During periods of low economic confidence, it can be tempting (and fairly easy) for brands to increase the number of price promotions they run in a bid to win over cost-conscious consumers. But is this the right decision for countering drops in sales and long-term brand health?
At face value, discounting may seem like a strong tool for boosting sales, with short-term spikes seen during promotions. However Les Binet explains that through measurement of incremental sales volumes in econometrics, this observed increase is an “illusion” and a large proportion of promotional sales is just subsidising existing sales.
Many discounted sales originate from those who would have otherwise purchased later regardless, thus impacting sales in the weeks following. Additionally, discounted sales often take from an alternative sales point. For example, online promotions taking sales from brick-and-mortar locations. Therefore, whilst discounting can feel like a good way to improve conversion rates and revenue, it actually reduces margins. A study by Nielsen estimated that around 84% of price promotions are unprofitable.
From a consumer perspective, although people are looking for brands to support them through the cost-of-living crisis, they have different expectations as to how they can do this. Recent IPA research showed that promotions faired low on consumer agendas, with fair pricing overall ranking most important, followed by price freezes on value-range products and offering more value for money propositions. GWI research also showed that although consumers expect to spend less, 70% are most interested in reliability.
Excessive discounting will shift a brand’s positioning, resulting in messaging being dominated by price, not the perception of cost-effectiveness and value. It is also likely to shift a brand’s consumer base, attracting less profitable bargain hunters, and customers’ expectations, by training them to expect the biggest discounts. If prices are heavily discounted in the short-term, it will bring challenges when restoring them later down the line during economic recovery.
Of course, promotions still have a place in ecommerce, but brands should be focused on their value and loyalty propositions as a better incentive, for both the consumer and the business. This will also help to protect price points post-recession. Where promotions are utilised, the timing, frequency, audience and positioning of these should be carefully reviewed. For example, free shipping is a way to cut costs for the consumer while still encouraging an increase in basket value, and earnable discounts offered through loyalty programmes can help prevent one-time orders and build customer relationships.