Do you remember marvelling at a beautiful rainbow as a child?
You were told there was a pot of gold at the end of it, right?
Me too.
But when you got to the end of the rainbow, or rather, where you thought it should be, what was there?
Nothing.
The rainbow had moved!
Well, as a food producer or food processor agreeing to price discounting at the request of retailers is the grown up equivalent of chasing that pot of gold.
You’ll go on a long chase, and eventually you’ll find nothing but emptiness.
I learned this the hard way. I’ll tell you what happened to a brand I was marketing, called SupaJuice.
Introducing SupaJuice
SupaJuice * is a brand of unique juice combination that sells in the major supermarkets across Australia and has done for some time.
Anyway “SupaJuice” usually sells for $14.99 for a 1 litre bottle and is the market leader in the category. Yes it’s expensive! It’s main competitors start at around $13.49, but SupaJuice has special ingredients people love, and they trust it.
SupaJuice is occasionally discounted to around $13.29 on a mid‐weight deal (to suck volume up from the cheaper brands) and, very rarely, down to $11.99 on a deep cut (usually only once or twice a year).
So, our story starts when the supermarkets knocked on SupaJuice’s door and sought to push the SupaJuice sales team into a special new promotion: a “2 for $20” deal. This kind of buy one get one free was quite new at that time, and the retailers were talking it up.
The lure of the pot of gold was on.
The deal was sold by the retailer as a wonderful rainbow ‐ “a way to help SupaJuice build business” ‐ but their real motivation was to help develop the retailer’s OWN reputation (they wanted to be seen as offering cheaper prices and were using loss‐leaders to generate store traffic).
Now remember, for SupaJuice, the $11.99 occasional discount already represented a major discount on the unit price ($3 is a deep cut). The “2 for $20” deal (affectionately known as the “2 for”) meant that SupaJuice 1L was at $10 per unit – an unprecedented – a 33% slash.
Now to add to the picture, in this particular juice category, you would not expect a heavy consumer to buy any more than say 1 bottle per year, so encouraging the purchase of 2 bottles at once was likely to encourage pantry‐stocking rather than push for real consumption.
However, the retailer reported truly wonderful results with ALL of the brands that had accepted their new “2 for” offers so far.
There were no losers.
The pot of gold was just there for the taking.
The retailer was totally committed to the “2 for” format, so it was going to put all sorts of amazing effort into making sure that this worked for everyone. (And those retailers sincerely hoped they would not have to take that same unbeatable offer down the road to WonderJuce.)
Of course, all this presented a dilemma of the worst kind for SupaJuice management. And the internal fights began.
Sales and marketing fought over chasing the “2for” pot
Facts were assembled and sales and marketing had a rather typical “full and frank exchange of views,” (a fight) largely driven by how they were each, respectively, remunerated.
It was the classic sales vs marketing standoff. Sales had lots of immediate reasons why it would be a good idea to do a SupaJuice “2 for $20.” And Marketing (yep, that was me) was paid to be worried about the longer term implications.
Anyway, we had a showdown. So, should we go for the promo, or leave it to the competitor?
Should SupaJuice chase the rainbow, and do the “2for” promotion?
Well, naturally there were lots of reasons why it was a BAD idea:
- The marketing folk were concerned that the deep discounting would reduce the perceived quality of the brand
- Consumers would rebase their pricing expectations, possibly as low as $10 ‐ and it would make it harder to achieve a baseline volume at decent margins. The slippery slope of promotional pricing.
- Discounting this deep would be largely taken up consumers who were happy with the current price. Furthermore, consumers did not need to have an extra bottle in their pantry as SupaJuice is not an impulse product (as an aside, with impulse products like chocolate you generally do want as much as you can in the consumers panty).
- And the funding for the 2 for $20 activity would ultimately start to come from funds that otherwise could support healthy brand growth (i.e. through advertising, innovation, and so on).
But there were also some strategic reasons why taking part in this promotion would be a GOOD idea:
- The pressure was on from supermarkets, and to say no would be considered a seriously “bold” move.
- If SupaJuice said no, then archrival Wonderjuce would say yes.
- Forcing double purchase pantry stocking would “lock out” competitors for a while and shift volume share to SupaJuice, which might “stick.”
- The sales team was paid bonuses based on volume, not value, and would all get a nice cheque if it worked
So there were plenty of arguments for and against.
What would you have done?
I can say that although I argued against taking up the “2 for $20” deal, it would have been a tough decision for anyone due to the trading power of the supermarket chains in Australia. Saying no is not easy here.
After a debate, the decision was made to go ahead by the Managing Director.
The green light for “2‐fors” was given.
Having accepted the retailers’ story of what lay at the end of the promomotional rainbow, the “2fors” were locked in. We were on our way to see if there was really a pot of gold there.
And so the chase for the pot of gold began.
Many brands track brand health and SupaJuice is no exception. At the time we used a classic indicator: VFM or “value for money” – yes this was a crude and previously useful measure of how consumers feel about a product.
