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We are now offering some of our management content as podcasts.
The podcasts available on this page are specially written by David Pollitt. They are drawn from reviews in the Emerald Management Reviews database.
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Why price cuts can cost dearly in the long term
Crisp-maker Walkers meant business when it launched its premium Sensations sub-brand in 2002. It not only lined up Victoria Beckham and Garry Linker for the advertising campaign, it also launched the product with a price cut.
The tactics worked - at least in the short term. By 2004, Sensations was the third-biggest bagged-snacks brand, behind Pringles and Walkers Crisps. Sales were more than £100 million.
The price cut remained in place, but sales began to stall. By 2008, Sensations was estimated to be worth less than £80 million. Amid signs that consumers no longer considered it to be a premium brand, parent company PepsiCo launched Red Sky crisps in 2009 to fill the premium positioning. In Volume 33, Issue 43 of Marketing Week, published in October 2010, Burrows uses the example to illustrate the long-term threat to brand values posed by the aggressive use of price cuts. And Hill explains exactly why price cutting is such a perilous strategy in the October 2010 issue of Admap.
According to Hill, repeated discounting takes away the element of surprise that draws attention to the product. Consumers simply come to believe that the low price will continue into the future. And people may come to question the quality of a product that has been on sale at a low price for a significant period. People who previously bought the product at a higher price may feel duped when seeing it on sale at a discount. They may simply stop buying it when the price goes up again. A company that leads on price may be indicating that it has nothing else to say or show in its advertising.
Moreover, says Hill, a focus on price is a focus on numbers. As a result, it moves consumers from an emotional response to the product to an analytical one. But research has revealed that emotionally orientated marketing campaigns generate twice as much profitability as hard-sell, rationally orientated ones.
The author suggests that, rather than relying on lower prices, companies should ensure that their products appeal to consumers' emotions. Brand associations can be inexpensive to build and have the considerable advantage that people do not become desensitised to them as they do to lower prices.
Hill also suggests that companies should invite consumers to become involved in what the product should look like next. 'When people have enjoyed having a hand in creating the offer, then the advertising that advocates for its value becomes a far easier sell,' he concludes. Burrows points out that this kind of involvement is easier to achieve than previously because of the internet. The Doritos: King of Ads 'crowd-sourcing' website and the Carlsberg Team Talk viral video provide good examples of producers embracing 'the full gamut of the socially connected world' to talk to their customers.
But price-based promotions still make up 34% of grocery sales and 65% of sales in areas such as beer, cheese and blocks of chocolate. Price cuts, like chocolate itself, can be addictive. Weaning customers, brands and retailers off them will not be easy.
In other Emerald news, the inaugural issue of Arts Marketing: An International Journal, is due to be published in February 2011. The journal is dedicated to publishing high-quality contemporary research into arts marketing and strongly encourages creativity in the development of marketing theory and practice.
For more information about the journal, or to submit an article, go to: www.emeraldinsight.com/am.htm