Price is a signal too

I believe that a brand's greatest asset is its ability to command the price it chooses, not one that is determined by competitor or retailer pressure. Sure, you have to grow sales, but any fool knows how to do that. Just drop your price. Until, that is, people learn to expect your brand to be on discount. Then the trouble really starts.

Right now, there are a huge number of brands out there in a world of hurt. The business environment is harshly competitive and almost every brand is struggling to hold ground. And, unfortunately, holding ground is usually defined in terms of sales or volume market share. And that is why so many brands get lured into lowering prices – only on a temporary basis of course! Unfortunately, what starts as temporary often ends up becoming permanent.

How does temporary become permanent? The problem is that decisions to price promote are often taken without reference to the consumer. Falling behind on a budget, set as much by the need to cover capex and fixed costs as actual demand, the pressure to hit the numbers becomes irresistible. And, to start with, discounts have the desired effect; people respond and sales increase, even if those sales come with a lower margin. But there are only so many people in the market at any one time and before too long the response to price reductions lessens.

And consumers are not dumb – they are the same as us after all – they interpret the scale and frequency of price reductions, just like you do. People may not have an accurate understanding of what price a brand sells at, but they do have expectations, and when reality and expectations are at odds it sends a signal,

"Wow! That is a huge discount for a brand like that. What's wrong with it? Is there a better one out there? Maybe they introduced a new version? Look, it's on sale again! They must be in trouble."

Worse still, people come to expect price reductions. And if competitors respond with price reductions of their own things get even worse, because now all the brands in the category start being seen as commodities, and price is the only yardstick by which they are judged. End result, more people shopping on price, less response to price promotions, deeper discounts to drive the same volume, too much inventory and – hey presto! – you have the American car industry in the run up to the Great Recession.

Of course, there is one other consequence to this little chain of cause and effect. Failing to make the numbers, marketing and research and development are cut to make the year end budget, which further undermines the company's ability to support the brand. Solution? How about more price reductions? And the downward spiral has started, because the only real combination proven to help grow sales over the longer-term is meaningful innovation supported by effective marketing.

Why do you think that companies are so quick to price promote? And why are they not more strategic about how they do so? Please share your thoughts.