We hosted the 8th edition of our annual Brand Growth event recently. This year’s Brand Growth Event was a big success, sharing insights about the role of promotions in brand growth with a wide group of marketing and insight professionals.
The talk from Prof. Dr. Lauren Sloot, from the EFMI Business School, stirred up a thought-provoking debate on the impact of price promotions.
Price promotion has become habitual right across Europe, especially in the food retail sector, with a significant portion of sales involving promoted items. In April 2023, sales of items on promotion at UK supermarkets rose to 23 per cent, the highest level since December 2020 (NielsenIQ)
Caught in the Price promotion Trap
Empirical studies reveal that while promotions can provide a significant boost to short-term sales, they have minimal to no impact on long-term category growth or brand strength. Research involving over 500 product groups shows that the positive impact of promotions drops drastically from 58% in the short term to just 2% in the long term.
Here’s the thing. Promotions fail to sustain long-term brand growth due to behaviours such as ‘forward buying’, where shoppers stock up on promoted items, leading to no net increase in sales over time. In consequence, promotions can erode the often modest profitability (typically around 4% of turnover) in the retail sector.
And then there’s the effect on the supply chain. Promotions introduce significant complexities in supply chain management, including increased inventory fluctuations and logistical challenges. This adds to the overall cost of running promotions and complicates operations for both retailers and manufacturers.
Academic research views price promotions as inefficient and largely ineffective in the long term, advocating for a cautious approach. Still, brands and retailers find themselves compelled to engage in promotions to stay relevant and attract customers. The rolling cycle of promotions persists.
It’s a sobering thought given the investment.
The continual reliance on price promoting erodes profitability, leaving brands trapped in a short-term gain mindset that undermines long-term success. Are we too entrenched in this practice?
Intrigued, I listened again to some of our Brand Growth interviews on the topic
If the ROI is so questionable, where’s the business case?
Our Brand Growth interviews reveal that breaking the habit actually has big structural challenges.
Digging deeper, there are several factors that cause retailers, brands, and customers to stick with the formula.
- Habits are hard to break. Retailers often feel compelled to follow the established market norms, believing that without price promotions, they risk losing customers. Promotions drive positive value perceptions for retailers.
- The lure of the sales spike. Price promotions are effective in providing a quick boost to sales figures. Both brands and retailers often rely on this immediate increase in sales to achieve weekly and monthly targets
- Managing stock. Retailers can manage inventory levels more effectively, reducing stockpiles of slow-moving items
- Standing out. For manufacturers, promotions are a way to stand out amidst the vast number of competing products. Promotions increase on-shelf visibility and trial
- Shortening decision-making. Promotions can simplify the decision-making process, reducing the complexity. This can make shopping more efficient and less overwhelming for consumers
The higher the promotion level, the more it becomes expected by shoppers.
Looking to the future
Perhaps price promotions are a habit that we can’t and don’t really want to kick.
For all the evidence on poor long-term ROI, the short-term metrics are seductive. Brands benefit from increased visibility and sales volumes during the promotion period, while retailers can attract more customers to their stores and visibly deliver on the customer promise of value. While retailers get the benefit from the brand’s marketing power, brands gain from the retailer’s customer base and store presence.
With or without ROI, the headwinds are strong. Price promotions are simply so much a part of the trading terms between brands and retailers – each ‘invested’ in continuing to price promote.
And what shopper will ever argue with lower prices?
About the Brand Growth Platform
The Brand Growth platform is a knowledge base providing unique learnings for marketing and insight professionals looking to grow their brands. The platform consists of qualitative interviews with CMOs, CMIs, and CEOs from both global and top local brands like Domino’s, Vodafone, Volvo, Cloetta, and Nestlé; a quantitative research study spanning 8 years among thousands of marketers across Europe and the US.
The annual Brand Growth Event is where all the knowledge and learnings come together.
Find out more on the website.
