online marketing psychology

November 11, 2010

A closer look at promotions part 2

photo credit: ICP
When researching promotion for the first part of this post, I came across this interesting story about Pepsi and Coca-cola.

Being arch enemies, you would think that they are at each others throat when it comes to promotions.

Turns out that that is not the case. They alternate their promotions, using a rotation schedule that is more complex than one week Pepsi and the other week on Coke promotion.  One time they will promote a certain type of package, let's say a deal on 24 cans of Coke. Other promotions might involve a price reduction on all their products and another time it might be a new in-store display. One of the reasons behind this strategy is to ensure the promotions don't wear out too easily.

In an American study on this situation it was found that on average, each strong bottler (Coke, Pepsi and RC/7UP) spends between 33% and 47% on promotion. With some deviation that is indeed the whole time.

So why would they all agree to this? If any of the involved parties would diverge from this strategy a series of price cutting would follow, which isn't healthy for anyone. The Prisoners Dilemma.

Another reason is to fight off private label brands. In this example, brand switching is asymmetric, which means the following:
A promotion will convince a certain amount of users to switch from the private label brand to Coke. Now if the private label holds a promotion of its own, a number of users will switch back from Coke to the private label. In the second case however, fewer users will switch back to the private label, that's the asymmetric part of brand switching.
The income effect is a possible explanation. Because of a price decrease, the consumer is now able to buy a higher quality product with the same income. This results in a larger total utility.

Promotion and prices

The price is the most powerful element in the marketing toolbox. A promotion uses a lowered price to make people buy when they were not planning to.

But for consumers that were not aware of the price, organizing a promotion might make them more sensitive about it. And price sensitive customers are not your ideal ones.

People should also be attracted to the brand, not just to the deal they are getting. Sure the promotion is there to convince them. But if you don't reinforce buying again, possibly without the price reduction, people will get used to buying on promotion. And since you don't want to eternally discount your product, that is not a situation you want to be in!

If you are aware of other conspiracy stories within the world of promotion, or have any other thoughts on the subject, please let us know in the comments!

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