Why do sales promotions

Since , we have been using single-source data to examine the productivity of the marketing dollar spent on advertising and promotions for consumer packaged goods.

The results are striking:. About 3, households in test markets receive ID cards that household members show when they purchase goods at scanner-equipped supermarkets. By agreement with the cable company and the advertiser, we intercept the cable signal before it reaches each household and send different advertisements to different households.

To test advertising copy, some households receive advertisement A, while others simultaneously receive advertisement B. To test advertising weight, households receive different amounts of advertising for the same brand. Split-cable tests typically run for one year, and we have conducted them for both new and established products.

We control for variables such as past brand and category purchases and statistically adjust the sales data to account for the impact of promotions for the test brand or for competing brands. This instrumented test environment provides the ultimate degree of experimental control and is well suited for isolating the sales effect of advertising. Some of the findings from our split-cable tests conducted over the past decade support traditional assumptions.

For example, most people believe that advertising is more effective for new brands than for established brands, and this turns out to be the case. But in most respects, our findings clearly contradict conventional wisdom. In more than half of the established-brand experiments, increased advertising did not result in more sales. Nor does advertising take a long time to work.

When a particular advertising weight or copy is effective, it works relatively rapidly. Incremental sales begin to occur within six months. The converse of this finding is even more important. If advertising changes do not show an effect in six months, then they will not have any impact, even if continued for a year.

When advertising does boost sales, the extra profits often do not cover the increased media costs—at least in the short term. Company payout analyses are highly sensitive, and we have only partial pay-out statistics on a subset of our test database.

However, the long-term effect of advertising is at least as substantial as its short-term effect. This is the upside to the downside that advertising works only about half the time. Even if increased advertising returns only half the money spent over the course of one year, it will break even on average if the long-term effects are taken into account. We have evaluated the sales effect of advertising over the long term by analyzing 15 market tests up to two years after they ended.

In these experiments, the test group viewed more advertisements than the control group during the test year. We then stopped the extra advertising and sent both groups the same amount.

Across 15 cases, there was a demonstrable carryover effect. Although the carryover effect declined on average, in six cases it actually widened. More important than the pattern is the magnitude of the carryover. Over a three-year period, the cumulative sales increase was at least twice the sales increase observed in the test year. To evaluate trade promotions, we have developed computer programs that measure the marginal productivity of promotional events. Using sales data from individual stores, the programs compare sales from these nonpromotion weeks with those from promotion weeks.

Algorithms then project what the sales of the product would have been during the promotion week if the promotion had not taken place. This provides a baseline against which we can measure the incremental impact of the promotion.

The only possible bias is that our programs may overestimate the incremental sales of a particular event since promotions tend to accelerate purchases by consumers. But when you consider the economics underlying promotions, it is easy to see why. You can use them to encourage joining a mailing list, or as a thank you to people who have.

Launching a new product? Take a tip from companies like Costco and hand out samples in store, or include them with online orders. Sampling works well with products such as health and beauty products, perfume, and food. Offering a gift to consumers who buy a specific product or spend a certain amount can also help convince customers to make a purchase or spend more than they might have otherwise.

The difficulty with any marketing campaign lies in targeting who will eventually become loyal customers. Many marketers cast a large net to catch customers by virtue of percentages. Their strategy is to contact enough prospects so that some of them convert.

A smaller percentage of those customers will become loyal customers. Instead, by predetermining a target audience, businesses can put their finite marketing resources to better use. To understand the best target audience for your promotion, you first need to understand more about the customers you have. The same is true for sales promotion campaigns.

Send customers a simple survey asking them about themselves. Offer an incentive that encourages them to take the time and share their personal information. Once you have a clear idea of who uses your product or service, identify exactly what kinds of problems your product or service is designed to solve. Creates a platform to cross-sell and upsell If a promotion is based around giving money off a next order or something in a similar vein, then it can hold valuable opportunity to get sales around another product.

Creates a reason to buy All the points above drive sales and make customers decision-making much simpler if a brand is offering a similar product but something additional, then the consumer will often select that product and get more for their money! Creates a focused marketing approach A sales promotion often becomes an event for the firm and then allows a company to focus all its channels of marketing.

