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Price Promotions (Part 1 of 3): Design promotions to drive consumer behavior

Temporary Price Reduction, price promotion, sale price, discount price… all mean essentially the same thing; a short-term lowered price offering the consumer a savings on a purchase. The majority of us learned in Econ 101 that items are elastic; sales units go up as price goes down. As a buyer, the majority of time I had a conversation with a brand about sales needing to increase on their product, the first tactic that was discussed was price. Simple, right? If you want sales to increase on an item, just lower the price. What’s the catch? The catch is that there are multiple ways to determine if a promotion is effective: margin, sales dollars, pull forward business, etc. As retailers get back to the basics and focus on the fundamentals, promotions are increasingly being evaluated by retailers in more detail. Translation: it is getting increasingly harder for brands to get promotions on their products.

Price promotions should be designed to drive consumer behavior.

The worst kind of promotion, for brands and retailers, is one that gives a discount on consumer purchases that would have happened regardless of the sale. The best way to ensure that TPRs are effectively used and to ensure margin for brands and retailers isn’t wasted, is to first identify the type of consumer behavior that you jointly want to reward. There are generally 5 types of consumer behavior that promotions can influence.

Generating new consumers is the goal of most price promotions. This means taking a consumer that has your brand in their consideration set and using the promotion to close the deal. New consumers are the holy grail for brands, and if buyers ask a brand why a promo is being recommended, driving new consumers is the goal of the majority of the promotions. The dissonance between brands and retailers comes from where the consumer is sourced. Brands, to some degree, are agnostic on whether the new consumer comes from an existing brand in the retailer’s store or if the consumer is new to the category. However, for a retailer, consumers that switch brands to receive the discount have an opportunity cost. The trick to these promotions is to understand where the consumer enters the category and what truly motivates a new consumer purchase.

Driving traffic to the store.  While this can seem similar to the new consumer promotions, there is a difference. These price promotions often include loss leaders, larger discounts, or seldomly promoted items. There are some items that “get the consumer off the couch” and into a store because the savings are large and some items that determine which store a consumer will shop.  The hope for retailers is that the consumer will buy additional items along with the promoted item to make the sale worth the margin risk. For brands, the challenge to recommend these promotions is that a brand needs to prove that the item being recommended is in fact a traffic driver. Success with these promotions is often easier to obtain if this promoted item is used with other items that also need to be purchased…at regular price…from the same store.

Stealing share of wallet is another goal that can be achieved with promotions. Most consumers shop at more than one store for their basic or staple items. My staple purchases are split between Amazon, Target, Walmart, grocery stores, and sometimes convenience stores… if I’m being honest. Additionally, there are categories that consumers are less brand loyal to and they might stray between a couple brands leaving opportunity. Share of wallet promotions are used to entice a consumer to stock-up on one brand at one retailer, earning retention with the promotion. Think about buy-get promotions, BOGOs, 10 for $10s, or even Target’s buy X items in a particular category and get a gift card. All these promotions are designed to get a consumer to purchase more items than planned to stock their shelves. Consumer and purchase insights are needed to determine the right quantity of items to incentivize and to determine if the category warrants a stock-up promotion.

Trading customers up to a more expensive item.  Grocery stores use this tactic often. Branded items will be on sale to trigger consumers to trade-up from a private label or less expensive option. Depending upon the item, often the national brand will be equal in price to the private label. The margin win behind these price promotions is either generated by anticipated future consumer purchases in the brand or driven by brands subsidizing the margin for the retailer with incentives. However, trading a consumer from a private label into a national brand isn’t the only time these promotions can be used. This can also be a successful way to encourage a consumer to purchase an item with additional features or attributes by narrowing the price gap between the alternatives. Think, “but this one is only $X more!” These promotions are most effective if consumer brand loyalty is known and if consumer insights confirm which products are most likely to be in the decision-making set.

Not to be forgotten, basket building promotions.  These can also be looked at as driving impulse purchases. These price promotions target items that were not on the consumer’s shopping list with the goal of increasing total ticket price. There are multiple categories and products that fall into this space, and multiple tactics that can be deployed besides price to drive similar outcome. Most commonly, retailers use location, location, location to trigger impulse purchases as well. All the more reason to use consumer insights to support a basket building promotion idea. Understanding what actually motivates the consumer to add the item to the basket is important when maximizing results. Based upon the product, it could be location, education, associate recommendation, or getting the product adjacency correct. It doesn’t have to be price as the only tactic, and more importantly, price might not even be a trigger.

There isn’t one specific promo offer that is perfect at driving your desired consumer behavior, and not all promos fit into one consumer behavior category. The key is knowing what you are trying to influence, and then having the consumer insights for your product or category to understand how to accomplish it. Without focus, promotions can be a margin strain for retailers and brands. As more and more retailers recognize the margin loss attributed to ineffective promotions, retail teams are headed into optimization mode furthering the need for consumer insight supported promos.

Stay tuned for the upcoming podcast and blog in this series on creating effective promotions. Can’t wait to talk promos?! Email me.