How discounting destroys brand equity

Recent figures from Which? reveal that more than 40% of all groceries sold in the UK - which equates to ￡46 billion of spend - are now sold on promotion. The scale of this activity should be a major concern to any brand owner.

Experimental evidence

There is a growing body of proof that discounting destroys hard-earned brand equity. The most interesting experiment on this topic was conducted by Baba Shiv, Professor of marketing at Stanford University.

He recruited students to answer maths puzzles and paid them a small sum for every correct answer. Before the students were tested they were allowed to buy a caffeinated energy drink which would supposedly focus their mind. Half of the students were sold the drink at full price while half bought it at a discount.

When Shiv analysed the students' performance he discovered that those who bought the reduced price energy drinks answered 30% fewer questions correctly. Surprised by the results Shiv repeated the experiment. In his words: "We ran the study again and again, not sure if what we got had happened by chance or fluke...but every time we ran it, we got the same results."

So why do low prices damage the performance of a product?

The answer lies in expectancy theory. This is the idea that our expectation of a product's performance changes our experience. If we expect a product to be brilliant we're more likely to have a positive experience.

The most famous example of this is the placebo effect where the false belief that we have taken a medicine makes us feel better. When it comes to pricing it seems that shoppers have come to expect that they'll get what they pay for. Therefore, low prices prime customer to expect a lower quality experience.

What should brands do?

Martin Sorrell has coined an interesting dietary analogy about promotions. Brands should view promotions as "bad cholesterol" which boost sales but at a cost to brand health. In contrast advertising should be seen as "good cholesterol" which delivers sales whilst also maintaining profitability and brand equity.

Just as it's fine for anyone to have a little bad cholesterol in their diet, so it's fine for brands to indulge in the occasional promotion.

However, Which?'s figures show that brands are investing too great a proportion of their marketing spend on short term promotional fixes.

In order to preserve their long term health brands need to replace their promotional spend with the good cholesterol of advertising.

Twitter: @rshotton

First published on: https://mediatel.co.uk/newsline/2015/09/03/how-discounting-destroys-brand-equity/