Creates greater revenue Put simply, more sales from your promotion will create higher revenue. Creates a source of information When customers attempt to redeem brands can often retrieve data such as email addresses and their home address. Business No Comments. Author Joshua Kennedy. Share Tweet Share Pin. Get in Touch. Please enable JavaScript in your browser to complete this form. A number of estimates of the average price elasticity of groups of brands have been published.

But this increase alone provides an extremely incomplete picture of the effect of the price reduction, as I will demonstrate later. Tellis argues that typical marketplace elasticities may be much higher than the —1. The empirical support for this claim is more tenuous, however, than that for his —1. Estimates based on European experience suggest that even this figure may be too high. The sales projections in the table give ample support to the view that promotions can shift merchandise. The attraction they hold for brand managers is therefore understandable, particularly if managers find themselves in the uncomfortable situation of running brands whose shipments during the year have been unexpectedly slow and whose sales targets have to be met by December But the attractive volume figures are not the whole story; the brand managers must look at the effect on costs.

To do this, they have to make assumptions about cost structures. The obvious feature of the profit calculations is that most of the sales increases provided by the price reductions yield a lower profit than before the sales rise.

Indeed, some of the resulting profit reductions are disastrously large. The reasons for this unappealing outcome are an increase in variable costs including raw materials, packaging, and labor required by the extra sales volume, in conjunction with a reduction in NSV that applies to all sales resulting from the lower price. Manufacturers undertake a certain amount of promotion for defensive reasons—for instance, to maintain high distribution and display for brands in an increasingly concentrated retail trade, especially the supermarket trade.

Although it is difficult to distinguish offensive from defensive motives in promotional activity, I believe that the former are generally more important. Indeed, it seems clear that in most circumstances, manufacturers that promote heavily are deliberately exchanging profit for volume; in other words, making less profit on more sales or, to make the point more crudely, slicing into their own margins in dumping their merchandise. Looking beyond the distressing short-term effects, the manufacturer may be able to spot the even more worrying long-term legacy of promotions.

There are three related points to consider about the long range:. Nielsen consumer purchases graph looks like the silhouette of a top hat.

The reason is simply that the strategy for such a promotion aims to move merchandise by bribing the retailer and the consumer. When the bribe stops, the extra sales also stop. In an exceptional circumstance, when a brand is on a strongly rising sales trend, a promotion admittedly can put sales more or less permanently a notch higher than at the beginning.

Some commentators have argued that a portion of promotional money has a long-term, franchise-building effect. These are factors that might encourage the public to buy the goods on a more continual basis. As a consequence, promotions bring volatile demand while franchise building leads to stable demand. Thus full-price sales following the promotion period may be even slower than they would otherwise have been.

This prolongs the period when the manufacturer is paying a heavy promotional subsidy to the consumer. All this leads to a significant weakening of the brand. A parallel point, for which there is patchy evidence, is that brands supported more by advertising than by promotions often carry a higher-than-average list price without much trouble and tend therefore to be more profitable. The consumer will pay the premium price because the advertised brands have offered more psychological added values than heavily promoted brands.

Promotions fuel the flames of competitive retaliation far more than other marketing activities. As a result, they bring diminishing returns with frightening rapidity. When the competition gets drawn into the promotion war, the effect can be a significant muting of the sharp sales increases predicted by the original price elasticity coefficients—with an even more disastrous effect on the profit outturn of the promotions.

The long-term result of such retaliation is sometimes the elimination of all profit from total market categories. There is no shortage of examples of this self-destructive effect. Two dramatic instances I remember are the market for laundry detergents in Denmark during the s and the once-large market in Britain for fruit concentrates, which were mixed with water to make soft drinks.

In both markets, heavy promotions eventually caused strong brands to degenerate into virtually unbranded and unprofitable commodities. This agrees with common sense, although there is little evidence to support it. As a rule, promotions can never improve a brand image or help the stability of the consumer franchise.

At Unilever, a saying describes the vicious circle as promotion, commotion, demotion. Consumer advertising, on the other hand, can strengthen the image. This represents a long-term effect in addition to short-term sales generation, and it leads to a growing perceived differentiation of the advertised brand from rival brands.