by Temel Aksoy
Given these conditions, most sellers today think it’s impossible to make sales without giving shoppers additional incentives. In most companies, the sales staff claim that they must offer additional advantages, such as price discounts, gifts, paying on installment, logistical convenience or free after-sales service, to be able to sell the brand.
As industrial marketing professor Claudio A. Saavedra says, it’s actually much easier than ever before for the competition to copy these benefits. In a short time, discounted prices, extended payment plans, gifts and free after-sales service become the sector norm. Brands that begin by selling identical products end up being brands that still sell identical products but must also offer identical incentives.
The fact that a brand is focusing on practices such as price discounts (or their equivalent) to achieve sales is actually an indication that it’s not implementing the necessary and critical elements of marketing appropriately. Instead of applying proper marketing techniques, if a company takes a shortcut to get sales volume by offering price discounts—and it makes the product, distribution and advertising a secondary focus—it will end up without any profit at all.
In this short-sighted laziness, the misinterpretation of market research findings also plays an important role. While studying consumer (customer) expectations in market research, most companies find that customers (consumers) are looking for a cheaper price, better payment terms and additional service free of charge. Company executives—especially sales executives—tend to believe that all of these are really necessary to achieve sales. In fact, all of these demands are actually related to customer purchasing behavior. None of them have anything to do with product use: why or how often the customer wants to buy the product. Yet knowing about product use enables brands to find other ways to market their products without discounting price and giving up profits. I’ll break this down below.
Every brand has a value proposition (details in chapter 17). In the equation Value = Benefit/Price, all brands in a category demand a price proportionate to the benefit they provide. In other words, the value of every brand is theoretically 1, but brands are ranked from the most expensive to the cheapest based on price. In all product categories the most expensive brand and the cheapest brand each are sold at a price equivalent to their value.
From among the brands ranked by price, consumers (customers) will purchase a brand that suits their budget. Discounting the price of a brand that offers the same benefit increases its value and the demand for the brand, but the price discount diminishes or even erases profits.
The proper course of action is to offer a value based on a fair price and properly communicate the benefits that the product or service offers.
I am well aware of how crucial the roles of price and other attending sales conditions are when it comes to selling a product in a fiercely competitive market. I agree that every company must take a realistic approach here, but I don’t believe that marketing is sustainable if it stands only on price rather than the other pillars of marketing, such as product, distribution and advertising.
“Engaging in effective marketing” and “providing the customer with purchasing convenience” are very different concepts. Providing purchasing convenience, including lowering price, is equivalent to giving in to the shopper at the expense of sustainable sales. Effective marketing, on the other hand, consists of understanding “the job to get done” through the purchase of a product or service, and then offering products and services that accomplish this “job” at a fair price people can afford.
60. Pri
ce Discounts Have a Short-Term Effect
There’s a reason price discounts are so popular: speed. The marketing decisions that companies obtain the quickest results from are those related to the prices of the products or services they sell. Brands offer discounts for three primary reasons: to convert inventory to cash, to meet their monthly goals or as a response to the discounts of competitors.
While each element of the marketing mix (product, distribution, communication and price) is critical, and for every company there are many improvements that can be made to each one of them, the worst habit that most marketers have is taking the easy route of discounting prices on the products or services they sell. However, price alone isn’t the most important element of marketing. If it were—if consumers cared more about price than anything else—the leading brands would be a category’s cheapest brands.
Every shopper instinctively knows that there is an accurate correlation between product quality and price. People buy items at different price points at different times for different reasons. They don’t always buy economical or more expensive products because of differences in their income. Just as some wealthy individuals are in the habit of buying cheap goods, some middle-income people have a tendency to buy as many high-quality brands as they can afford. What’s more, no one uses the same measure of value in every area of their life. One person may choose the highest quality brands and pay a premium for food while choosing the cheapest brands of clothing. Another may eat beans from a can to be able to afford a luxury brand coat or watch.
John Dawes and John Scriven of the Ehrenberg-Bass Institute conducted research into customers and price discounts. The empirical generalizations listed below that were obtained from their findings offer invaluable guidance for any company.
The vast majority of shoppers don’t have complete and accurate information about pricing. Studies have shown that approximately half of people shopping at a supermarket can’t tell exactly the price of the brands they buy. At checkout, the prices that half of shoppers remember for the brands they purchased differ from the real price by ±10%. Apart from brands that they buy frequently, their knowledge of prices on products that they buy less frequently was even lower. People learn the prices of these products when they decide to go shopping. And the information that they obtain is based on comparison with the other brands they see.
