strategic perspective on sales promotion

strategic perspective on sales promotion - Transcript

SUMMER 2007

V O L 4 8 N O 4

Betsy Gelb Demetra Andrews and Son K Lam

A Strategic Perspective on Sales Promotions

REPRINT NUMBER 48401

A Strategic Perspective on Sales Promotions
Betsy Gelb Demetra Andrews and Son K Lam

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hile most managers would think long and hard before bringing to market a product that lacked patent protection and could be easily imitated many invest in sales promotions sweepstakes coupons time limited price discounts free gifts or samples special events displays membership rewards consumer directed promotions and so on that are easier to imitate than the simplest new product Others sign off on plans so generic that they seem unrelated to the brand or company offering them despite the fact that sales promotions may absorb a significant portion of a company s promotional dollars currently a reported 31 of marketing budgets1 and they are increasingly being used for both packaged goods and consumer durables as concern has grown about the cost effectiveness of media advertising 2 For example the you pay what we employees pay price promotion instituted by General Motors Corp during the summer of 2005 was imitated after only five weeks by its two major U S rivals Analysts estimate that the promotion cost GM an average of more than 5 000 per vehicle3 through its September 30 termination contributing to a 4 billion loss on North American operations during the first nine months of 2005 4 The full year was marked by a 50 decline in GM stock value and a 4 decline in sales vs 2004 5 The unhappy outcomes for GM and similar ones for imitators Daimler Chrysler and Ford illustrate the negative consequences of easy to copy promotions but this example is hardly unique An analysis of 20 years of research evaluating sales promotions indicates that most such promotions do not pay off and even the studies painting a happier picture find no more than 60 earning back their costs 6 In contrast a strategic focus leads to promotions that defy or delay imitation and yield disproportionate benefits for companies that have already developed a strong competitive position For a fraction of the cost of the you pay what we pay promotion any automobile marketer or any other marketer has a range of promotional tools to consider For example both the Pontiac and Cadillac divisions of GM reported successful promotions in 2005 that did not involve discounts Pontiac used an episode of Donald Trump s The Apprentice television show to have two teams compete in producing brochures for the 2006 Pontiac Solstice a new model compact convertible Viewers were offered an early chance to purchase the Solstice and with the help of supplementary web promotions Pontiac presold 7 116 cars to become the market share leader in the compact convertible category Cadillac sponsored a Super Bowl post game show to promote the ability of its V Series cars to hit 60 miles per hour in less than five seconds The company created a special Web site promoting a Five Second Film Competition then invited site visitors to shoot and upload a five second film on any topic More than 2 5 million consumers visited the
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How to plan profitable sales promotions by considering the stature of your brand in the marketplace the message being delivered and how customers and competitors will react

Betsy Gelb is the Larry J Sachnowitz Professor of Marketing and Entrepreneurship and director of Ph D Programs Bauer College of Business University of Houston where Demetra Andrews and Son K Lam are doctoral candidates in marketing and entrepreneurship Comment on this article or contact the authors through smrfeedback mit edu

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page 2 600 of whom submitted films Cadillac reported in its award winning Reggie entry that in the four months following the promotion sales of the This paper began as a hypothesis that promotions easy for consumers to adopt and difficult Cadillac V Series jumped by 25 7 for competitors to imitate would disproportionately be profitable The sources of promotions permitting a test of that idea were the Promotion Marketing Association s Reggie award A clearer contrast to GM s sumWeb sites for 2005 and 2006 since each entry seeking to be adjudged a sales promotion winmer price promotions could hardly be ner must provide data on sales results and ideally also on profitability Thus in a sense the imagined These were successful promoresearch proceeded in an unorthodox way Because promotions that fail are not entered in tions that no competitor even tried to the competition for Reggie awards the authors could not simply compare promotions that imitate given their unique ties to the fit the easy to adopt and hard to imitate category with those that did not fit that category to brand images created by Pontiac and calculate the proportion of successes in each However it was possible to look at the set of Cadillac respectively successes and see to what extent they fit the expected category Almost all appeared to do so Any sales promotion worth its salt although only a few illustrations were selected for this paper Winners were also analyzed to will increase sales but creating a profitsee what other characteristics they shared leading the authors to conclude that communicatable promotion is more difficult 8 Indeed ing something about the brand predicts a successful promotion as does promoting a brand successful promotions are most often with a differential advantage rather than counting on the promotion to bring an unknown those that consider how customers and brand out of obscurity Read more about the 2007 Reggie winners at http www pmalink org awards default asp p 2007reggie winners competitors will react to any promotional effort as well as the message delivered and the brand s stature in the marketplace To help managers align those factors in planning profitable sales promotions this article will analyze successful and unsuccessful promotions and what differentiates them See About the Research Whether designed for consumers or for organizational buyers it appears that a successful promotion has these features

