Hidden Secrets of Brand Promotion

Many brand managers are unaware that promotion of a brand name product actually does two things simultaneously. In the short term, it may work in favor of the promoted brand. But too much promotion of a strong brand can “de-value the entire product category,” according to Rick Briesch of SMU Cox. Recent research by Briesch and co-authors Eileen Bridges (Kent State University) and Chi Kin Yim (Hong Kong University) shows that promotions not only influence current purchases, but they can also impact future purchases by changing consumer sensitivity to subsequent promotional activity. 

As an example of how promotions may lead to changes in consumer behavior, suppose that a consumer buys a brand name product while a promotional price cut is offered. Following this purchase, the consumer may grow increasingly price sensitive toward all brands in the category; this means that the consumer becomes more likely to switch to a lower-priced alternative, such as a store brand. This implies that promotions incur a hidden cost to major brand managers, but also lead to unanticipated retailer profits, assuming that store brands offer higher profit margins. Such changes in profitability should be taken into account when designing promotional plans.

Cannibalizing Product Categories

Briesch and his colleagues offer a “big picture” view of how promotion affects a brand, expanding upon previous research results that suggested promotions affect only the promoted brand. For example, it was previously thought that promoting Coke resulted in price sensitivity increases only for Coke. “Our findings suggest that people become more price sensitive for the whole category, including Pepsi and RC Cola, not just Coke,” Briesch explains. “Simply put, Coke promotions affect Pepsi and RC. This is significant.” A brand that promotes has two effects that offset each other – usage dominance (the advantage a brand holds among loyal buyers) and increased price sensitivity for all brands in the product category. Thus, brands that promote a lot drive the price sensitivity of their competitors as well.

Given this new insight into the broader effect of brand promotion, retailers should carefully monitor the competition among national and store brands when developing a product category promotion strategy, because increases in price competition can lead to reductions in overall category profits. “If usage dominance is really strong (as in the case of butter), there’s not a negative effect due to promotion of your brand,” Briesch notes. “It increases price sensitivity for everyone else, but overall, people will be less price sensitive to your brand. This illustrates the notion of brand equity or ‘stickiness’ of the brand. Are consumers going to stick to my brand in spite of price sensitivity? That’s what brand managers need to know.”

Managers should consider whether brand equity would be compromised by offering a product on promotion, particularly if it leads to brand switching. Procter & Gamble stopped running promotions some years back. By cutting out promotions, they lost share in the short-run (to Unilever) but gained in profitability, and later recovered market share. “Our research suggests the effect of the brand equity can really overcome price sensitivity when promotions are cut and prices set judiciously,” Briesch concluded.

The Tipping Point

There may be a tipping point where a brand manager can overpromote to such a degree that the entire product category is harmed. “We observed that, after national brands promoted, consumers switched to store brands because of increased price sensitivity,” Briesch commented. “This does not mean you shouldn’t ever promote, but it does mean you should not promote when you have really strong price effects. When you promote, and the brand lacks “stickiness,” buyers may migrate to your brand this time but switch next time.” 

Contrary to the idea that brand loyalty (usage dominance) and price sensitivity (promotion enhancement) are competing theories, the authors find that both effects are present in all four of the product categories tested. Further, in at least three of four categories, they find that promotions influence future purchasing behavior for three out of four marketing mix decisions (regular price, price cut, and feature advertising) as well as for consumers’ tendency to repurchase the same brand. This is illustrated by an example from the tuna category. When no promotions were run, 92 percent of purchasers bought national brands, as opposed to store or house brands. Following a national brand promotion, national brand share declined to 89 percent. Thus, store brands may increase in share when a national brand promotes. The promotion enhancement effect is much stronger than usage dominance in this category.

In summary, these results indicate that both usage dominance and promotion enhancement can influence consumer response to promotional activities. The magnitude of the effects must be compared in a particular situation, to see which is more influential. (In three of the four product categories examined, promotion enhancement appears to have greater impact.) These findings are relevant to managers and have theoretical significance. The message to retail managers is that promotions of national brands may actually lead to increased interest in smaller and store brands, which may offer higher profit margins. Additionally, neglecting the effects of brand loyalty and promotion enhancement may lead to understatement of market shares for such brands. Brand managers can benefit from the research, which helps them develop a clear understanding of their brand’s promotional effectiveness by separating out the contributions due to brand loyalty and promotion enhancement.

Note: “Effects of Prior Brand Usage and Promotion on Consumer Promotional Response” by Eileen Bridges, Richard A. Briesch, and Chi Kin (Bennett) Yim is forthcoming in the Journal of Retailing, 2007.

Research Summary by Jennifer Warren