Because periodic price discounts are common in every product category, shoppers buy brands they’re accustomed to purchasing at different prices at different times. The vast majority of those who buy a discounted brand are people who have already bought this brand at the normal price. The opposite is also true. Shoppers buy brands that are on sale and later buy the same brand at the normal price. As a result, they pay different amounts for the same brand at different times.
Consumers (customers) aren’t negatively affected by the fact that a brand resumes sales at the normal price after a promotion ends. However, if a brand frequently offers discounts, shoppers become more price sensitive. Consumers (customers) who figure out that a brand is frequently discounted will refrain from purchasing it at the normal price.
The ones who end up benefiting the most from discounts are the brand’s current users. The discounts merely make it possible for them to buy brands at a cheaper price that they would buy anyway.
Price discounts have the biggest effect on light users of the brand. They buy the brand more frequently when it’s on sale, but their buying behavior returns to normal after the promotion ends. Price discounts don’t turn light users into regular users.
Empirical evidence proves that new customers aren’t acquired through price discounts, even though brands offer discounts for the purpose of new customer acquisition.
Though frequently touted in marketing, it’s simply untrue that the consumers of cheap brands in a category are different from the consumers of expensive brands and that these constitute different segments. Of course, some products and services are too expensive for some people to afford, and they do constitute a separate market partition, but some of the consumers who buy cheap brands in numerous product categories will buy expensive brands the next time around. The opposite is also true. Those who buy an expensive brand may choose to purchase a cheap brand the next time they go shopping. The segments we frequently see in research reports such as “bargain hunter
s,” or “quality hunters” are actually meaningless. Every shopper who buys from a category may buy every brand, because the brands competing in the same category are substitutes for each other (details in chapter 35).
The segment that’s the most sensitive to price discounts is young people because they have less disposable income. Young people are the ones who respond most positively to discounts. On the other hand, the relationship between discounts and other variables is weak. Those with different levels of education and income respond similarly to price discounts, as do those who are aware of prices compared to those who are not. There are no significant differences in the behavior of these groups—apart from youth—when a brand is discounted.
Discounting a brand to get closer to a competitor’s price has little effect, but beating their price makes a price discount more effective.
Effectiveness is also improved by advertising the discount, especially by comparing the old and new prices at points of sale. Specifying the old and new prices creates a benchmark for the shopper, making it possible for them to calculate how much they’re saving. If a discount isn’t advertised, it has a limited effect.
When brands with a small market share are discounted, their sales will increase more, while brands with more market share experience a relatively smaller boost to sales from such discounts. The reason is that a discount of 50% on a brand with market share of 5% may increase sales 20%, but it’s less likely that a discount of 50% on a brand with a market share of 40% will increase sales by 20%. As a rule, sales of brands with a greater share of the market are less sensitive to price discounts, while smaller brands are more sensitive.
At a certain price level, the increase in sales achieved by a discount won’t be the same as the loss in sales from an equivalent price increase. The reason is that customers have a reference price range that they view as “normal” in any product category. The loss in sales experienced when the price of a brand increases more than 10% above this reference price is greater than the sales gain from a discount of more than 10%.
Discounting a brand that has a history of selling for a lower price than its competitors will have limited effectiveness. Reducing an already cheap price even further will increase sales only marginally. It doesn’t boost sales for supermarkets to discount their own generic brands, which are generally already cheaper than branded products, but raising the prices to something that approaches that of branded products will reduce sales drastically. In this scenario, the shoppers will prefer to buy branded products.
When the price of a brand falls below the “accepted price” of the category, this price reduction will significantly increase sales.
In cases where brand prices vary drastically in a product category, the effect of price changes is relatively less effective. The most powerful sales effect is observed when a brand lowers its price in a market where all brands are priced similarly. However, this is generally short-lived, as the competition responds rather quickly.
In general, discounts work when it comes to “stealing” customers (consumers) from the brand’s rivals, but this effect is temporary because no competition on earth leaves a brand alone long enough for it to gain an advantage from the price reductions.
Price reductions in a product category that shoppers buy frequently are more effective, because in these categories people are more knowledgeable about prices. This is why discounts are more common in supermarkets and in clothing categories.
In markets with few competing brands, price reductions are more effective because shoppers in these markets are more knowledgeable about prices.
Price reductions on products that can be stored increase sales more dramatically. For example, discounting the price of a brand of diapers that a mother uses all the time will more likely result in her buying a lot more of this brand during the discount time period.
