One of the challenges of using promotions effectively is that the more successful they seem initially, the more detrimental they can be over the long run. The reason is that the condition buyers to wait for promotions. Instead of drawing in new business, they shift buying patterns by encouraging people to stock up during promotions (time-shifting), or to buy the promoted products instead of higher-margin items (cannibalization).
Dell (NASDAQ: DELL), which used promotions to great effect in the direct-to-consumer computer market, has seen them hurt its margins. Despite efforts to reduce or eliminate promotions, their website is still chock full of promotional prices.
The New York Times recently ran an article on Macy’s (NYSE: M) attempts to eliminate an old-fashioned promotional vehicle: the coupon. Shoppers revolted, sales fell, the stock sagged 40%, and the CEO admitted that they needed coupons.
The Harvard Business Review has a relevant article on how companies spend years building brands, but the quarterly pressure to make numbers often manifests itself in promotions that erode or destroy the value of hte brand.
We always recommend that promotions have clear objectives, defined not only in the positive sense (increase sales by 10%), but also in the negative sense (without more than 2% time-shifting, and without increasing sales by more than 15%). Promotions should also have specific target audiences: new customers you want to try your business, existing customers you want to try something else that you sell, and existing customers that want to purchase more or in different patterns. These different types of promotions will have different fencing mechanisms to allow you to focus them on the target audience as narrowly, effectively, and inexpensively as possible. For example, items that have a limited shelf-life are more resistant to time-shifting. We also provide visibility into “promotion addiction.” In other words, which customers and products increasingly buy on promotion? This is not inherently bad, as long as you are actively managing the promotions and targeted segments so that you don’t have an overall promotion addiction.