The Waning Impact of Price Promotions

One of the most venerable ways brands have urged customers to buy their goods is through in-store price promotions.

You know these promotions well. You see them when you walk through the door of the supermarket and spot a coupon for $1.00 off a box of Cheerios. For decades, brands have been relying on these price promotions to boost their sales. And the evidence shows that it works: In the week of the promotion, it’s not uncommon to see a 200 to 500 percent sales bump for that box of Cheerios.

Scott Neslin, the Albert Wesley Frey Professor Marketing at Tuck, knows the allure of price promotions has persisted over generations of managers. At a meeting with marketing execs in the 1980s, when he was presenting data on the price promotion sales bump, one of them said it was now clear what his job was: to promote more and get more bumps. That mentality prevails to this day, even though CMOs have become more sophisticated in their approach to promotions.

There’s just one problem: some managers and industry experts have noticed that it’s not working as well as it used to. The practitioner literature has been documenting the declining effectiveness of price promotions since at least 2015. So Neslin, a longtime expert on promotions, set out to evaluate that claim.

In a new working paper titled “Response to Price Promotion: Does It Increase or Decrease Over Time, and What Drives It?” Neslin confirmed what marketing managers have been seeing. In a study of 589 consumer packaged goods brands in 117 product categories, over a span of 13 years, he found that 75 percent of the brands showed a decline in the price promotion response. The average annual decline is about 4 percent, but compounded over 13 years, the total effect is a decreased response of about 40 percent. The bump has almost been cut in half, Neslin says.

Having documented the reduced response, Neslin then turned to what was driving it. He studied more than a dozen factors that could have contributed to the downward promotion evolution, but the top four were competitor brand loyalty, own-brand loyalty, quantity purchased, and new sub-brand introductions. Most of these factors are bad news for chief marketing officers because they mean that consumers are buying other brands or buying less of their brand. But the own-brand loyalty driver is actually good news for CMOs, because it implies customers don’t need a discount—they’ve become more willing to buy the product at the regular price. People are getting more loyal to the product itself, to its quality and what it stands for, and that’s great, Neslin explains.

Neslin’s research points to a complicated reality of price promotions. While managers often use them as a short-term tactic, a long-term factor, say the growth in loyalty to the brand, is reducing their power. Managers, therefore, need to treat the price promotion tactic as more of a strategic tool that must be monitored over years, not weeks.

The key message to managers is: measure this, Neslin says. Don’t take for granted that the bump will be sustained over long periods of time. Measure what’s happening with your brand and what’s causing the bump to change, and that will suggest actions to take.

One way to address the decline is to celebrate it and undertake strategies to reinforce the decline. This would be the case if the decline were due to increased loyalty to your product.

However, if the decline signals weakness in your brand, you want to reverse the decline. One possibility is to discount your product more steeply. But that may be a dead end because brands can only discount so much before promotions become unprofitable. The other way is to acknowledge that price promotions aren’t a silver bullet to sales growth, but just one approach among many.

More strategic managers might move away from relying on this short-term thing and start focusing on long-term aspects of their business, Neslin says, like product quality and nurturing relationships with their suppliers.

Tuck School of Business

Please visit the firm link to site