A Strategic Perspective on Sales Promotions

How to plan profitable sales promotions by considering the stature of your brand in the marketplace, the message being delivered, and how customers and competitors will react.

While most managers would think long and hard before bringing to market a product that lacked patent protection and could be easily imitated, many invest in sales promotions — sweepstakes, coupons, time-limited price discounts, free gifts or samples, special events, displays, membership rewards, consumer-directed promotions and so on — that are easier to imitate than the simplest new product. Others sign off on plans so generic that they seem unrelated to the brand or company offering them, despite the fact that sales promotions may absorb a significant portion of a company’s promotional dollars — currently a reported 31% of marketing budgets1 — and they are increasingly being used for both packaged goods and consumer durables as concern has grown about the cost effectiveness of media advertising.2

For example, the “you pay what we [employees] pay” price promotion instituted by General Motors Corp. during the summer of 2005 was imitated after only five weeks by its two major U.S. rivals. Analysts estimate that the promotion cost GM an average of more than $5,000 per vehicle3 through its September 30 termination, contributing to a $4 billion loss on North American operations during the first nine months of 2005.4 The full year was marked by a 50% decline in GM stock value and a 4% decline in sales vs. 2004.5

The unhappy outcomes for GM — and similar ones for imitators Daimler-Chrysler and Ford — illustrate the negative consequences of easy-to-copy promotions, but this example is hardly unique. An analysis of 20 years of research evaluating sales promotions indicates that most such promotions do not pay off, and even the studies painting a happier picture find no more than 60% earning back their costs.6

In contrast, a strategic focus leads to promotions that defy or delay imitation and yield disproportionate benefits for companies that have already developed a strong competitive position. For a fraction of the cost of the “you pay what we pay” promotion, any automobile marketer — or any other marketer — has a range of promotional tools to consider. For example, both the Pontiac and Cadillac divisions of GM reported successful promotions in 2005 that did not involve discounts.

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References

1. The Promotion Marketing Association issued its “7th Annual State-of-the-Promotion Industry” report in 2005; however, its numbers, the most recent available, extend only through 2004. It published two methods of calculating spending; we have used the more conservative. The alternative allocates $515 billion in promotional spending among consumer promotion (44%), trade promotion (27%) and advertising (29%).

2. J.A. Quelch, S.A. Neslin and L.B. Olson, “Opportunities and Risks of Durable Goods Promotion,” Sloan Management Review 28 (winter 1987): 27–38.

3. J.B. White and J. McCracken, “Auto Industry, at a Crossroads, Finds Itself Stalled by History,” Wall Street Journal, Jan. 7, 2006, A1, A5.

4. M. Maynard, “Kerkorian Aide Tells G.M. to Be More Like Nissan,” New York Times, Jan. 11, 2006, C1, C4

5. M. Maynard and J. Brooke, “Toyota Closes in on G.M.,” New York Times, Dec. 21, 2005, C1, C14.

6. D.M. Ruch, “Effective Sales Promotion Lessons for Today: A Review of Twenty Years of Marketing Science Institute-Sponsored Research,” Report No. 87-108 (Cambridge, Massachusetts: Marketing Science Institute, 1987).

7. Both Pontiac and Cadillac were 2006 “Reggie” winners.

8. P. Raghubir, J.J. Inman and H. Grande, “The Three Faces of Consumer Promotions,” California Management Review 46, no. 4 (summer 2004): 23–42.

9. L.S. Simpson, “Enhancing Food Promotion in the Supermarket Industry: A Framework for Sales Promotion Success,” International Journal of Advertising 25, no. 2 (2006): 223–245.

10. M.J. Chen and I.C. MacMillan, “Nonresponse and Delayed Response to Competitive Moves: The Roles of Competitor Dependence and Action Irreversibility,” Academy of Management Journal 35, no. 3 (1992): 539–570.

11. K.G. Smith and C.M. Grimm, “A Communication-Information Model of Competitive Response Timing,” Journal of Management 17, no. 1 (March 1991): 5–23.

12. Promotion Marketing Association (PMA) “Reggie” awards (2005). Reggie awards are named for the cash “regi”ster, emphasizing the point that sales promotions are intended not simply as image builders but as builders of sales. The annual awards are made jointly by the Promotion Marketing Association and Brandweek magazine. Other promotion awards can be accessed at http://promomagazine.com/resourcecenter/campaignshowcase.

13. Raghubir, Inman and Grande, “Three Faces.”

14. PMA “Reggie” awards.

15. S. Coomes, “Meaningful Rewards,” Dec. 22, 2005, http://www.pizzamarketplace.com/article.php ?id=4565&prc=149&page=135.

16. R.C. Blattberg, R. Briesch and E.J. Fox, “How Promotions Work,” Marketing Science 14, no. 3 (1995): G122–G132.

17. Cummins was another 2005 “Reggie” awards winner.