Pricing is one of the 4P’s of marketing mix. It has significant impact on the range of performance metrics, such as sales, revenues, profit and market share. While base pricing is part of broader strategic considerations, price promotions are more of a tactical nature. They offer sales team an opportunity to get ahead of competitors with a more effective promotional program.
Promotional effectiveness has many aspects. They include promotional group composition, interaction of discount and display, promotion planning and timing across product portfolio. In this post, I would like to focus on one piece of the puzzle – promotional mechanic.
First, I want to share some thoughts on the two types of promotions: Multibuys and Temporary Price Discounts. I will show how they are differently perceived by consumers and often lead to different responses. At the end I touch on what approach is suitable for correctly capturing promotional effect.Multibuy (MB) promotional mechanic stand for a wide range of offers, where a customer willing to purchase the required number of items gets a better unit price.
Temporary price reduction (TPR) means simply a purchase at a price lower than the regular bench price. Price reduction can be expressed in absolute terms (e.g. $1 off) or as % discount.
In case of MB, to re-deem the promotional discount, customer needs to buy X units of a product. This implies that only 1/X incremental customers should participate to achieve the same effect as TPR. This leads to (quite intuitive) assumptions that promotional uplifts generated by MB should exceed the uplift of TPR, providing the discount is at the same level.
Why Multibuy Effect Differs from Price Discount Promotions?
The demand dynamics can be a bit more complex. MBs can and often do have different impact than TPR at a similar discount depth. For example, in case of MBs, benefits of price discount are weighted against potential disutility from having to buy more units.
In general there are several factors contributing to differentiated impact on sales:
- the depth of offered discount,
- the amount that a customer has to buy to get a promotional discount,
- the amount and frequency of consumption (in general or on this occasion) and
- customer’s preference for the brand.
All these factors determine the decision simultaneously. However, let’s look at them one by one.
The depth of offered discount is generally the most important factor driving price promotions. The shape of response curve varies across products and categories. While demand for some products is exponentially growing with the discount depth, other product categories see the marginal sales diminish after certain discount depth was achieved. The response curve is mainly shaped by price elasticity, consumption frequency and willingness to stockpile.
The amount that a customer has to buy, to get a promotional discount. Generally, the higher the number of units, the more consumers are likely to be discouraged. Therefore, the MB effect exceeds that of TPR when higher required purchase volume more than compensates a lower number of customers attracted by the promotion.
The amount and frequency of consumption in the category. Promotional uplifts can be larger in categories with weekly consumption frequency compared to monthly purchase cycle. For example, cleaning detergent is an example of product with relatively lower consumption frequency. One can use only a certain amount; there is no need for more. On the other side of spectrum are some foods, like soft drinks or confectionary. These are often part of weekly shopping basket and we can consume or let our guests consume more if the goods can be sourced at a price perceived as a good bargain.
Customer’s preference for the brand is an additional, more subtle, factor that co-determines how MB performs compared to TPR. MB promotion competes on the market with TPR. Customers not committed to any brand go after the best deal and the deepest discount. On the other hand, slightly less attractive offers can still appeal to the customers with stronger preference for the respective brand. Therefore, if the brand has built a more loyal and committed customer base, MBs are more likely to work well.
In sum, MB promotional strategy can generate stronger results if at least some of the points below hold.
- The offered discount is ‘competitive’
- Consumption frequency of promoted good is high
- Consumer demand for a given product is price-elastic
- Product or brand has stable demand and more loyal customers who are more likely to stay with the brand, even when MBs promotion is competing with other brand TPRs.
But There Is Still Something More About Multibuys
In addition to volume uplift considerations; there are a few other benefits MBs offer. These can be highly valued by marketers, depending on their strategic vs tactical objectives.
Given that consumers have an option to buy the product at a full price or to go for a bigger amount and receive the MB discount, MBs extract higher value from the customers and maximise revenues and profits.
Moreover, while TPR promotions attract incremental customers looking for a bargain, MBs are more likely to appeal to a smaller subset of more loyal customers who like the brand. When the discount is offered, they are happy to consume more or to stock up. In sum, MB is a way to engage brand-loyal and committed customers.
Essential to Measure What One Wants to Manage
For better management of promotional program, solid measurement framework must be in place to build robust models and at the same time to provide a sufficient level of detail.
The first step is to determine how to separate individual parts of promotional program. If different response is expected betwen two types of promotions, their effects should be estimated separately. E.g. TPR should be measured separately from MB. Within MB, it is ideal to differentiate mechanics in line with the required purchase amount, e.g. 2 for $X, 3 for $X.However, to get robust response curves, there must be a minimum number of events for each individually measured type of promotions.
If the promotional effect is estimated through several series, an equivalent modellled metric, such as a discount, makes the response rates directly comparable.
Also, do not forget to control for off-shelf, displays and catalogues and any other store activity that can contribute to the promotional uplift quite a bit.
Instead of Summary
With higher costs of promotion execution and communication, it is important to use them to their full potential.
Marketers who want to use MBs with better results need to understand the demand dynamics in the category as well as how their brand stands relative to competitors.
Good understanding of how MB performance compares with TPR, what drives the response and how the range of cross-effects modifies the results can significantly enhance the effectiveness of promotional program.
Sydney, 11 February 2014,
Elena Yusupova, PhD