In modern retail, the use of promotions has slowly escalated to become a now-standard practice that has resulted in a shared reliance among retailers and manufacturers, but decent returns on trade promotion spend are increasingly hard to generate. In fact, the spiraling cost of trade promotions has yielded a diminishing return on investment for many categories. Knowing which categories are more or less sensitive to pricing changes is essential for breaking the promotion addiction and driving growth.
While price sensitivity varies by category, it’s helpful to understand what consumers say they would do if prices were to increase by 10%. Not surprisingly, nondiscretionary items, such as dairy, fresh foods and personal-care products, are less price sensitive than discretionary items, such as convenience foods, snacks and alcoholic beverages. For example, only 13% of global respondents say they would stop purchasing dairy products, 15% say they would not buy personal-care products, and 16% say they would not purchase meat or poultry if prices increased by 10%. More than one-third, however, said they would stop purchasing convenience foods (37%) or prepared meals (36%) if prices increased by 10%. For the most part, however, consumers aren’t cutting out categories altogether. Rather, they’re simply buying less.
“It’s time to abandon the presumption that the same promotion strategies work for all categories,” said Steve Matthesen, global president of retail, Nielsen. “Promotion spend needs to be tied to performance, adjusting above-the-line spend based on how well the product or portfolio has delivered on the money invested. Fewer, smaller, better promotions, rather than more, bigger ones, will deliver better returns. Focusing promotions on the most profitable outlets will be critical.”
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