Companies invest in building strong brands not because it's a fun thing to do (although—professional secret—it is!). They do it because stronger brands pay off for them in terms of more revenue, bigger margins, higher customer loyalty, better talent acquisition and ultimately, greater shareholder value. Yet on a regular basis many companies do something that hurts their brand value now and erodes it significantly over the long term—they run price promotions.
After investing millions to build their brands, why do companies turn around and do something that damages those same assets? The reasons for price promotions are multiple and overlapping; to drive short-term sales, because the competition is doing it, retailers expect it, it's a holiday season and/or because customers are searching out deals. These all sound logical and sales and marketing people can easily make the case for them to upper management. However, the visible short-term sales results lead managers to overlook the long-term negative impact to the brand's value and ultimately, the financial returns to the firm.
So how do price promotions hurt the brand? In several ways. Consumers become conditioned to buying only during sales. And when they do buy they buy in bulk and store up so they have enough supply to last til the next sale. Consumers also become increasingly focused on price over product differentiators and perform mental trade-offs based primarily on cost/benefit versus emotional attachment to the brand. They are also much more likely to switch between brands just to get a good price. For the company this means that it is continually selling its product at a lower price throughout the year and offering steeper discounts to woo customers back from the competition. Over several years this continued discounting erodes margins significantly, which in turn erodes shareholder value.
Nancy Smith, founder and CEO of Analytic Partners, has been studying the impact of price promotions on brands across several industries. She's compiled a database that has tracked the impact of seventy-two thousand marketing tactics representing $250 billion worth of marketing spend executed in 46 countries. Smith was an Insights Manager with Clairol prior to starting her company and is in the business of helping brand managers measure and understand the impact of their marketing tactics and she's seen what happens to brands that rely too much on discounting.
Based on her experience Smith explains "If you've spent many years training customers to wait for your price promotions it's very hard to get back to better profitability" (J.C. Penney's tribulations illustrate how difficult that truly is). Recognizing that in many industries a firm needs to do at least some level of discounting her advice is, "You need to develop a plan to move off that approach and determine where a limited set of price promotions make sense within a long-term and holistic strategy that builds back the brand's strength."
The key components of that strategy are threefold and really are about getting back to the fundamentals of brand building:
1) Differentiate your offering.
Providing customers something unique is at the heart of a brand's value. No differentiation means your offering is just a commodity, which means you are competing solely on price. So you need to go back to the basics, figure out what makes your brand special and build off that. Using the Brand Promise format (below) and being rigorous and truthful about what is unique about you is one way to do it:
- For (target customer - e.g. "athletes")
- Who needs (what - e.g. "to stay warm but still perform")
- The (offering name - e.g. "Under Armour")
- Is the (category - e.g. "sportswear")
- That (primary differentiation benefit - e.g. "keeps athletes comfortable and dry throughout the course of a game, practice or workout")
- Because (reason to believe - e.g. "our high-tech fabrics wick sweat and other moisture through the fabric to the surface instead of absorbing it")
2) Communicate that differentiation.
One thing a deep dive of Analytic Partners' marketing tactic database shows is that strong communications is one of the best ways to build back brand value. The key here is developing a creative way to tell people what's special about your brand, position it positively against the competition and then spend the money to get that message out through earned, owned and paid media. For example, rather than try and compete against other beer brands on taste or calories or other beer features Corona built their entire positioning and advertising around how enjoying their beer is like a relaxing beach vacation.
3) Move from price discounting to value-add offers.
As you move to reduce promotions to only those that make sense within your strategy (e.g. those tied into key retailer plans) you need to also move off promotions around price to ones that offer additional value. Making offers such as "get a free printer with the purchase of a computer" are fine but it pays to be more creative. While other automakers gave huge rebates to consumers during the recession Hyundai did something different. Their Assurance program let customers feel they could buy a new car safely because Hyundai would let them walk away from the car with no negative equity if they lost their job.
So if your brand has become addicted to price promotions now is the time break the habit. Taking the actions above can put it back on the path to being a stronger and healthier brand.
—Mark McNeilly is the author of three books (including the popular Sun Tzu and the Art of Business: Six Principles for Managers) and a Lecturer at UNC’s Kenan-Flagler Business School in the MBA@UNC online program. Prior to that Mark was a marketing executive with experience at IBM and Lenovo. All blog views and opinions are his own. You can follow him at @markmcneilly or learn more at www.suntzustrategies.com