“Price promotions are a drug. They are the crack cocaine of marketing. I hope we’ve seen an end to the senseless promotions that we’ve seen.”
Les Binet, group head of effectiveness at adam&eveDDB, shared these thoughts at last year’s IPA’s Global Effectiveness conference.
Much of the spike in sales that brands see during a price promotion subsidizes consumers who would have bought anyway — time-shifting or moving from other sales channels.
Nielsen reports that a whopping 84% of price promotions are unprofitable. As Les put it, “if you keep doing it, you increase your price sensitivity, reduce your pricing power and erode your margins.”
Pressure to run price promotions can be intense, particularly in an inflationary climate. Retailers push hard for the brands they carry to run increasingly steep or frequent price promotions. Competitive brands can accelerate a race to the bottom And once brands are used to high levels of promotional volume, it’s very hard to back off.
Mark Ritson described the doom loop that can result:
“Eventually, brands reach a rock bottom where promotional pricing becomes the norm. Selling at the recommended retail price becomes a minority activity. Many organizations then begin to cut quality, because their RRP is now another more than a bluff and their average selling price, many percentage points lower, now demands a lesser quality of construction for any profit to be possible.”
Mark recently explored the strategic reset that the Tyrrells brand of crisps had to take to break their price promotions doom loop.
“Most organizations develop a promotional addiction because of an over-emphasis on sales and an ignorance of profit. That was the story over at Tyrrells, where an initially premium product had gradually seen prices decline over the years. Revenues remained flat, but by the time KP Snacks acquired the brand its profit had completely disappeared.”
In the Tyrrells brand turnaround, KP Snacks knew they had to get off “the short term drug of promotions” and invest in the brand instead. In pulling back on promotions, they ultimately increased the average price by 29%, which caused overall volume sales to drop by 27%.
Tyrrells global marketing controller Dan Winslet called this “a real squeaky bum moment” for the business, but they stuck with their turnaround plan. Four years later, revenue is up 40% at a much higher profit, and market share is up.
Price promotions will always be part of the brand marketing toolkit, but we always have to watch out for the slippery slope.
Here are a few related cartoons I’ve drawn over the years:
