Branding or price offers to grow business

Often the first thing companies do during a downturn in the economy and a time of head-on competition, is to reduce prices of their products and services to maintain sales volumes.

Look at the price wars and unbelievable promotional campaigns in Sri Lanka in Credit cards, super markets, home appliances, clothing and eateries. Crazy deals such as 50% discount or 1:1 free.

But is this a sound strategy? Can a price reduction actually hurt rather than help? While it may be necessary in some cases to reduce prices, discounting has its risks. The biggest risk is that it can create a negative long-term perception of a brand, ultimately leading to market-share erosion. Value-minded consumers have long-term memories and it is hard to retain market-share when the economy recovers and you try to raise your prices or eliminate promotions.

However, when offered at the wrong time - for no other reason than to boost sales - it can cut the other way and create brand deterioration. One of the quickest, easiest, and most popular ways for brands to compete in a tough operating environment is price.

Why discounts

When you offer a discount, you are taking the focus from the value you provide and placing it squarely on your price. There is no way to escape that. After investing millions to build their brands, why do companies turn around and do something crazy that damages the core value of brands?

The reasons for price promotions are multiple and overlapping; to drive short-term sales, because the competition is doing it, retailers expect it or because customers are searching out deals. All these sound logical and sales and marketing people can easily make a case for upper management approvals. However, the visible short-term sales results lead managers to overlook the long-term negative impact to the brand's value and ultimately, the financial returns to the firm. How do price promotions hurt the brand? In many ways; Consumers become conditioned to buying only during sales. And when they do buy they buy in bulk and store up so they have enough supply to last till the next sale. Consumers also become increasingly focused on price over product differentiators and perform mental trade-offs based primarily on cost/benefit versus emotional attachment to the brand.

They are also much more likely to switch between brands simply to get a good price. For the company this means that it is continually selling its product at a lower price throughout the year and offering steeper discounts to woo customers back from the competition. Over several years this continued discounting erodes margins significantly, which in turn erodes shareholder value.

The ultimate decision-maker

Whether or not discounting has an effect on brand image is not something you can dictate, or wish away. Don't fall for the trap where you confuse the message sent with the message received. Some marketers believe 'positioning' is inherent in their advertising, but it never is. Unfortunately for the brand, price is more easily tampered with than quality. Quality is made up of tangible attributes, intangibles, or just warm fuzzy feelings. Quality is a belief, often difficult to articulate, held by the collective mind of customers. Quality and price do not exist as isolated concepts in consumers' minds. They are interrelated. Deep and persistent discounts do cause the consumer to doubt your brand - that quality also has been lowered.

Two points. First, avoid getting into the cycle of frequent deep discounts. Second, if you are in it, slowly get out. A deal can always be beaten by a competitor if they so decide, no matter if they make money or not.

An image is quite a different thing altogether. Strong brands can withstand and benefit from a well thought out discount program only if it's a part of your brand equity building plan.

Don't get me wrong; there's no doubt that discounting and sales promotions are a vital sales techniques when done correctly. It inspires excitement and creates a call to action but make sure it's a part of your strategy not discounts in isolation.