“Value for money” scores trending up were seen as GOOD because, for a brand selling at a given price, it meant that it had added somehow to desired attributes ‐ the marketing efforts were on track.
The researchers were ready. We watched with interest to see what would happen.
The discounting began.
Wanna know what happened next?
The pot of gold was there!
We could actually SEE IT!
It was wonderful.
Sales volumes went through the roof: over 20% growth year on year. Sales got their bonuses. And even I was surprised to see our leading brand health indicator go up. Yes, UP!
As I mentioned, that brand health indicator was “Value for Money,” a measure that was tracked each week by market researchers.
After the “2 for $20” promotions started, consumers said SupaJuice was better value for money than it was before. Now this was a surprise to me because I had thought that discounting would quickly reduce perceived brand value, and here were consumers themselves, all saying that SupaJuice was BETTER value for money than before.
My sales colleagues, naturally, said “I told you so” as they banked their bonuses. And for a while I believed they were right. My SupaJuice brand health scores had gone up, and I would get my bonus, too!
I had obviously got my arguments all wrong.
Some promotions might be structured in a way that makes people value a brand MORE.
This could be a revolution!
But then ….. the pot just disappeared.
And of course, it disappeared just AFTER the sales guys had banked their bonus and BEFORE I had pocketed mine.
You have probably already seen the error I was making as I equated the increasing “value for money” rating with increasing valuation of the brand.
A reasonable approximation of what constitutes value is:
V = A/P
(Value = Desired Attributes / Price)
If you accept the model, it’s basic math. But before this instance, this had always been seen as an indicator of positive work on a brand, or quality.
In this case, the 2 for $20 promotion had had a positive effect on value, but for a different reason. Price was going down fast. And consumers knew it.
Consumers weren’t telling us they thought the product was better, they were telling us it was CHEAPER.
Cheaper was not good.
Cheap is nasty.
Then the pain began
After a few months, consumers got used to the lower discounted price.
And then, the “Value For Money” indicator began to free fall. As SupaJuice became cheaper relative to other products, the other products started to be seen by consumers as having better and more desirable attributes.
Consumers had started to see price as an indicator of whether SupaJuice was as good as they always thought it was.
So, what happened next?
The decision to participate in the 2‐for promotions was reversed …. this effectively put the SupaJuice price floor back up from $10 to $13.
You do know what happened next, don’t you?
Yes, this time, we had made the reverse error. Those smart old consumers were doing their math again.
SupaJuice had just got more expensive. And because the price just leapt upwards, the spiral of pain continued. SupaJuice became worse and worse and worse value for money as price rose again.
V = A/P
(Value = Desired Attributes / Price)
Eventually remedial action had to be taken, the craziness stopped and because SupaJuice is a well-known brand, consumers “forgave” the error.
But the story does not end there.
Remember how, when you were a child, you go to the place where the pot of gold should have been – and all you found was that the rainbow had moved?
The great moving rainbow of retail
Retailers are great at retail. And they want your promotional funds. Frankly they could not really care less about your brand except to the extent it can bring them traffic or make them money.
Once you have worked out that one promotional format is working for them, not your brand, it is time for them to move the rainbow. They will find the next bug promotional thing.
And it will be another breakthrough promotional format, with another “you can’t lose” promise to you, the brand owner.
For SupaJuice, the rainbow just moved. The retailers came knocking again, this time with their new EDLP (Every Day Low Price) program.
Another name for another discount. Another rainbow to chase. And what’s on the other side of the EDLP promo?
You guessed it …….
And as well my association with SupaJuice ended after the debacle.
Summary Lessons Learned
- There is no pot of gold at the end of the promotional rainbow. In the words of a famous Australian after being revived following a heart attack: “Mate, I’ve been to the other side, and there is %$^%g nothing there.”
- Don’t trust retailer motivations for encouraging deep cut promotions. Guess what? They are doing it for them, not you.
- Try to find better brand health indicators than “Value for Money.” And if you do use value for money then for crying out loud, understand what can impact it. “Makes a great gift” is a better tracking statement.
- Discounting increases perceived value in the very short term. Which is nasty, because it encourages you to dig deeper just when things are turning pear shaped in the consumer’s head.
- Cheap consumption is not valued in the long run. The price leader in a market is very rarely the most profitable player. If valuable marketing funds are diverted to price, you are burning your brand’s future for nothing.
Postscript:
SupaJuice just featured in a 2 for $30 advertisement this week.
Looks like the new management are about to learn it all over again.
“Let me know if you find the pot of gold!”
* No, it is not really called SupaJuice. And the product is a compilation of three similar circumstances where each brand got sucked in by the deal on offer.
But the situation is real and I’m seeing the same supermarket tactics happening today with fresh produce as well as processed food products.
Brand marketing and promotional strategies are just one area where businesses can be supported by engaging and Advisory Board