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Perils of Promotion

Given the predominance of the quick-trip shopper, how important are traditional promotions? Promotions are designed for stock-up shoppers, not for quick trippers. If shoppers are only buying a handful of items, promotions probably don’t have their desired effect in either attracting them to the store or generating sales inside. In fact, in a 1997 study of 300 randomly chosen shoppers in four retail chains, Glen Terbeek found that consumers were unaware that 51 percent of the promoted items they had purchased were on sale; the discount had no impact on their buying behavior.

Of those 49 percent who were aware of the promotion, 40 percent would have bought the item anyway; 37 percent switched from another brand, and only 23 percent purchased product “incremental” to their regular buying behavior. Terbeek’s conclusion: “Trade promotion is unproductive, disruptive, and complex, with a dubious return on investment for anyone. Specifically, hidden costs are higher, and benefits much lower, than participants imagine.”5

The hidden cost of price promotions is also emphasized by Rui Susan Huang and John Dawes in their paper for the Ehrenberg Bass Institute for Marketing Science. Analyzing 3,000 price promotions, they found that the promotions had a hidden cost: the profit margin forsaken on sales that would have been made at the normal price, which they call the “baseline” volume. In many cases, the baseline volume that is sold cheaply is twice as much as the extra sales arising from the price promotion. As they write, “Plainly, many price promotions result in a price reduction on significant amounts of inventory that would have been sold anyway.... This means that marketers are paying a heavy price for making some extra sales from price promotions—for every extra sale, they are often giving away margin on another two times as much volume (or more). So while many marketing people and trade sales teams say ‘price promotions work,’ these promotions have massive costs in foregone margin on sales that would have been made anyway, at a normal price.”6

Of course, as we will consider later, the promotions may have more to do with the relationship between the retailer and manufacturer than the retailer and shopper. Even so, they are ostensibly designed to increase sales and seem to be less effective than expected in this task.

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