These posts are a collection of notes and summaries from the book “How Brands Grow: What marketers don’t know” by professor Byron Sharp. This work is a must read for any marketer. My personal goal when I embarked on this series of posts was to get a deeper understanding of the book and its lessons, and as I have worked through them I have not only gained that understanding, but also an idea of the areas I need to investigate more deeply in the future. Sharp is always very insightful, but I feel the need for more perspectives on many of the topics he covers. You can buy How Brands Grow here.
To provide a holistic view of marketing Byron Sharp could not avoid a discussion on price promotion and some important highlights on pricing.
Pricing is a very wide topic and that’s why I will take three posts to discuss this chapter.
Of course there are specific books about it that go deeper on the matter, but integrating the reading with the papers quoted gives you a very broad idea about price promotion.
On this subject I am pretty sure that one of the first marketing books I read was on pricing: Pricing Fundamentals by Danilo Zatta.
He is one of the most influential Italian experts on pricing strategies and optimization. If I remember correctly I read his book 10 years ago!
In the following months I will deepen the argument by reading Priceless: The Hidden Psychology of Value and the new one from Danilo.
Price Promotions long term effects revealed
Coming back to the book, it’s well proven when a manufacturer or a retailer applies a price discount the effects on sales volume are quick and positive. The flip side is that these effects don’t last in the long term.
The book cites a deep research made by Koen Pauwels, Dominique M. Hanssens, S. Siddarth called “The Long-Term Effects of Price Promotions on Category Incidence, Brand Choice and Purchase Quantity”.
I decided to find and studied it, here is the link, because I was very interested in it.
The authors analysed the long term effects of price promotions on the components of brand sales (category incidence, brand choice and purchase quantity).
While dynamic effects of price are not negligible, the study shows how long term effects are not present.
The study revealed that the components of brand sales are predominantly stationary or mean-reverting (https://en.wikipedia.org/wiki/Regression_toward_the_mean).
Not only that, indeed according to Byron Sharp price promotions also don’t affect buying propensity (in the long term) and are not the best way to get new customers.
Let’s take a step back and rewind.
Pricing is one of the 4 marketing Ps(product, price, placement, promotion) and is one of the more responsive actions in the marketing mix.
Nevertheless what is interesting to discover reading the book, but It can also be understood by looking at market leaders in the various industries, is that brand leaders are never the cheapest.
So even if pricing is a critical aspect in the company’s success, it is not the only one.
If pricing is a critical aspect in the company’s success, it is not the only one.
In the previous chapter we saw how consumers are rarely 100% loyal for several factors. This behaviour applies also on price, because intrinsically it is part of the product.
In all the various buying situations a customer will never be loyal to the cheapest or the most expensive brand for a particular category.
This data from the book shows how people who drink instant coffee in a year buy different price tiers. Source: Kantar Worldpanel
How to read the table before?
Share (%) represents the market share distribution of the UK instant coffee market, if you sum the figures it will give you 100%.
“Percentage buying in other price tiers” means for example that buyers of “Below average Instant coffee” category, 64% of the time also buy cheap coffee, 57% of this category also buy Expensive Coffee and 36% above the average coffee.
So as you can see there is an important fluctuation in consumer behaviour related to price.
Continuing the reading another interesting aspect covered by the author is the manager perspective. Why do they run price promotions?
Based on classic marketing text the success for a brand manager is based on the following steps:
- Understanding customer needs
- Mapping the competitors
- Creating a brand coherently positioned with the customer base
- Defining a price aligned with the customer expectation
The question arises naturally. If price should be aligned with customer expectation, why do price promotion?
If price should be aligned with customer expectation, why do price promotion?
One reason, from the manager’s perspective, is to reach sales targets, even if they lose marginality.
Based on my recent experience with some clients, related to the previous motivation there is also the need to reach this target to avoid being delisted.
Some retailers set very aggressive ROS (Rate of Sales) to be on the shelves of their supermarket, otherwise the SKUs will be delisted.
Another reason still connected to the retailers side, is to allow them to offer special discounts for their customers. It is a kind of negotiation, “you will be on my shelves but you will guarantee me a certain amount of discount even if it will affect your margins”.
Attractive offers make people happy to visit specific retailers and on Facebook there are specific groups that talk only about it.
Take for example this Lidl and Eurospin Facebook reviews groups, they are two of the major retailers in Italy (with Esselunga, Coop, Conad and few others):
People will discuss new promotions and decide to go to the store based on the bargain they think they will do.
It is also funny that the same person is managing both groups and updating both groups on the new offers and she has a very Italian vanilla name like “Paola Rossi” the equivalent of “Paolo Rossi”.
Everything is orchestrated, but quoting Mark Twain: “It’s easier to fool people, than to convince them they have been fooled”.
There is another reason connected to promotions highlighted in the book and evaluated deeply by another researcher professor Pawels: promotions are a cheap way to avoid innovation but keep selling.
As discussed in Pawels paper quoted by Byron in the Book “New Products, Sales Promotions, and Firm Value: The Case of the Automobile Industry “ promotions don’t increase long-term financial value while new products do.
With these last thoughts I am going to close the first part on pricing, because I need a second and third post to introduce and talk about choice behaviours, price elasticities and how it is affected by price promotions.
