Featured Research

from universities, journals, and other organizations

Frequent Price Promotions Threaten Quality Brands, INFORMS Study Shows

Date:
December 8, 2008
Source:
Institute for Operations Research and the Management Sciences
Summary:
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.

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.


Story Source:

The above story is based on materials provided by Institute for Operations Research and the Management Sciences. Note: Materials may be edited for content and length.


Cite This Page:

Institute for Operations Research and the Management Sciences. "Frequent Price Promotions Threaten Quality Brands, INFORMS Study Shows." ScienceDaily. ScienceDaily, 8 December 2008. <www.sciencedaily.com/releases/2008/12/081208180512.htm>.
Institute for Operations Research and the Management Sciences. (2008, December 8). Frequent Price Promotions Threaten Quality Brands, INFORMS Study Shows. ScienceDaily. Retrieved July 30, 2014 from www.sciencedaily.com/releases/2008/12/081208180512.htm
Institute for Operations Research and the Management Sciences. "Frequent Price Promotions Threaten Quality Brands, INFORMS Study Shows." ScienceDaily. www.sciencedaily.com/releases/2008/12/081208180512.htm (accessed July 30, 2014).

Share This




More Mind & Brain News

Wednesday, July 30, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

It's Not Just Facebook: OKCupid Experiments With Users Too

It's Not Just Facebook: OKCupid Experiments With Users Too

Newsy (July 29, 2014) — If you've been looking for love online, there's a chance somebody has been looking at how you're looking. Video provided by Newsy
Powered by NewsLook.com
How Your Face Can Leave A Good Or Bad First Impression

How Your Face Can Leave A Good Or Bad First Impression

Newsy (July 29, 2014) — Researchers have found certain facial features can make us seem more attractive or trustworthy. Video provided by Newsy
Powered by NewsLook.com
Losing Sleep Leaves You Vulnerable To 'False Memories'

Losing Sleep Leaves You Vulnerable To 'False Memories'

Newsy (July 27, 2014) — A new study shows sleep deprivation can make it harder for people to remember specific details of an event. Video provided by Newsy
Powered by NewsLook.com
University Quiz Implies Atheists Are Smarter Than Christians

University Quiz Implies Atheists Are Smarter Than Christians

Newsy (July 25, 2014) — An online quiz from a required course at Ohio State is making waves for suggesting atheists are inherently smarter than Christians. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
 
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:  

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:  

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile iPhone Android Web
Follow Facebook Twitter Google+
Subscribe RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins