The effects of promotions

Promoting a product is one of the key elements of the marketing mix. It involves price setting, public relations, selling, advertising, etc. In 1995, Robert Blattberg, Richard Briesch, and Edward Fox from Northwestern University and New York University gave an overview in “How Promotions Work” about different empirical findings that are relevant still today.

    • Short-term price reductions in retail help increase (short-term) sales substantially, i.e. promotional price elasticity is higher than normal price elasticity (link explaining the term elasticity to another article)
    • The higher the market share of a brand, the lower its deal elasticity, even though the brands with a larger market share may capture more switching customers.

      Promotions reduce reference prices

    • Heavy promotion of a brand lowers its reference price, i.e. the price consumers have in mind when thinking of the brand. Consequently, this leads to less brand equity.
    • The higher the deal frequency, the lower the impact on additional sales, as consumers both get used to the deal frequency, expecting other deals in the future and see no hurry to buy immediately, and the height of the reference price diminishes (see 3, “reference price”)
    • In some product categories, the promotion-induced sales increase comes from switching customers, in other categories not.

      Do regular sales promotions effect negative on brands?

    • It is unclear if promotions affect the long-term health of brands or not. We believe that this also depends on 3)
    • Brands have different price elasticity, and also the elasticity of brands in comparison to each other differs. Asymmetries are possible where, upon comparable deals, one brand attracts more switching customers from the other brand than vice versa. This might be an interesting aspect in strategic pricing. The researchers raise concerns that if the brand that attracts more switching customers than the other uses too many deals, the effect may diminish or even change the direction.

The findings from Blattberg and colleagues are, in our opinion, not only relevant for own pricing activities and strategies of merchants, they are as well relevant for brand manufacturers. For them, it is important to monitor merchants’ promotions (particularly deal frequency and deal depth, i.e. the magnitude of the discount) that finally might harm their brand image.

 

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