About the Research

It provides the sponsor with a period of exclusivity because it precludes or delays imitation but encourages quick buyer response This criterion is the most critical in avoiding promotional losses Difficulty of imitation may occur either because of a unique association of the promotion with its sponsor or because some hard to duplicate resource makes imitation difficult Quick buyer response is encouraged by a promotion that is simple to understand ideally with informative elements or emotionally appealing components or both It does not rely on discounting alone but communicates something about the company the brand or the specific goods or services offered It informs potential purchasers or creates an emotional bond even if the message connecting the brand to the potential buyer is conveyed indirectly It is launched by companies that have some differential advantage in the marketplace already Sales promotions don t create that advantage as much as they exploit it

Deterring Imitation but Attracting Buyers Quickly
An easily imitated promotion like a time limited price cut or reward program based on purchase frequency can result in a lose lose outcome both for the originating company and for its imitators Depending on the type of promotion imitation can not only reduce profitability it can even reduce per unit sales revenue If a temporary price promotion is more than matched by competition an escalating price war can lower prices throughout a product category That danger suggests that price promotions should be adopted only with great cau

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tion Certainly longer term price reductions can be valuable competitive tools The Monopoly Window when they expand the total market for a product category promote trial for a Optimally customer response is quick and imitation is brand with a distinct but hard to communicate advantage or discourage comslow yielding a period of exclusivity between those two events for the promotion to attract buyers petitors from entering a category However a price promotion is by definition a short term cut and many such promotions accomplish little more than inviting Launch of Higher Consumer imitation and reducing profits Their primary advantage accounting for their attractive Payoffs Response Delay and hard tofrequent use is that buyers understand price promotions easily and so can reimitate Competitive promotion spond quickly Ideally promotions are designed with consideration of the time Response Delay gaps between initiation of a promotion and two subsequent events significant response by a target audience and imitation by competitors Launch of Consumer Realistically maximizing the monopoly window the time between easily imitated Response Delay or overconsumers response to a promotion and competitors reaction to it involves complex Competitive Lower promotion trade offs because the simplicity and ease of communication that speed up a Response Delay Payoffs consumer purchase will likewise normally speed up imitation See The Monopoly Window Conversely promotions designed to be difficult to mimic Time may also be difficult for targeted individuals to understand and thereby may delay customer response Furthermore promotions designed for implementation by channel partners distributors or retailers for instance must be simple enough so that those channel partners are motivated and able to implement them an effort often made more complex if those partners span the globe 9 Given these conflicting priorities managers increase the likelihood of successful sales promotions when they buy time by employing elements that are scarce or difficult to acquire and incorporating complex linkages with third party providers that are difficult to imitate See Predicting Imitation of a Promotion and Speed of Consumer Response Among the factors that predict competitive imitation of promotions preemption of scarce resources ranks high as a way to preclude imitation Developing a strategy for preventing promotional imitation is of course most important when imitation of a promotion by rivals is most likely The best clues to such a likelihood come from research on imitation of pioneering new products Such research identifies as factors that increase imitation 1 a high degree of market dependence on the part of the competitor 10 2 market power asymmetry in favor of the competitor and 3 a high degree of perceived similarity between the competitor and the pioneer 11 In other words an underdog brand in a category where the leading brand is similar and is vital to its parent company s profitability is likeliest to face promotional competition Managers responsible for such brands are thus most strongly advised to consider the strategic considerations presented here and the methods utilized by award winning promotions to compete successfully The Home Depot Inc provides an example of a promotion that was difficult to copy In 2004 the Atlanta based retail chain increased Web site and store traffic by employing 450 athletes training for the Olympic Games and the Paralympic Games By offering a flexible work week with full time pay and benefits to the athletes who donned orange aprons and worked in aisles of Home Depot stores the chain cemented an association with the Olympic Games that differentiated it from other Olympic sponsors and certainly from its retail competitors Its reported results included publicity at a level equivalent to having every American hear or see its story twice plus 40 000 registrations at its Web site 12 A far more common promotion offering loyalty bonus points offers another example of the need to gain a differential advantage through preemption since rivals will either have similar promotions underway or are likely to initiate them The key to creating a bonus points program that is the least vulnerable to competition is communicating the idea

