Promotions have traditionally been a default move for marketers under pressure to deliver immediate revenue. The challenge is executing a promotion without corrupting and cannibalizing media campaigns that build the brand and create enduring value.
An ROI Genome Report released by Analytic Partners reveals that the ROI delivered by marketing promotions is skidding. I recently asked Mike Menkes, SVP at Analytic Partners a few questions about some of the headwinds promotions are facing.
Paul Talbot: Why has the efficiency of marketing promotions been falling?
Mike Menkes: Many brands have been increasing their spending behind promotions over time, particularly in the past decade. Since the recession in the late 2000s, many companies have been prioritizing more investment behind activities they perceive to be short-term sales drivers.
As a result, spending behind promotions, discounting and coupons/offers have been on the rise and with that increased spend we see a decrease in efficiency, on average. Essentially, efficiency is declining because consumers are inundated with more and deeper deals, and each one becomes less compelling.
We’re past the point of diminishing returns with promotional offers in the marketplace. This doesn’t mean promotions aren’t effective – they can be very strong sales drivers – but the ROI on each additional dollar spent to promote deeper or more frequently becomes less effective than the prior dollar spent.
Talbot: The “over-reliance” on promotions you reference…why is this happening and what can marketers do to strike a more profitable balance between media and promotions?
Menkes: In many cases, the over-reliance on promotions is driven by the budgeting process. As increased funds are spent in certain areas and a positive impact is generated, more funding is allocated.
In principle this isn’t a bad approach – but the important factor that should be more heavily considered is what the opportunity cost of that option would be. While increasing promotional spending has a positive impact on sales, it may be less efficient than an alternative investment in areas such as more spending behind advertising, innovation, or other areas of business improvement.
Talbot: As promotions lose power, do you expect to see fewer of them, or is the tendency to launch a promotion because of pressures for an immediate revenue lift so ingrained that the number will remain more or less the same?
Menkes: As companies better understand what drives their business in both the short and the long term and understand the opportunity cost of different investment areas and the associated benefits, better decisions will be made. Many organizations are already doing this and are taking the appropriate steps to balance and optimize their investments.
Talbot: The report indicates that consumers are “oversaturated with deals.” Can you provide some historic context? Is this a result of marketers building up email lists and relying on a promotion for email marketing content?
Menkes: Consumers have become both oversaturated with deals and more informed with shopping alternatives and pricing.
Many research companies have shown that the vast majority of consumers regularly use discounts and codes, wait for promotions, and stock up when sales are offered. In fact, promotions DO drive sales, but the key is to understand what the right level is and what alternatives might exist to drive business forward.
Talbot: Any other insights you’d care to share on the eroding impact of promotions?
Menkes: While we’ve talked a lot about how promotion efficiency has declined, it’s important to also recognize that promotions are crucial for many businesses. Promotions are an essential, key ingredient for the success of many businesses, it’s just a matter of what the right balance is with other brand building alternatives. Just because promotion efficiency has been on a downward trend as investment has increased over time doesn’t mean that companies shouldn’t be investing heavily in promotions.
In fact, while our ROI Genome research shows that overall advertising efficiency is on the rise, digital advertising efficiency has been on a downward trend over the past decade as spending has increased. While the reasons for this are different from promotions, the key is to understand there is a balance that brands should strive for across and within investment areas – whether it be advertising or promotional spending, or which product, service or tactic to invest behind.