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How short-term profits can mask a brand's long-term losses

Prof. Carl Mela explains the negative impact promotions can have on brand equity

Published: Jun 16, 2021 10:28:10 AM IST
Updated: Jun 16, 2021 11:40:07 AM IST

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Price discounts and other promotions on consumer goods can boost a product’s sales in the short term, but that same strategy may destroy a brand’s equity, according to research from Carl Mela, a marketing professor at Duke University’s Fuqua School of Business.

Brands often focus on the short-term incentives of price promotions – a large and temporary increased lift in sales – but that effect can cause them to under-invest in brand-building strategies such as advertising, new product development and new forms of distribution, Mela said in a live discussion of his research on Fuqua’s LinkedIn page.

Regular promotions can also turn loyal customers into “deal junkies” who learn to buy the products only when they’re on sale, Mela said.

“If firms destroy brand equity, they risk conditioning their customers to only buy its product when it’s available on deep discount,” Mela said in an interview. “As a result of misguided pricing strategies, even some powerhouse brands have lost customer loyalty and strength.”

In an article Mela co-wrote for Harvard Business Review, he suggests three main reasons brands can become focused only on short-term gains.

The first is an abundance of real-time sales data that shines a spotlight on the short-term benefits of promotions. Mela uses pasta sauce as an example. If it goes on sale regularly, customers learn to time their purchases strategically, buying only when the product is on sale. This can make promotional lift appear even greater with time.

“If I’m using all those things we were taught in our standard MBA class about computing the profitability of promotion, a promotion looks even more profitable. Why? Because the promotional lift is higher,” Mela said. “So it looks like promotions work just great. So what do I do? I offer even more promotions. And next thing you know, the brand is in a death spiral.”

Marketers can't fix what they can't measure.
Carl Mela, marketing professor Duke University's Fuqua School of Business

It can be easy for brands to fall in this trap because, unlike data from promotions, there’s a dearth of data to measure the impacts of long-term investments in brand equity such as new products and distribution changes, Mela said. This is a second reason most managers are prone to short-termism, he said.

“People focus on the things they can measure,” Mela said. “Things like distribution or product development take a long-term perspective, and if firms can’t measure how that affects their brands, then they’re pressured by analysts, senior managers, to continue with a strategy that harms them, because marketers can’t fix what they can't measure.”

In his research, Mela has developed some methods for linking the long-term effects of marketing strategies to brand outcomes like higher margins and baseline sales.

A third reason many brands fail to consider how promotions affect the brand in the long term is the brief tenure of brand managers, who typically hold the position for less than one year before being promoted, Mela said.

“If it's a long-term investment, you won’t really see that brand benefit until the next year,” Mela said. “So by the time a brand manager has left their position and created a strong brand, it’s their successor who benefits. And their successor, seeing this, will just start discounting a lot and look like a real superstar… the successor can destroy the brand, and leave a mess for the next brand manager.”

[This article has been reproduced with permission from Duke University's Fuqua School of Business. This piece originally appeared on Duke Fuqua Insights]