Th

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icting
Predicting Imitation of a Promotion and Speed of Consumer Response Critical factors to be considered
No preemption of scarce resources

What that means in practice
By contrast exclusive access to scarce resources such as a newsworthy event a celebrity partner or a channel of communication or distribution can make mimicry by a competitor difficult or impossible If a competitor depends on the product category now experiencing a promotion they are likelier to imitate a promotion more is at stake for them By contrast a multi product firm with many irons in the fire is less likely to match a promotion

Competitors will imitate when there is

A high degree of market dependence on the part of one or more competitors

that as spending increases the reward per dollar spent increases even more A shopper who spends 100 in a given month at a particular chain for example earns double reward points for every dollar spent thereafter in the same month While any retailer can institute such a promotion the one who couples it with a New Year s Day or April Fools Day food festival to attract shoppers on the first day of the month starts out with a substantial number of buyers reaching the 100 threshold Such a tactic exemplifies the multiplier effect inherent in many excellent plans A sales promotion works most effectively when the brand attracts interest for more than the buy now offer alone

Speeding Consumer Response

The uniqueness of the Olympics protected the Home Depot promotion from duplication However sponsors such as retailers with Market power asymmetry When a market leader is challenged loyalty programs expect that rivals will simply be delayed from imitathat company is likely to fight to keep tion not precluded entirely Thus however difficult or easy a promotion leadership By contrast when the promotion initiator has higher power may be to imitate wise managers design promotions not only to delay the competitor is less likely to retaliate or imitate imitation but to accelerate consumer response High similarity between Similarity in terms of customers What factors influence consumers to act quickly Promotions competitor and pioneer suppliers capabilities and or market intelligence results in faster awareness elicit purchase by tapping into one or more of three types of motivaof competitive moves hence faster imitation tions economic informational and affective Economic incentives Consumers response will be faster when make a purchase less expensive in money and or in time and effort Information influences consumers beliefs about the brand or product The product falls into the Products that are purchased on the spur impulse purchase category of the moment are likelier to be bought category The affective approach arouses favorable feelings and emobecause of a deal They are often in selfindulgent categories and the tions and associates them with the promoted brand 13 promotion gives the buyer an excuse for spending on the indulgence The best way to increase success for a promotion is to structure Buyers can stockpile The promoted products can be bought it to supply all three motivations An example of this kind of triple ahead of need and saved for future use threat is the promotion for Procter Gamble Co s Pampers Feel n Learn Advanced Trainers described by P G as the next step up from disposable diapers for children ready to graduate to toilet training P G set out to empower these toddlers as they learn to anticipate a potty urge with cutting edge technology that allows children to actually feel when they are wet The sales promotion mechanism was to declare August We Can Do It month A partnership with five other toddler brands included special offers and store displays including I ve Got the Power motion activated talking shelves Stores offered training kits in English and Spanish and 417 day care centers in the Chicago test market received kits along with potty training tip booklets and discount coupons for parents Thus the promotion combined the economic impact of saving money with information on training toddlers out of diapers and the emotional plus of toddler empowerment all magnets to speed trial of the brand by the mothers whom P G targeted Also the promotion s linkages with third party providers increased its complexity deterring imitation Results included a reported 4 9 share point increase for Pampers and a product trial rate that was 7 percentage points higher among day care test respondents versus a control sample 14 Some promotions can be very successful by employing only one or two types of motivation Often an informational approach seems unnecessary for instance and a sponsor simultaneously offers a deal while communicating to produce an emotional link between the company s brand and the consumer One such mechanism is to invite that consumer to in effect join our exclusive

