Leonard M. Lodish

Carl F. Mela

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">The Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <p>The allure of brands is fading. Increasingly, consumers would rather buy a generic product than its pricier big-brand counterpart: From 2003 to 2005, private-label market share jumped 13%.</p>
  <p>To counter this trend, big brands are increasingly resorting to price promotions. Sure, promotions provide a quick revenue “lift.” But they also hurt your brands’ long-term health. Customers don’t buy more of your products over the long run: they stock up during sales and wait for the next deal. Result? Deeper discounts for shoppers—and shrinking profits for you.</p>
  <p>To stop this vicious cycle, start protecting your brand equity, say Lodish and Mela. First, track purchasing trends. For instance, major lifts in sales volume when you offer discounts may signal consumers’ unwillingness to pay a premium for your brands. If promotions <em>are</em> backfiring, invest in advertising, new-product development, and new distribution strategies—strategies that enhance short- <em>and</em> long-term sales.</p>
  <p>The Idea in Practice</p>
  <p>To protect your brand equity, Lodish and Mela offer these guidelines:</p>
  <h2>Understand How Short-Term Focus Weakens Your Brand</h2>
  <p>Three forces make companies short-sighted about managing their brands:</p>
  <ul>
   <li><strong>Abundant short-term data.</strong> Through store scanners, managers can immediately tie a spike in sales to a price promotion. This makes promotions look highly profitable, so managers push for more of them. Eventually, most of a product is sold at a discount—eroding profit margins.</li>
  </ul>
  <ul>
   <li><strong>Difficulty measuring long-term marketing tactics.</strong> It’s easier to measure instantaneous sales spikes than the results of other marketing strategies with longer-term impact—such as advertising, new product introductions, and increased distribution. Yet these other tactics have a more positive effect on long-term sales than promotions do. For example, a TV advertising campaign that spurs sales increases during the first year will continue doing so for two more years—even if the ads are no longer aired. And the revenue arising from the first year of advertising doubles over the subsequent two-year period.</li>
  </ul>
  <ul>
   <li><strong>Wall Street pressures.</strong> Analysts use quarterly sales performance to value firms and advise clients. So managers are rewarded for delivering short-term results.</li>
  </ul>
  <h2>Construct a Long-View Dashboard</h2>
  <p>Monitor your brand’s long-term health by tracking these metrics:</p>
  <ul>
   <li>Changes in baseline sales—your estimate of what a product’s sales would be at a constant, nondiscounted price over months, quarters, and years.</li>
  </ul>
  <ul>
   <li>Consumers’ responses to regular prices and price promotions. A jump in buyers’ price and promotion sensitivity reflects a decrease in the price premium your brand can command.</li>
  </ul>
  <p><span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>A consumer-goods firm’s analysis of one of its beverages’ performance from 1994 to 1999 revealed a 3% decline in baseline sales (shoppers were buying the beverage only when it was on sale) and a 14% jump in price sensitivity. The brand decline wasn’t obvious from short-term sales data—because discounts had spurred a 7% growth in sales during the period. The firm realized the damage to the brand when it tried to raise prices in 1999. Consumers’ resistance to paying full price cost the firm more than $5 million in revenues. </p>
  <h2>Focus Your Marketing Strategy on Brand Equity</h2>
  <p>Make marketing decisions that protect your brand. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>When General Mills acquired Lacoste, it lowered the price on the alligator-adorned tennis shirts and broadened distribution. Sales rose in the short run, but the brand lost its cachet when shirts moved from elite stores to clearance bins. Lacoste repurchased the brand. After it limited distribution, advertised the shirts through celebrities, and raised prices, sales jumped 200%.</p>
 </div>
</article-ideainbrief><p>The numbers tell a sobering story about the state of branded goods: From 2003 to 2005, global private-label market share grew a staggering 13%. Furthermore, price premiums have eroded, and margins are following suit. Consumers are 50% more price sensitive than they were 25 years ago. In recent surveys of consumer-goods managers, seven out of ten cited pricing pressure and shoppers’ declining loyalty as their primary concerns.</p>

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<p><span class="reprint">Reprint: R0707H</span></p>
<p>Brands are on the wane. Many consumer-goods companies blame the big-box discount retailers, but the Wharton School&#8217;s Leonard Lodish and the Fuqua School&#8217;s Carl Mela have a different explanation. Their research suggests that companies have damaged their brands by investing too much in short-term price promotions and too little in long-term brand building. To rescue their brands and increase profitability, corporate managers must arm themselves with long-term measures of brand performance and use them to make smarter marketing decisions.</p>
<p>Several factors explain the shortsightedness of brand management: the increased availability of weekly, or even hourly, scanner data, which show a clear link between discounts and immediate boosts in sales; the relative difficulty of measuring the effects of advertising, new-product development, and distribution&#8212;all of which can contribute to a brand&#8217;s long-term health; the short tenure of most brand managers; and the near-term orientation of Wall Street analysts.</p>
<p>Although discounts do increase sales in the short term, they ultimately lower profit margins. If a product is often discounted, consumers learn to buy it only when it&#8217;s on sale. Moreover, when one firm increases its discounts, others usually follow suit, lowering everyone&#8217;s margins.</p>
<p>Executives can monitor a brand&#8217;s long-term performance by watching a dashboard of measures. Only after examining such measures, for example, did managers at Clorox discover that the company&#8217;s heavy discounting and decreased advertising had caused a steady decline in overall bleach sales and profit margins. In response, Clorox reduced discounting and increased television advertising, moves that ultimately strengthened the brand and reversed the firm&#8217;s downward trends.</p>

If Brands Are Built over Years, Why Are They Managed over Quarters?

Reprint: R0707H Brands are on the wane. Many consumer-goods companies blame the big-box discount retailers, but the Wharton School’s Leonard Lodish and the Fuqua School’s Carl Mela have a different explanation. Their research suggests that companies have damaged their brands by investing too much in short-term price promotions and too little in long-term brand building. To rescue their brands and increase profitability, corporate managers must arm themselves with long-term measures of brand performance and use them to make smarter marketing decisions. Several factors explain the shortsightedness of brand management: the increased availability of weekly, or even hourly, scanner data, which show a clear link between discounts and immediate boosts in sales; the relative difficulty of measuring the effects of advertising, new-product development, and distribution—all of which can contribute to a brand’s long-term health; the short tenure of most brand managers; and the near-term orientation of Wall Street analysts. Although discounts do increase sales in the short term, they ultimately lower profit margins. If a product is often discounted, consumers learn to buy it only when it’s on sale. Moreover, when one firm increases its discounts, others usually follow suit, lowering everyone’s margins. Executives can monitor a brand’s long-term performance by watching a dashboard of measures. Only after examining such measures, for example, did managers at Clorox discover that the company’s heavy discounting and decreased advertising had caused a steady decline in overall bleach sales and profit margins. In response, Clorox reduced discounting and increased television advertising, moves that ultimately strengthened the brand and reversed the firm’s downward trends.

If Brands Are Built over Years, Why Are They Managed over Quarters?

Summary.

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