How Do Price Promotions Really Work?

Byron Sharp delivered the simple truth in How Brands Grow that the ONLY route

to brand growth is through buyer acquisition. Our work looks at what happens

on the purchase occasions when a brand acquires a new buyer. These occasions

– which are essential for brand growth – are called First Purchases.

By contrasting First Purchases with Repeat Purchases we identify the drivers of

First Purchases to help brands gain new buyers. We have analysed nearly 5

million purchases spanning different countries and categories, and through this

work we have uncovered a number of ‘universal truths’ about First Purchases.

Previously we looked at how First Purchases of brands were mainly unplanned

in advance and “won” at the point of purchase. Today we examine the role of

price promotions in driving First Purchases.

Do Price Promotions Win First Purchases For Brands?

In How Brands Grow the chapter titled What Price Promotions Really Do is

emphatic that price promotions don’t win new customers. And at first glance

analysis of panel data shows that price promotions have little or no effect on

driving First Purchases, and that price promotions are mainly bought by

shoppers who have bought the brand previously. But dig a little deeper and a

different story emerges. A more accurate conclusion might be that price

promotions usually fail to win new buyers for brands because of how they are

applied.

The Trouble With Averages

We all know that averages can be misleading. As Mark Ritson observed last

week, the average marketer has one testicle! To understand how price

promotions impact First Purchases of a brand we need to look beyond a ‘brand

average’ and understand how different pack sizes perform when they are

discounted. The catch is that not all pack sizes are equal when it comes to

driving First Purchases of a brand. For most brands we see that smaller packs

have a far higher proportion of First Purchases than larger packs. We call this

proportion the First Purchase rate. Appreciation of the First Purchase rate by

pack size helps us better understand how price promotions really work, and

provides brands with a more effective and cost efficient route to using price

promotions to gain new buyers.

What Price Promotions Really Do

Most price promotions do increase the First Purchase rate for a pack. However,

this fact is often masked by the significant difference in the First Purchase rate

between smaller and larger packs.

Consider the example above: Brand A is available in 3 sizes, and the large pack

accounts for more than one-half of sales volume (and nearly two-thirds of sales

value). Yet the smaller pack sizes have a far higher First Purchase rate – and the

smaller pack sizes account for nearly two-thirds of all First Purchases of the

brand.

Most of Brand A’s discount activity is focused on the best-selling SKU – i.e. the

larger pack size. As we have seen though, this SKU isn’t that important for First

Purchases. When the price is reduced on this pack size the First Purchase rate

increases from 6% to 11%, BUT this rate is still far less than the rate achieved by

the smaller packs at regular price. So whilst price promoted sales of Brand A

have a First Purchase rate of 11% this is considerably less than the average First

Purchase rate for Brand A of 16% - leading to the conclusion that price

promotions aren’t effective in winning new buyers!

What About Costs?

I often read that most price promotions lose money, but if a price promotion

does cause an increase in the First Purchase rate is it a good investment?

Consider another example: Brand B comes in 2 sizes, and the larger pack

outsells the smaller pack by nearly 2 to 1. Once again though, it is the small pack

which is more important for First Purchases. Both pack sizes are regularly

discounted - with a price reduction of £1 on the large pack and 50p on the small

pack - and both enjoy an uplift in the First Purchases rate (compared to the

regular price) when they are on promotion.

For every 100 units of the large pack sold on promotion the cost of the discount

is 100 x £1 = £100, and 2 additional buyers are won at a cost of £50 per new

buyer. For every 100 units of the small pack sold on promotion the cost of the

discount is 100 x £0.50 = £50, and 4 additional buyers are won at a cost of

£12.50 per new buyer – a staggering 4 times less cost than the large pack!

The Way Forward

Price promotions are costly and can be wasteful as there is no doubt that a lot of

volume is bought by shoppers who are regular buyers of the brand who would

have bought anyway. But they don’t have to be! There is a significant

opportunity for brands to make their price promotions much more effective at

gaining new buyers by aligning their price promotions with the smaller pack

sizes that have a higher First Purchase rate. This approach offers huge rewards -

both in terms of gaining new buyers to drive brand growth and cost savings!