Price promotions are bad for manufacturers trying to build brand loyalty, as Procter & Gamble has realised. But the retailers love them, particularly the 'multi-buy offer'.
When Procter & Gamble cut the price of its washing-up liquid brand Fairy by 10% recently, the move caused a storm. Why? How could such an apparently trivial move create such shock waves?
Simple: P&G has struck at an issue which is becoming a lightning conductor of related controversies, ranging from how brand manufacturers should set and deploy their marketing budgets to the great issue of the day - manufacturer versus retailer power.
At any one time at least 10% of the items for sale in any grocery store are likely to be under some kind of promotion. Now, with P&G's so-called everyday low-pricing initiative, a long-running debate about price promotions' effects on short-term sales, longer term profits, brand loyalty and total supply chain costs is coming to a head. Setting aside short-term tactical considerations, P&G has all but concluded that price promotions are both expensive and addictive.
The list of downsides is almost endless. P&G estimates that 25% of its US sales people's and 30% of brand managers' time can be spent designing, implementing and overseeing promotions. If the promo involves different pack sizes (such as for 10% extra), they add extra cost from start to finish, from production line to retailer shelf.
The feast-and-famine pattern of demand such promotions create also sends further costs spinning back up the supply chain in the form of extra stock in warehouses, overtime in factories, and so on. Meanwhile share of spoils negotiations between manufacturers and retailers only fuel mutual mistrust.
And yet, according to research by Professor Andrew Ehrenberg of South Bank University, usually all price promos do is bring forward purchases that would have been made in any case. Over the longer term, they do precious little to improve base-line sales, increase the incidence of repeat buying or attract new customers.
They do, however, undermine other marketing initiatives by sensitising consumers to price. Nielsen, the market-tracking firm, reports that nowadays 44% of consumers stand by the statement: 'I will buy a brand I normally don't buy if it is on offer'. Only 30% say they are brand-loyal. 'It's amazing,' says John Millen, P&G vice-president. 'We are actually training consumers to hunt around, to look for high-value offers. We're either encouraging them to shop up heavily when the offer appears and distort the supply chain, or we're really annoying them if they miss the offer because it's just stopped. Net, we're undermining their loyalty. Crazy.'
Yet price promotions are as popular as ever. Indeed one form - the buy-one-get-one-free or buy-three-for-the-price-of-two or multibuy offer - is becoming ubiquitous. Why?
For a number of reasons. Supermarkets now have computer systems which recognise a second or third pack and automatically adjust the bill at the till, thereby eliminating most of the administrative hassle. And the fact that the goods being promoted come in standard packs eradicates many of the design, manufacture and transport costs associated with other types of promotional offers.
What's more, as Alan Toop, president of sales promotion experts The Sales Machine International, explains, they're a cheap way of buying popularity.
'If you take 15p off, it costs you 15p. But if you offer a third pack free, the difference in value to the consumer compared to what it costs you is huge.'
A Nielsen analysis of scanning data shows that while a 10% price reduction or x% extra free offer generates an average 28% sales boost during the promotional period, multibuys produce a rocketing 53% uplift. 'We find that the volume in sales generated outweighs the cost of the discount given,' comments a Boots spokesperson.
This is the real vector driving the current rise and rise of the multibuy: retailer power. Next to the straightforward and widely advertised special offer, multibuys are now every retailer's prime means of convincing consumers that they offer value for money.
If it's a branded multibuy, the offer is still 'seen as coming from the retailer, not the brand,' notes Martin Glenn, marketing director of Britain's biggest food brand, Walkers. And if it's an own-label offer, which is increasingly common, every time the consumer buys those three own-label items for the price of two, the manufacturer's brand is kept out of the market for that much longer.
Either way, retailers, using the powerful argument of shelf space, usually manage to persuade their suppliers to foot most of the bill, while still claiming the value-for-money kudos for themselves.
P&G's strategy of everyday low pricing is designed to force everyone, own-label producers included, to stop messing with promotions and start building true brand loyalty instead. The logic behind the multibuy suggests it will have a hard time convincing retailers to buy the idea.