As a rule, discounts are specific to points of sale. Sales points that don’t apply discounts or don’t ensure that shoppers notice the discount will reduce the overall effectiveness of the sales campaign. In other words, discounts are by their very nature specific to a sales channel.
Because light buyers are the majority of the user base for all brands, for a discount to be effective, it’s essential that shoppers notice that the brand is on sale when they go shopping—or, even better, that they hear the brand is on sale from advertising before they go shopping. If these conditions are satisfied, the discounts will be effective at the sales points, but it’s almost impossible for every brand to manage all of the sales channels like it wants to.
As a rule, the effects of discounts will be felt quickly but will be short-lived. Marketing executives generally overreact to the competition’s price reductions and immediately change their own prices. The result of this formulaic response is that none of the brands make a profit in categories dominated by price wars.
The assumption of every brand that offers a discount is that doing so will boost sales, and the reduction in profits per unit will be offset by sales volume. However, this rarely happens. The reason is that a massive boost in sales is required to achieve this goal, and these plans generally fail because the competition responds with equivalent discounts of its own.
Other variables also factor into the equation. The effect of a discount on sales and profitability is determined by the following parameters:
Profitability at the company’s normal price level
Discount percentage
Shopper sensitivity to price reduction (price flexibility)
The competition’s response
We can formulate as follows: If the category has a high profit margin; if the brand’s discount is significant; if shoppers are sensitive to price reductions (high price elasticity); and if the competition’s response to the company’s discount is delayed, then the discount will be successful.
Not every brand can meet those four checklist requirements. Therefore, another question to ask is whether a brand can boost sales through advertising—tapping a financial resource—instead of through price reductions. If we assume that price discounts and advertising cost the company the same amount, which method is more effective?
A brand can boost sales both through discounts and through advertising. However, boosting sales through price reductions is more expensive for the company and hurts profits more because the effect is short-lived and discounts are specific to sales points. Taking the option of investing in an advertisement and making it effective will have a positive impact at all sales points. Therefore, brands with extensive distribution networks are better served by growing through advertising.
Although it’s true that advertisements have a limited short-term impact on the likelihood of increased sales, they have a very powerful long-term impact. Scientific studies prove that brands that engage in continuous advertising are the ones that grow.
If discounts aren’t beneficial over the long term, why do brands continue to offer them? Mark Ritson says that a brand’s first price reduction is very successful. It gets rid of inventory and boosts sales. However, the brand can’t achieve the same success with a second price reduction. It’s like a person who uses drugs and needs a higher second dose to achieve the same effect as the first time. Brands that make a habit of selling products at discounted prices have a hard time changing their ways.
BRAND-CONSUMER RELATIONS
61. Eve
ry Brand Must Understand Its Own Cultural Context
French marketing consultant Clotaire Rapaille is one of the most well-known researchers in the field. According to Rapaille, brands must understand every dimension of the culture where they’re selling their product.
Understanding the language: Language reveals how people’s minds work. It’s a cultural heritage that reflects all cultural values. It’s impossible to convey any aspect of culture without language.
Understanding beliefs: Igno
rance of the target culture’s religious beliefs, or failure to respect those beliefs, can be a disaster for a brand. For example, in Muslim countries, it’s very appropriate for foreign brands to embrace religious holidays like the month of fasting.
Understanding values: Every society has its own values. Concepts such as patriotism and honor have different meanings in every society. A brand must respect those values in its communications for the products and services it sells.
Understanding traditions: Traditions are like an unspoken covenant that outlines how people are supposed to act in a society. They define acceptable behavior and attitudes in almost every moment of our lives, from greetings, dining and celebrations to forming friendships and spending time together. It’s impossible to engage in effective marketing and communications without learning these customs.
Understanding humor: What one society views as funny can be viewed as an insult in another society. One reason for the communication mistakes experienced particularly by advertising professionals is the fact that they don’t have a good grasp of the society’s sense of humor.
Understanding popular culture: This can be defined as the music people listen to, the TV series and entertainment programs they watch and the sports they love. Contrary to the claims of some, popular culture isn’t just an area of interest for the uneducated. Popular culture is where we all live, and it impacts all of us, even the elite. Popular culture is a reflection of the spirit of the age. This is why we see all of the big brands sponsoring every World Cup, music festivals and other popular events. Big brands go where consumers go to be part of their experience.
Marketing is not something that occurs in a vacuum, but in society, so it’s essential that marketing executives understand all of the dimensions of the culture they live in, including popular culture. Marketers must try to understand the regular people and pay special attention to sports, music and the film industry. It’s impossible to manage brands simply by reading research reports.