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club with the assumption that customers who establish such a bond to a product or service provider will see no need to shop elsewhere Among recently reported successes An Italian restaurant offered valued members a pint jar of the house spaghetti sauce annually in return for a 15 membership fee The sauce was presented to them during a meal at the restaurant so that nonmember patrons could watch the presentation and presumably decide they too should join the club Pizza Hut a subsidiary of YUM Brands Inc of Louisville Kentucky offered a large pizza to customers joining its VIP Very Into Pizza group for 14 99 The company also provided an additional free large pizza for every two 10 orders and a monthly order of free breadsticks or baked cinnamon sticks The Pizza Hut VIP promotion increased members incremental orders by 93 in 2005 and raised incremental net sales by 65 in stores using the program 15 It therefore offers an instructive example of an astute trade off between complexity and simplicity To have announced VIP members get free pizza would have been simpler but that would not have explained the full nature of the Pizza Hut offer and would have made imitation easy By describing the promotion more fully the pizza chain chose complexity and deterrence of imitation over simplicity of communication with successful results

Winners Benefit Disproportionately
The third principle we infer from examining successful promotions is the disproportionate benefit accruing to brands that have some other plus factor besides the promotion itself One such factor is the perceived quality level of the brand sponsoring the promotion Researchers have found that consumer switching is not symmetrical but that promotions of brands with greater brand equity bring about more switching than do promotions of less distinguished brands 16 In other words promotions accentuate perceived quality advantages rather than overcoming quality disadvantages However these same researchers caution that market share should not be used as a proxy for perceived quality If a firm has bought market share through its pricing strategy or distributional advantages there is no reason to attribute share leadership to perceived quality and therefore no reason to expect a differential advantage from even the best sales promotion efforts Still a well planned promotion can build brand equity while making buy now an attractive proposition An example is a trade promotion directed to truck fleet owners by Cummins Inc a global supplier of diesel engines based in Columbus Ohio In 2003 and 2004 the company responded to stepped up U S Environmental Protection Agency emission regulations by developing a new technology while its largest competitor lobbied to delay implementation of the regulations claiming that the new technology would cause problems Cummins offered an uptime guarantee to build confidence in the reliability of its engines publicized at major trucking trade shows and through trade publications but implemented through channel partners If a customer had a problem with a Cummins engine the Cummins dealer or distributor would reimburse the customer for a rental truck for up to three days so the delivery could be completed The Cummins promotional program boosted this already well respected firm to record sales and an industry leading share in North America for the first time in five years 17 Clearly that successful outcome required no particular complexity to achieve but it required an astutely designed promotion that its largest competitor could not imitate without a complete about face on its stance concerning the EPA regulations Cummins success illustrates the double payoff from a pioneering promotion that upgrades a brand s image A company that pioneers can often exert a significant influence on

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consumer learning and preference formation because that company temporarily monopolizes buyers attention While its competitor s back was turned Cummins was able to dramatize the association of its engines with reliability More generally the monopoly window that exists before competitors imitate a promotion lets the pioneer foster both familiarity with and preference for the benefits and associations that the promotion creates

Additional Lessons
In addition to the three principles outlined above analysis of successful promotions suggests a number of other lessons Avoid Imitation Not only is it a mistake to launch a promotion that can be imitated easily but from the perspective of the imitator a copycat promotion also is likely to be a mistake The originating company may counter by escalating its deal incurring losses for the originating company and the imitators and trapping all competitors because none wants to stop the promotion first Also imitators may find that potential buyers associate a copycat promotion with the original promoter s brand Plan for Contingencies Given the downsides of imitation sensible managers will undertake contingency planning If our competition launches Promotion X we will launch Promotion Y This kind of contingency planning seems particularly valuable in a business to business marketing context where price promotions offered to one customer can be demanded by a competitor of that customer and matched almost instantly eliminating the profitable monopoly window

