Deal or No Deal? Cheap Prices Can Maim Your Brand

Give Shoppers a Bargain, but Don't Make Your Promotion Permanent

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BATAVIA, Ohio (AdAge.com) -- Google searches for the term "coupons" last month for the first time surpassed those for "Britney Spears."

That simple fact drives home what a lot of package-goods marketers already know: What consumers want now is promotion. But as the industry increasingly gives in to that wish -- more than half of all beverages in February were sold on some kind of deal -- the question becomes how much marketers can discount without doing permanent damage to their brands.

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"I'm seeing a lot of money being spent in trying to bribe the shopper to buy," said Thom Blischok, president-consulting and innovation for Information Resources Inc. "But the more you use just trade-promotional spending to bribe shoppers, the more you are setting your long-term pricing strategy."

For sure, a recession steeper than any since the Great Depression is creating a huge consumer appetite for deals. Not only did Penry Price, Google VP-advertising sales, tell the Promotion Marketing Association last month that searches for coupons topped those for the pop princess, he said searches on such subjects as "free" and "discount" have shown similarly sharp trajectories since late last year.

The burgeoning deal culture can turn even the most pedestrian items into buzz firestorms. In a segment on ABC's "Good Morning America" on March 20, technology contributor Becky Worley revealed how she hunted down coupons online to buy a $3.49 tube of Colgate for 24ยข. That sent the word "toothpaste" into the top five search terms on Google that morning, and related searches such as "toothpaste coupons" and "coupons" into the top 20.

Ramping up discounts
Package-goods companies seem to be complying. After relative restraint on trade spending in 2008, marketers appear to have stepped on the gas in February. The percentage of volume sold on promotion was up 5.6 percentage points to 38.4% in the four weeks ended Feb. 22 vs. a year ago though the ramp-up came much more in food (up 8.3 points to 38.4%) than non-food (up 1.8 points to 32.9%), according to IRI data from Deutsche Bank. Beverages were up 2.4 points, but more than half, 53.4%, of all sales were on some kind of deal.

Deutsche Bank analyst Bill Schmitz said he believes manufacturers are ponying up more in promotional funds to placate retailer demands for pricing relief amid falling commodity costs since the fourth quarter, and that could signal more-permanent price cuts in the second half.

Much as consumers and retailers may want deals, conventional wisdom is they pose a threat to brand health. Numerous studies have shown price promotion erodes brand equity by permanently making consumers more price-sensitive.

Sunil Garga, principal of analytics firm Mphasize, said ordinarily he would recommend against leaning heavily on price promotion. But these aren't ordinary times, he said, and many consumer-package-goods marketers will have to resort to price promotion for an extended period of time to stave off a growing threat from private label. "Does that tarnish brand image? Yes," Mr. Garga said. "But most companies aren't even thinking about that. Their sales targets are down so much, anything they can do to keep consumers from defecting, they're doing. And I think they'll continue to."

He said marketers will resist cutting prices permanently as long as possible in favor of stepped-up promotion, because temporary deals erode margins less than permanent price cuts.

Keeping market share
It's not clear, however, that price promotion is all bad for brands trying to fight off private label in a recession, according to research by University of North Carolina marketing professor Jan Benedict E.M. Steenkamp.

His study on the subject indicates that from 1985 to 2005, U.S. national brands decreased price promotion both in categories where brands suffered heavy share loss to private label during recessions and in those where they didn't. But brands that suffered little share loss to private label were in categories where price promotion decreased less sharply.

Brands in categories with less share loss to private label increased trade display and feature activity in downturns but by less than those in categories where brands suffered high share loss, according to research Mr. Steenkamp presented in a Sanford C. Bernstein conference call in March.

Directionally, brands that were successful in staving off private label behaved similarly to brands that weren't when it came to promotion. The bigger differences had to do with ad spending and innovation: Successful brands did more of both, according to Mr. Steenkamp's research (see related story at left).

Mr. Steenkamp also said he believes marketers will have no choice but to make the permanent price reductions they've largely resisted so far to close price gaps with private label, which average around 30%, according to a recent study by the Private Label Manufacturers Association.

Promotion can play a positive role for brands in a recession, said Andy Murray, CEO of Publicis Groupe's Saatchi & Saatchi X. He praised a recent "buy one, give one" promotion by Bayer, in which the second pain reliever went to charity. "The idea is a promotion that enhances your life rather than just increases hoarding and stockpiling," Mr. Murray said. "I think this is a reinvention time for promotions to reflect a new value set."

Promotion that wins a place on retailers' circulars becomes more important when more consumers are planning purchases at home, as they are now, he said. Realistically, that usually comes at the expense of a temporary price reduction. Circulars are used about 45% of the time to create shopping lists, he said. "If I'm a marketer, I want to make sure I'm in context of where the list is being made, because right now about 11% of the shopping list is by brand name, and when it is, there's an 85% chance [the shopper] is going to buy it."

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