José Ignacio Gafo Gómez-Zamalloa

In a superb paper published in Harvard Business School, Leonard M. Lodish and Carl F. Mela raise and answer this question.

Here is a summary of the main points:

From 2003 to 2005 private labels grew at a staggering 13%. Furthermore, price premiums have eroded and margins
are following suit. Consumers are 50% more price sensitive.

In recent surveys of consumer good managers, seven out of ten cited pricing pressure and shoppers´declining loyalty as their primary concerns.

Companies are paying too much attention to short-term data and not enough to the long-term health of the brands. They routinely overinvest in price promotions and underinvest in advertising, new product development and new forms of distribution.

Three main factors to be blamed for this short-term orientation:

1. Abundance of real time sales data that make short-term promotional effects more apparent, thus pushing manufacturers to overdiscount
2. A corresponding dearth of long-term investments in brand equity, new products and distribution
3. Short-term tenure of brand managers

The abundance of real time sales data is leading to misjudge the impact that promotions have in the baseline. The real effect in the long-term is negative, in spite of boosting sales in the short-term. The result is that from 1978 to 2001 trade promotion investment increased from 33% to 61% of firms´markeitng budget, while advertising dropped from 40% to 24%.

Three effects caused by promotions are usually ignored:
1. Changes in consumer behavior. They make consumers more promotion oriented and make them stockpile.
2. Promotions tend to make brands less differentiated and more price sensitive in the medium and long-term.
3. Competition is to respond, reducing the total turnover of the market.

On the other hand, studies suggest that:

1. Advertising has positive effects in the mid and long-term
2. Increased product-line variety and distribution in leading retailers reduce consumers´sensitivity to price
Therefore, the company as a whole and the brand managers in particular, are advised to refocus on the long-term approach and avoid quick but destructive effects.

So far, so good. However, many difficulties may arise when implementing this. For all of us that work in multinationals, we hold a great pressure to achieve quarter results. This is the case even when the company has a mid and long-term focus, for the stockholders and stock analysts are short-term and quarterly oriented.

Thus a balance is required. We cannot lose out of sight that we are building brands for the mid and long-terms, but need to look for ways to gain the confidence and support of the people that ultimately judge our performance: The stockholders and stock analysts.

What do you think? Is it really possible to build premium brands spite of the short-term pressure?

Think Different!!!

Ignacio Gafo

Posted on 14 October 2007 in Pricing, International Marketing, Branding

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