The Idea in Brief
The allure of brands is fading. Increasingly, consumers would rather buy a generic product than its pricier big-brand counterpart: From 2003 to 2005, private-label market share jumped 13%.
To counter this trend, big brands are increasingly resorting to price promotions. Sure, promotions provide a quick revenue “lift.” But they also hurt your brands’ long-term health. Customers don’t buy more of your products over the long run: they stock up during sales and wait for the next deal. Result? Deeper discounts for shoppers—and shrinking profits for you.
To stop this vicious cycle, start protecting your brand equity, say Lodish and Mela. First, track purchasing trends. For instance, major lifts in sales volume when you offer discounts may signal consumers’ unwillingness to pay a premium for your brands. If promotions are backfiring, invest in advertising, new-product development, and new distribution strategies—strategies that enhance short- and long-term sales.
The Idea in Practice
To protect your brand equity, Lodish and Mela offer these guidelines:
Understand How Short-Term Focus Weakens Your Brand
Three forces make companies short-sighted about managing their brands:
Abundant short-term data. Through store scanners, managers can immediately tie a spike in sales to a price promotion. This makes promotions look highly profitable, so managers push for more of them. Eventually, most of a product is sold at a discount—eroding profit margins.
Difficulty measuring long-term marketing tactics. It’s easier to measure instantaneous sales spikes than the results of other marketing strategies with longer-term impact—such as advertising, new product introductions, and increased distribution. Yet these other tactics have a more positive effect on long-term sales than promotions do. For example, a TV advertising campaign that spurs sales increases during the first year will continue doing so for two more years—even if the ads are no longer aired. And the revenue arising from the first year of advertising doubles over the subsequent two-year period.
Wall Street pressures. Analysts use quarterly sales performance to value firms and advise clients. So managers are rewarded for delivering short-term results.
Construct a Long-View Dashboard
Monitor your brand’s long-term health by tracking these metrics:
A consumer-goods firm’s analysis of one of its beverages’ performance from 1994 to 1999 revealed a 3% decline in baseline sales (shoppers were buying the beverage only when it was on sale) and a 14% jump in price sensitivity. The brand decline wasn’t obvious from short-term sales data—because discounts had spurred a 7% growth in sales during the period. The firm realized the damage to the brand when it tried to raise prices in 1999. Consumers’ resistance to paying full price cost the firm more than $5 million in revenues.
Focus Your Marketing Strategy on Brand Equity
Make marketing decisions that protect your brand.
When General Mills acquired Lacoste, it lowered the price on the alligator-adorned tennis shirts and broadened distribution. Sales rose in the short run, but the brand lost its cachet when shirts moved from elite stores to clearance bins. Lacoste repurchased the brand. After it limited distribution, advertised the shirts through celebrities, and raised prices, sales jumped 200%.
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Copyright © 2007 Harvard Business School Publishing Corporation. All rights reserved.
Further Reading
Articles
Harvard Business Review
January 2006
by Thomas H. Davenport
To sustain your brand, you need to gather reliable long-term data and analyze it in new ways. Davenport explains how leading companies are using analytics to make more strategic—and more profitable—marketing investments. To wring every last drop of value from your marketing processes, hire or train employees for analytics expertise. Make it clear that analytics is central to your marketing strategy. Invest in the technology needed to accumulate massive stores of data and slice it into a variety of fine segments. And formulate strategies for managing the data.
The Perfect Message at the Perfect Moment
Harvard Business Review
November 2005
by Kirthi Kalyanam and Monte Zweben
The authors recommend another way to combat brand-weakening price sensitivity: target your marketing promotions to the individual needs of your customers. For example, figure out who your bargain-minded customers are, and communicate with them (through e-mail, phone calls, Web offers, and on-site interactions) in ways that keep them loyal to your brand. Tactics include invitations to special marketing events, announcements of newly arrived goods, advance notice of markdowns, and updates on where customers stand relative to promotions. For example, Harrah’s Entertainment tells casino visitors when they’re “only one visit away from our Total Diamond reward level.” Also adapt your marketing messages for each customer’s situation. For instance, customers submitting a change-of-address notice could receive a promotional offer for a product that would be useful to someone who has just made a household move.
