Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Frequent Price Promotions Threaten Quality Brands

10.12.2008
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.

About INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications.

Barry List | EurekAlert!
Further information:
http://www.scienceofbetter.org
http://www.informs.org

More articles from Studies and Analyses:

nachricht Rutgers-led innovation could spur faster, cheaper, nano-based manufacturing
14.02.2018 | Rutgers University

nachricht New study from the University of Halle: How climate change alters plant growth
12.01.2018 | Martin-Luther-Universität Halle-Wittenberg

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: In best circles: First integrated circuit from self-assembled polymer

For the first time, a team of researchers at the Max-Planck Institute (MPI) for Polymer Research in Mainz, Germany, has succeeded in making an integrated circuit (IC) from just a monolayer of a semiconducting polymer via a bottom-up, self-assembly approach.

In the self-assembly process, the semiconducting polymer arranges itself into an ordered monolayer in a transistor. The transistors are binary switches used...

Im Focus: Demonstration of a single molecule piezoelectric effect

Breakthrough provides a new concept of the design of molecular motors, sensors and electricity generators at nanoscale

Researchers from the Institute of Organic Chemistry and Biochemistry of the CAS (IOCB Prague), Institute of Physics of the CAS (IP CAS) and Palacký University...

Im Focus: Hybrid optics bring color imaging using ultrathin metalenses into focus

For photographers and scientists, lenses are lifesavers. They reflect and refract light, making possible the imaging systems that drive discovery through the microscope and preserve history through cameras.

But today's glass-based lenses are bulky and resist miniaturization. Next-generation technologies, such as ultrathin cameras or tiny microscopes, require...

Im Focus: Stem cell divisions in the adult brain seen for the first time

Scientists from the University of Zurich have succeeded for the first time in tracking individual stem cells and their neuronal progeny over months within the intact adult brain. This study sheds light on how new neurons are produced throughout life.

The generation of new nerve cells was once thought to taper off at the end of embryonic development. However, recent research has shown that the adult brain...

Im Focus: Interference as a new method for cooling quantum devices

Theoretical physicists propose to use negative interference to control heat flow in quantum devices. Study published in Physical Review Letters

Quantum computer parts are sensitive and need to be cooled to very low temperatures. Their tiny size makes them particularly susceptible to a temperature...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

2nd International Conference on High Temperature Shape Memory Alloys (HTSMAs)

15.02.2018 | Event News

Aachen DC Grid Summit 2018

13.02.2018 | Event News

How Global Climate Policy Can Learn from the Energy Transition

12.02.2018 | Event News

 
Latest News

Japanese researchers develop ultrathin, highly elastic skin display

19.02.2018 | Information Technology

Dispersal of Fish Eggs by Water Birds – Just a Myth?

19.02.2018 | Ecology, The Environment and Conservation

Studying mitosis' structure to understand the inside of cancer cells

19.02.2018 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>