Managing Price Discounting and Its Possible Impact on Brand Equity - Essay Example

Managing Price Discounting and its possible impact on Brand Equity Pricing discounts and their consequences Wherever there is a market economy, there will be intense competition; whenever there is intense competition, companies will be using different strategies to secure a larger market share and beat their competitors. The idea is to get to the consumer and hook him in before anyone else does. Price discounting is one such strategy where companies battle it out against each other’s products by manipulating the prices in a downward slope pattern to make their goods look more attractive to the consumers. It first of all affects the market share that is held by any firm; it can cause massive brand-switching as loyalties shift with the amount being charged; and can also alter the quantity that is being purchased. At first glance what price discounting does is add volumes to the number of consumers that are already with a firm, but the picture is never as simple as that. A firm may take to price discounting either to instigate competition or to hit back against it. This can especially be prominent in a declining market such as the one we are seeing today because of the recession. Price discounting thus becomes an important part of the marketing mix. The problem with price discounting is that once one firm starts using it as a marketing strategy, most firms have no choice but to follow suite i.e. if Pepsi decides to slash it prices by 50 per cent to attract customers, CocaCola will have no choice but to do the same because the products are extremely similar and are more or less interchangeable. In a market economy it is often the case that some products are homogeneous in nature. Then there are those that are not homogenous but are providing very similar products e.g. HP laptops and Apple laptops. In order to beat each other and obtain the most market share the pricing war begins and once this starts more and more companies fall into a loop where they keep decreasing their prices to attract more consumers till it begins to hurt their businesses. It becomes transparent that these firms are entrenched in a zero-sum game. No firm indefinitely introduces a pricing discount. This would mean losing their revenues, and subsequently, a part of their running costs, and most importantly their profits for an indefinite period of time. This is why the life of a pricing discount is short and its status rarely goes from the temporary to the permanent. In the short run it may cause an increase in the market share of the product that is being promoted i.e. the higher the discounts being offered the higher the market share becomes. However, as Shoemaker and Shoaf (1978) pointed out that most consumers often revert right back to their original brands and purchase patterns if the pricing discounts were temporary. The higher quantity that is sold during this period is only restricted to that period alone. Hence, only the short term purchase behavior of a consumer is disrupted and that doesn’t account for much in the long run. Another point of view was presented by Anderson and Simester (2004) who discovered that such pricing discounts were in fact effective in their goals. To answer the question of whether big discount straggles really convince new consumers to purchase a larger amount and to purchase more frequently; or if it has a completely opposite effect on the consumers and undermines the entire product itself, a study was conducted. It was in their findings that heavy price reductions did indeed have an impact on the market and brought in new customers, and also that these new customers did spend more in the long run. The problem was that the pricing discounts did not motivate the existing customers to spend anymore than they were already spending and in fact their future spending decreased after they received the pricing discounts. What it did was attract new people which were probably not nearly as many as number as the existing customers that the company already had. So instead of improving sales in a way it hampers their sales because it demotivates their old customers from spending too much once they get used to the discounts. The idea is that if a person gets comfortable with spending only $ 100 per month on something and then you let them spend $ 50 instead of that amount for a set period of time, they will get used to the cut back and will begin using that money elsewhere. Once that happens you cannot convince then to spend more than they already are. The overall effects of such pricing strategies are not seen in a favorable light. In ‘Revenue Management,’ we are given the example of AT&T, MCI, and Sprint that waged an “intense price slashing war” against each other in trying to come on top and diminish the others programs. “The result of this was the loss of billions of dollars and thousands of jobs. Three other things have happened: consumers have had a field day running from competitor to competitor to get the lowest price; the consumer has perceived a lower value of the product, particularly in the case of discretionary purchases; and the bloodied companies have jacked up the full-rate prices for their highest paying customers (usually business customers) to make up for the money they lost in the price war,” (Cross p.151). In effect not only does the company lose revenue by indulging in pricing wars but they risk angering their existing customers too because of their policies which may result in the image of the company being tarnished and a general dissatisfaction amongst the consumers. There is also a possibility that because of such practices the exist customers that had nothing to do with a particular products pricing policies, i.e. corporate users of AT&T, might switch to other carriers out of discontent. It can be concluded then that pricing discounts are best suited for short term goals. They do attract new customers but mostly in the short run and no real loyalty is developed if the only incentive they have for coming towards a brand is the pricing. If the money factor is what