Too many price promotions can injure brands, even today

Food brands are walking a tightrope this year, one made more perilous than usual because the soft economy has people shopping and saving more aggressively. Because of this, retailers are excitedly raising their focus on private labels that often compare well in quality with name brands. Against a backdrop of dramatically higher raw ingredients and transportation costs, CPG suppliers are in a squeeze. About the only good news is people are eating at home more, so more sales are streaming through supermarkets. CPG has to get smart in a hurry about pricing and promoting right in order to keep demand high for each of their brands, or they risk being cast aside in the new frugality mindset. Some suppliers and retailers use optimization software to match prices and promotions with market-by-market demand, and not leave money on the table. While these corporate users may be better prepared for today’s challenges than the trade at large, a collaborative study by four universities is sounding the alarm that frequent price promotions can have a major adverse effect on brand equity, even for well-respected brands.

Food brands are walking a tightrope this year, one made more perilous than usual because the soft economy has people shopping and saving more aggressively. Because of this, retailers are excitedly raising their focus on private labels that often compare well in quality with name brands.

Against a backdrop of dramatically higher raw ingredients and transportation costs, CPG suppliers are in a squeeze. About the only good news is people are eating at home more, so more sales are streaming through supermarkets. CPG has to get smart in a hurry about pricing and promoting right in order to keep demand high for each of their brands, or they risk being cast aside in the new frugality mindset.

Some suppliers and retailers use optimization software to match prices and promotions with market-by-market demand, and not leave money on the table. While these corporate users may be better prepared for today’s challenges than the trade at large, a collaborative study by four universities is sounding the alarm that frequent price promotions can have a major adverse effect on brand equity, even for well-respected brands. 

“Approximately one-quarter of the increase in sales generated by a temporary price cut represents cannibalization of future sales due to the brand-equity-diluting effect of the promotion,” said the research study, A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality.

The study appears in the current issue of Marketing Science, the journal of the Institute for Operations Research and the Management Science (INFORMS). Authors are Tulin Erdem of New York University; Michael P. Keane of the University of Technology, Sydney, Australia, and Arizona State University; and Baohong Sun of Carnegie Mellon University.

“It may seem unglamorous, but the ketchup category is well-suited to the analysis (corroborated with Nielsen scanner data),” the authors wrote. They noted that Heinz is the dominant brand, largely perceived as high quality, though also higher priced, and with substantially greater ad expenditures than Hunt’s and Del Monte.  “Thus, there is scope for consumers to use price and ad expenditures as signals of quality in this market,” they added.

They projected that a 10% permanent price cut for Heinz would raise sales by 26%. But, they added, if the price cut could be implemented without reducing perceived quality and brand equity, the sales boost would be considerably greater, at 32%.

Some manufacturers have seen this academic light early. They’ve resorted instead to cuts in package size, new cross-merchandising tie-ins, and other ‘non-price-discount’ consumer incentives to buy.  In order to win long-term, brands and retailers must absolutely give consumers what they want. But, SupermarketGuru.com believes, they can be artful about it: By drilling down to the aspects of brands people really like and emphasizing those, or by reconfiguring packages, innovating with related items, or adding brand equity in other ways, they’re better able to ensure consumer satisfaction and lengthier relationships with their brands.