Should durable goods companies offer price incentives when they advertise?
Consumer goods companies have options for incentives – either direct them at consumers (consumer promotions) or at retailers (trade promotions). In addition, companies also spend on product-specific advertising to encourage customers to opt for a higher-priced product in their portfolio. In durable goods, this strategy works only when advertisements are combined with consumer-directed incentives. When advertisements are combined with retailer incentives – they deter customers from purchasing higher-priced products.
Durable goods companies often create vertical product line-ups to appeal to different consumer segments, improve overall brand perception, provide an opportunity for upgrading, and increase their profitability. For example, a mattress company could have a basic coir mattress, a coir + foam mattress, a spring mattress, a memory foam mattress, and an orthopaedic mattress. To push the premium products in the line, companies adopt multiple marketing tactics like price incentives and advertising. However, the combined impact of these tactics is unclear. A study investigates price incentives and product-level advertisements for premium products and attempts to answer the question: Is it worth using both these tactics together?
[The study was based on the automotive industry in the US, but the findings and implications can be extended to durable goods companies in India, making their insights relevant for them as well.]
The study considered two types of incentives: customer-directed and retailer-directed. Customer-directed incentives are monetary incentives targeted at the end-consumer, e.g., discounts and cashbacks. Retailer-directed incentives are monetary incentives that target the retailer, e.g., commissions and bonuses. The study found that the impact of product-level advertising is the opposite for these two types of incentives.
Customer-oriented incentives lead to a “premium effect” when combined with product-specific advertisements. That is, a combination of advertisements and customer-directed price incentives encourage customers to buy the higher-priced premium product. Customers are more drawn to discounted products that they perceive to be higher in value. Advertisements provide information that highlights the higher value of premium products as well as the discount for that product. Thus, together they can push a customer to buy the premium version of a product. For example, a 20% discount might convince a customer to buy a Convection Microwave Oven rather than a basic Microwave Oven.
On the other hand, retailer-oriented incentives combined with advertisements hurt the chances of a customer switching to a premium product. These incentives are meant to encourage retailers to upsell, but retailers do not always pass them on to customers readily (a problem called low passthrough in trade promotions). Customers are also unaware of these incentives, so they are reluctant to opt for a premium product. They prefer to buy a product that fits in their budget, and product-specific advertisements help to fix their choices on the less premium products. Thus, a combination of retailer-directed incentives and advertisements hampers upselling.
This study has significant insight for durable goods companies. They should not use both advertising and retailer-directed incentives if they want to upsell customers to more premium products. In fact, using retailer-directed incentives is not helpful for either the company or the customer. The company loses out on profits, and the customer loses out on the premium product they could have afforded with the incentive being passed on. Therefore, these types of incentives should be avoided by durable goods companies.
However, if durable goods companies intend to use customer-directed incentives, they should definitely advertise, and if they are advertising, they should use only consumer-directed incentives. This will encourage upselling, which will benefit the company as well as the consumer.
Customers should also be aware of product details as well as the types of incentives offered by companies. They should leverage this knowledge during negotiations to get the best possible price on a product of their choice.