got them there in the first place then the money factor can just as easily knock them back to where they came from or to another brand. To increase the overall market share of the firm in the long run, a pricing discount policy will serve as a gigantic failure and also serve some heavy losses to the firm. In the short run however, the pricing discount is king as it not only attracts new customers to the firm but also increases the quantity of goods sold. Brand equity: the basics ‘The Brandmindset,’ defines brand equity as “The image of the brand and how it affects its consumers, employees and all stake holders is its brand equity. It can be defined as the totality of the services, financial performance, customer loyalty, satisfaction, and overall esteem towards the brand,” (Knapp pg. 3). It is basically the additional value that customers place on a brand over and above all other values attached to it. So, in a way the brand equity is its reputation and how people feel about it overall. It is also what builds goodwill and maintains and sustains customer loyalty. You are loyal to a brand that you like and respect, not a brand you deem trivial. No one would go and buy from a brand that they didn’t like twice; brand equity thus becomes vital for a company’s survival. In order to keep the customers happy a company has to focus on their brand equity a lot more than most companies realize. At times in order to get ahead of the other firms they forget that their foremost priority should be improving or adding to the brand image which automatically attracts more customers. Most firms end up ignoring their responsibility towards their brand equity. When a firm indulges in a practice like price discounting they forget that they don’t control the consumer and it is the consumer that ultimately is the decision maker. The brand image is what gets it its value and not the pricing mechanism. (Kapferer p.208) An effective pricing strategy will incorporate demand, cost and the competition factor. When enacting a price strategy, specific tools can be used to supplement the board base of the strategy. A brand manager should know when to use customary and variable pricing, one-price policies and flexible pricing, odd pricing, lead pricing and price lining. Some price adjustments may be required to adapt to internal and external conditions. Adjustments include markdowns and markup and employee discounts. Through advertising a brand has access to a large customer base and can therefore take more risks. A brand manager needs to know how to satisfy the brands market share of consumers through its advertising. If pricing discounts are coupled with an effective marketing plan then the company may not lose its market share. If the public is satisfied with the image and confidence that the adverts have tried to make then the brand can take the risk of pricing discounts and their after effects. The pricing strategy that the brand manager comes up with should only be pertinent to a small period of time. In the short run pricing discounts can be very effective; however, in the long run they can prove disastrous. For example in the case of cigarette companies, because the product is somewhat homogenous and interchangeable it is very easy to entice consumers with lower prices. A chain smoker spends a considerable amount of his income on his daily fix and if he finds that a different brand is offering a cheaper option then he will most definitely leave his current brand to save money. But with this the accompanying advertisements need to give a concrete reason for the change in prices i.e. the product should not look like it is desperate for consumers. The consumers are not stupid and they will migrate to another brand if they think this one is mediocre. (Winninger p.127) Similarly, a real life example is the pricing war that is currently taking place between different gaming consoles. The main focus of the advertisements of these products is never the price; instead they always talk about the new features and the benefits that gamers will get if they pick Sony over Nintendo for example. There is a subtle pricing war going on but it is not being shoved down the consumer’s throat. In this way for a gamer he gets to focus on the features of his console and the best option that suits him, an added bonus then becomes the price. By keeping price at the background of the entire operation the branding managers have made sure that the brand equity and value stays intact. The brand remains desirable for the market and it remains a viable and interesting option for consumers. At the same time once the consumer is done going over the features he will then review the prices and, because the products are so similar, the cheapest brand will win the most consumers and ergo the highest market share. Pricing discounts are an effective tool for attracting consumers to one’s brand. The problem with them is that they can at times make the brand appear desperate for consumers which does a lot more damage in the long run than most realize. In order to sustain any kind of strategy, regardless of pricing or not, a firm needs to develop its brand equity first. The better the image of the company, the higher the likelihood is that its products will sell. If the brand’s reputation is solidified then it can go through anything without a problem and that includes pricing discounts because then consumers will not think they are buying something trivial, it will be more a case of getting a hold of a great brand at better prices. Work Cited Anderson, Eric T., and Duncan I. Simester "Long-Run Effects of Promotion Depth on New Versus Established Customers: Three Field Studies." Marketing Science 23.1 (2004): 4-20. Cross, Robert. Revenue Management. Orient Blackswarn, 2003. Kapferer, Jean-Noël. New Strategic Brand Management: Creating & Sustaining Brand Equity. Kogan Page Publishers, 2008. Shoemaker, Robert W., et al. "Relation of Brand Choice to Purchase Frequency." Journal of Marketing Research (JMR) 14.4 (1977): 458-468. Winninger, Thomas J. Price wars: how to win the battle for your customer! St. Thomas Press, 1994. Read More