In a challenging business and economic environment, marketers need to maximize the efficiency and effectiveness of all the tools at their disposal. Sales promotion as it is largely practiced – the mass distribution of immediate price reductions via coupons, rebates and other monetary incentives – is a key candidate for reform. In many countries and in many categories, sales promotion accounts for 75% of the discretionary marketing budget. But what do marketers get for their money?

Over the years, virtually every study undertaken has concluded that mass price promotion is a money-losing proposition. The latest evidence comes from an analysis of almost 200 FMCG brands in the United States, representing 13 product categories.¹ Based on the findings of the study it can be demonstrated that, on average, the most common form of mass couponing, distributed via newspaper inserts, almost always costs more than it returns in profit. Trade promotion, money given to retailers in return for favorable displays and reduced shelf-prices, barely breaks even.

Why does sales promotion negatively impact the marketer's bottom line? Principally because, as David Ogilvy said, "The consumer is not a moron." The heaviest users of price promotion are the brand's current buyers or considerers who would have had a high probability of buying the brand even without the price incentive. But given the opportunity, they are quick to take advantage. This subsidization of what would have been higher-margin sales offsets any gains from new buyers or switchers.

But that is not the whole story. There is ample and growing evidence that mass price promotion has pernicious long-term effects as well – undermining brand loyalty and training consumers to buy only when a deal is offered. This is a broadly accepted notion in many categories, such as mobile phone carriers, automobiles, and FMCG products in general, all of which have been among the most enthusiastic users of price promotion. Now new evidence from the Ogilvy Loyalty Index (see Diagram on page 2) shows that the number of consumers who consider themselves 'price-buyers' versus 'brand-loyalists' varies directly with the overall amount of price promotion in the market.

Across virtually all categories in the US, arguably the most promotionally-developed nation, consumers who describe themselves as usually considering "most of the brands and going for the one that offers the lowest price" outnumber consumers who say "there is only one brand I'd ever consider" by a ratio of greater than 2:1. Even making allowances for consumers' desire to provide a 'socially correct' response, from a marketer's perspective this is a disturbing imbalance between price-buyers and brand-loyalists. But in Germany, where until very recently price promotion was relatively limited due to considerable government regulation, the ratio of price-buyers to brand-loyalists in a range of comparable categories is only 4:3. Similarly, in a developing economy like India, with a limited infrastructure to implement consumer promotions and consequently a far lower percentage of marketing spending devoted to price promotion than the US, the situation is just the reverse. Self-described brand-loyalists outnumber price-buyers by a margin of greater than 2:1.

The pattern is clear: the greater the amount of price promotion in the market, the lower the perception of loyalty and the greater the difficulty of creating future loyal buyers. Consumers are definitely not morons but they can be conditioned like laboratory mice. The perceptual, rather than economic reason for being a price-buyer is brought home by the substantial percentage of upper-income consumers who characterize themselves as price-buyers. In the US, within frequently purchased categories, the ratio of upper-income price-buyers to loyalists is almost 2:1. For durables and services, the ratio is an astonishing 10:1. Clearly, buying on price is not only about saving money but also about seeing few distinctions between brands other than price.