Frequent price promotions threaten quality brands, study shows

December 8, 2008

Frequent price cuts can have a major adverse effects on brand equity, even for well respected brands, according to a study published in a journal of the Institute for Operations Research and the Management Sciences (INFORMS).

"A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality" appears in the current issue of the INFORMS journal Marketing Science. The study is by Tülin Erdem of NYU; Michael P. Keane of the University of Technology Sidney, Australia and Arizona State University; and Baohong Sun of Carnegie Mellon University.

Recurring price promotions that reduce the perceived average price of a brand can feed back and adversely impact perceived quality. Simulations of the authors' model imply that approximately one quarter of the increase in sales generated by a temporary price cut represents cannibalization of future sales due to the brand-equity-diluting effect of the promotion.

The authors tested quality with Nielsen scanner data for ketchup brands. "It may seem unglamorous," the authors write, "but this category is well suited to the analysis. One dominant brand (Heinz) is generally perceived as being high quality. It is also higher priced and has substantially higher advertising expenditure than its name-brand competitors, Hunt's and Del Monte. In fact, the lowest-priced name brand (Del Monte) does not engage in any TV advertising. Thus, there is scope for consumers to use price and ad expenditures as signals of quality in this market."

The model sheds light on the importance of different information sources in influencing perceived quality.

For instance, the authors predict that a 10% permanent price cut for Heinz would increase sales by 26%. But if the price cut could be implemented without reducing perceived quality (and, hence, brand equity), the increase in sales would be considerably greater – 32%.

The implications of the authors' results would be much more pronounced in high-end product categories. For example, a Cunard Line promotion that employed aggressive push strategies reducing fare prices by half before Queen Elizabeth 2 left port could severely damage Cunard brand equity.

Whether the brand is Cunard, BMW, or a similar company, high-end brands will be better off if they target price promotions at micro-levels rather than through generic price reductions; integrate sales promotions in a consistent manner with the rest of their communications; and refrain from using price promotions frequently.

In their paper, the authors develop a structural model of household behavior where there is uncertainty about brand attributes, and both price and advertising signal brand quality.

The authors maintain that four quality signaling mechanisms are at work: (1) price signals quality, (2) advertising frequency signals quality, (3) advertising content provides direct but imperfect information about quality, and (4) consumer experience using a product provides information about quality.

They show that price is the most important signal of brand quality. The role of advertising frequency in signaling quality is also significant, but less important quantitatively.

Source: Institute for Operations Research and the Management Sciences


Rank 5 /5 (1 vote)
Related Stories
Relevant PhysicsForums posts

More news stories

A frank discussion of the power law and linking correlation to causation

(PhysOrg.com) -- Michael Stumpf a mathematics professor at Imperial College in London, and Mason Porter a lecturer at Oxford have teamed together to write and publish a perspective piece in Science regarding the in ...

Other Sciences / Mathematics

created Feb 10, 2012 | popularity 5 / 5 (5) | comments 11 | with audio podcast report

US workers are 'giving away the store,' costing firms billions

Nearly 70 percent of the nation's service employees give away free goods and services – from hamburgers to cable TV – costing companies billions of dollars a year, according to a groundbreaking study.

Other Sciences / Economics & Business

created Feb 09, 2012 | popularity 3 / 5 (5) | comments 11

Employers feel no love for unscrupulous practice of 'service sweethearting'

A new study led by two Florida State University marketing professors finds that some frontline service employees who are rewarded for hikes in customer loyalty and satisfaction also may engage in "service ...

Other Sciences / Economics & Business

created Feb 10, 2012 | popularity 3.3 / 5 (3) | comments 10

New insights into how to correct false knowledge

The abundance of false information available on the Internet, in movies and on TV has created a big challenge for educators.

Other Sciences / Social Sciences

created Feb 07, 2012 | popularity 4.9 / 5 (7) | comments 9 | with audio podcast

Neanderthal demise due to many influences, including cultural changes: study

As an ice age crept upon them thousands of years ago, Neanderthals and modern human ancestors expanded their territory ranges across Asia and Europe to adapt to the changing environment.

Other Sciences / Archaeology & Fossils

created Feb 07, 2012 | popularity 4.4 / 5 (5) | comments 8 | with audio podcast


Google might launch Drive for cloud storage soon

(PhysOrg.com) -- Google's next big move, according to the Wall Street Journal, is a cloud storage service called Drive. Hardly first to the plate, Google is simply catching up to introducing its cloud reposi ...

Overeating may double risk of memory loss

New research suggests that consuming between 2,100 and 6,000 calories per day may double the risk of memory loss, or mild cognitive impairment (MCI), among people age 70 and older. The study was released today and will be ...

Scientists discover molecular secrets of 2,000-year-old Chinese herbal remedy

For roughly two thousand years, Chinese herbalists have treated Malaria using a root extract, commonly known as Chang Shan, from a type of hydrangea that grows in Tibet and Nepal. More recent studies suggest that halofuginone, ...

New method to examine batteries -- MRI from the inside

There is an ever-increasing need for advanced batteries for portable electronics, such as phones, cameras, and music players, but also to power electric vehicles and to facilitate the distribution and storage of energy derived ...

Injured boomers beware: Know when to see doctor

(AP) -- It happened to nurse Jane Byron years after an in-line skating fall, business owner Haralee Weintraub while doing "men's" push-ups, and avid cyclist Gene Wilberg while lifting a heavy box.

Lab study raises questions over nano-particle impact

Tests involving chickens have raised questions about the impact on health from engineered nano-particles, the ultra-fine grains commonly used in drugs and processed foods, scientists said on Sunday.