a competing brand offers a price cut” (Dawes, 2004). However, even in this case consumer don’t change the repertoire of their brands – they “respond if the bargain is for a familiar brand, i.e., one already in their usage portfolio, but very rarely, if ever, if it is for a previously untried brand” (Ehrenberg, Hammond and Goodhardt, 1994).

Considering the stockpiling effect, it is important to highlight that this will affect a brand as much as other brands who can come up with price promotion – “more significantly forward buying will include loyal customers who would have bought our brand at full price” (Dawes, 2004).

It’s also important to mention that consumers who try a brand in response to price promotion are not especially likely to become regular buyers of the brand (Dawes, 2004). Ehrenberg, Hammond and Goodhardt (1994) underline in their work that “buying a habitual brand once again does not normally increase the likelihood of buying that brand in the future – there is no “learning” in what is generally regarded as a “zero-order” stochastic process… Occasionally consumers do try something new, because of variety-seeking or competitive activity, or both. Sometimes they then develop a new repeat-buying habit. But this usually happens only as an exception and sporadically for different consumers”.

At the same time, price promotions can lead to various negative effects for a brand. Thus, Dawes (2004) mentions that frequent price promotions lower consumer’s reference prices for the brand, so that consumers experience a tendency to buy the brand when it’s promoted. In that case consumers no longer perceive the regular price as “the fair” one.

Moreover, price promotions damage brand perception in terms of the product quality –  this is the reason why luxury brands never sell their products on promo (Dawes, 2004).

To sum up, price promotions don’t represent a strong brand building potential as: 1) their gains are very short term and last only during the promotion period; 2) sales peaks can be followed by strong deeps; 3) they don’t drive trial and loyalty; 4) they can significantly decline “the fair” price point;  5) they can hinder a brand’s quality image.


Sources: Ehrenberg, A.S.C., Hammond, K., Goodhardt, G.J. (1994). The After-effects Of Price-related Consumer Promotions. Journal of Advertising Research, 34(4), pp. 11-21; Scriven, J., Ehrenberg, A. (2002). Is Coke Always Less Price-Sensitive Than Pepsi? Marketing Research, 14(4), pp. 40-42; Dawes, J. (2004). Assessing The Impact Of A Very Successful Price Promotion On Brand, Category And Competitor Sales. The Journal of Product and Brand Management, 13 (4/5), pp. 303-314

What does in Value for Money matter?

One raining evening after a long walk in Oxford I came up to enter a symbolic place- Blackwell’s bookshop where my strong inspiration  by consumer neuroscience led me to buy a book “Brainfluence” by R. Dooley.

One of the core topics in the book that readers find across chapters is linked with the area on which I have had a lot of conversations with my colleagues- how to build the best brand and product value for money.

R. Dooley steps a bit back from this question and highlights that for consumers cost has the same brain association as usual pain does. “Buying pain- the activation of our brain’s pain center when paying for a purchase -increases when the price seems too high“.

Therefore, in order to deal with the associated pain, consumers make both conscious and subconscious evaluations of the cost “fairness”. In order words, perception that the product or service has a good value for money means for consumers that the product cost is fair.

Here I see two crucial points- first, value for money attribution to both conscious and subconscious  evaluations, and second, the importance of value for money for the overall buying pain reduction.

Considering the conscious value for money evaluations, it’s important to remember that “our brains aren’t good at judging in absolute values, but they are always ready to compare values and benefits“.

Hence, from my point of view, the most relevant idea here is anchoring that has been introduced by D. Arley in his book “Predictably Irrational”. Anchoring means that consumers evaluate fairness of the product prices taking into consideration different anchor prices. They might come from products within the category, but also can be other prices with which consumer has recently dealt.

So, if anchor prices are established then offers involving lower prices will be attractive to consumers and be perceived as offers with good value for money.

For subconscious evaluations might be important attributes associated with the overall shopping experience. In case of repeated purchases, consumption experience might also play an important role.

To sum up, there are several recommendations for marketers. In order to enhance the perceived product value for money, it’s important to:

1. Understand and refer to the right product anchors: evaluating the category in terms of the most relevant consumer anchors and/or introducing the most relevant anchors.

2. Make a price a bargain: leveraging sales prices, restating prices to make them look smaller (e.g. monthly rate vs an annual subscription cost), using ‘nice’ price communication (like ‘just’ or ‘small’).

3. Avoid repeated pain points: utilizing product bundles/sets when purchase decision is done only once.

4. Appeal to important needs associated with the product purchase.

5. Create strong shopping and consumption experience: levering the shopper marketing tools and enhancing second moment of truth.


Source: http:// www. pandarix. com/ why- pandarix/

Sources: 1. Ariely, D. (2010). Predictable Irrational: The Hidden Forces That Shape Our Decisions, Harper Perennial, New York; 2. Dooley, R. (2012). Brainfluence: 100 Ways To Persuade And Convince Consumers With Neuromarketing, John Wiley & Sons, New Jersey