Managerial Challenges
The discussion presented here simply advocates considering how customers will react and how competitors will react to any promotional effort as well as the message delivered and the stature in the marketplace of the brand delivering it When all of these factors are aligned the result is a successful promotion However two aspects of what we have recommended work against adoption of these ideas in many organizations posing internal challenges for managers Overcoming the Comfort of Imitation In some corporate cultures marketing managers will encounter resistance to originality and innovation from others who ask for evidence of expected outcomes If a company re uses last year s promotion there is some basis on which to forecast the results If a company imitates what others have done there is likewise greater certainty than with a novel approach Thus a manager may face opposition in attempting the kind of promotion described here which by definition will most often lack a track record Overcoming the Resistance to Speed The approaches advocated here often require moving fast In some organizations the need for speed to preclude competition or to seize an opportunity doubles the intraorganizational doubts Not only is it unclear what a promotion will accomplish but those who want to launch it are in a hurry That alone may elicit resistance in some organizational settings Marketing managers in resistant organizations not only must tailor a promotion successfully to its intended market they must also skillfully shepherd it around internal barriers Knowing why how and for whom sales promotions will most likely be profitable the kind of strategic approach recommended here will surely help

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REFERENCES
1 The Promotion Marketing Association issued its 7th Annual State of the Promotion Industry report in 2005 however its numbers the most recent available extend only through 2004 It published two methods of calculating spending we have used the more conservative The alternative allocates 515 billion in promotional spending among consumer promotion 44 trade promotion 27 and advertising 29 2 J A Quelch S A Neslin and L B Olson Opportunities and Risks of Durable Goods Promotion Sloan Management Review 28 winter 1987 27 38 3 J B White and J McCracken Auto Industry at a Crossroads Finds Itself Stalled by History Wall Street Journal Jan 7 2006 A1 A5 4 M Maynard Kerkorian Aide Tells G M to Be More Like Nissan New York Times Jan 11 2006 C1 C4 5 M Maynard and J Brooke Toyota Closes in on G M New York Times Dec 21 2005 C1 C14 6 D M Ruch Effective Sales Promotion Lessons for Today A Review of Twenty Years of Marketing Science Institute Sponsored Research Report No 87 108 Cambridge Massachusetts Marketing Science Institute 1987 7 Both Pontiac and Cadillac were 2006 Reggie winners 8 P Raghubir J J Inman and H Grande The Three Faces of Consumer Promotions California Management Review 46 no 4 summer 2004 23 42 9 L S Simpson Enhancing Food Promotion in the Supermarket Industry A Framework for Sales Promotion Success International Journal of Advertising 25 no 2 2006 223 245 10 M J Chen and I C MacMillan Nonresponse and Delayed Response to Competitive Moves The Roles of Competitor Dependence and Action Irreversibility Academy of Management Journal 35 no 3 1992 539 570 11 K G Smith and C M Grimm A Communication Information Model of Competitive Response Timing Journal of Management 17 no 1 March 1991 5 23 12 Promotion Marketing Association PMA Reggie awards 2005 Reggie awards are named for the cash regi ster emphasizing the point that sales promotions are intended not simply as image builders but as builders of sales The annual awards are made jointly by the Promotion Marketing Association and Brandweek magazine Other promotion awards can be accessed at http promomagazine com resourcecenter campaignshowcase 13 Raghubir Inman and Grande Three Faces 14 PMA Reggie awards 15 S Coomes Meaningful Rewards Dec 22 2005 http www pizzamarketplace com article php id 4565 prc 149 page 135 16 R C Blattberg R Briesch and E J Fox How Promotions Work Marketing Science 14 no 3 1995 G122 G132 17 Cummins was another 2005 Reggie awards winner

Reprint 48401 Online only article posted May 15 2007 Copyright Massachusetts Institute of Technology 2007 All rights reserved

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