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 Multi-year study finds 'hotspots' of ammonia over world's major agricultural areas
17.03.2017 | University of Maryland

nachricht Diabetes Drug May Improve Bone Fat-induced Defects of Fracture Healing
17.03.2017 | Deutsches Institut für Ernährungsforschung Potsdam-Rehbrücke

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: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

Im Focus: Researchers Imitate Molecular Crowding in Cells

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to simulate these confined natural conditions in artificial vesicles for the first time. As reported in the academic journal Small, the results are offering better insight into the development of nanoreactors and artificial organelles.

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

Northern oceans pumped CO2 into the atmosphere

27.03.2017 | Earth Sciences

Fingerprint' technique spots frog populations at risk from pollution

27.03.2017 | Life Sciences

Big data approach to predict protein structure

27.03.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>