Do Price Promotions Help or Hurt Premium-Product Brands?

Price Promotions' Impact on Sales

Marketers use price-promotion activities as one of the key tools to increase sales and turnover (e.g., Alvarez and Casielles, 2005). Various studies have found an influence of price promotion on sales (e.g., Blattberg et al., 1981; Gupta, 1988). The existing research can be divided into two categories:

• studies limited to self-reported data, mainly suffering from analyses of mere purchase intentions instead of real behavior (e.g., Alvarez and Casielles, 2005), and

• analyses of actual market data (e.g., Silva-Risso and Ionova, 2008).

Furthermore, the existing scholarship varies in the types of products (“durable” versus “nondurable” goods) that are investigated (Spears, 2001). Specific characteristics of durable and nondurable products (such as different lead times and different unit prices) lead to diverse promotion types and different percentage discount rates (Quelch et al., 1987; Thompson and Noordewier, 1992).

The majority of promotion research has focused on nondurable products (e.g., Chen, Monroe, and Lou, 1998; Gupta, 1988; Raghubir, 2004); with some exceptions (Silva-Risso and Ionova, 2008; Beltramini and Chapman, 2003) investigating price promotion in the automobile industry. One analysis of the sales impact of promotion activities—based on real-market data from the automotive industry—found that a sales impact of price promotion (in this case, price discount) does not always occur (Thompson and Noordewier, 1992), but it did not take into account the different types of promotion activities (See Appendix A on page 283).

Price Promotions' Impact On Brand Perception

Although price promotion generally is regarded as an efficient technique for short-term increases in sales, it negatively can affect a brand's reputation in the long run (Blattberg and Neslin, 1989; Martinez et al., 2006). Negative effects that are referred to in the literature include (Blattberg and Neslin, 1989; Del Vecchio, Henard, and Freling, 2006):

• decreased brand preference;

• lower brand loyalty;

• decreased quality perception and brand image (Blattberg and Neslin, 1989; Del Vecchio et al., 2006).

There have been mixed results in the analysis of the impact of sales promotion on brand perception. Some scholars have revealed negative results (e.g., Martinez et al., 2006; Yoo et al., 2000). Still others could not find negative effects for the brand (Davis, Inman, and McAlister, 1992; Raghubir and Corfman, 1999). These differences in the findings can be explained by the product category and the promotion occurrence. Negative effects are lower when

• the consumer involvement with the product purchase is low,

• the product provides a low utilitarian value for the customer, or

• when the common nature of sales promotion for the brand or in the respective industry is low (Davis et al., 1992; Raghubir and Corfman, 1999).

The current study focused on price promotion for premium products—specifically premium automobiles—that represent high-involvement durable goods at high prices, positioned as high-quality products (Quelch, 1987). The high price is an important point of differentiation between a premium brand and a mid-range brand and, thus, can be one factor for establishing premium-brand reputation (Quelch, 1987; Truong et al., 2009). Price promotion, thus, often can be assumed to be harmful for premium automotive brands (Blattberg and Neslin, 1990). It can be assumed that it would be even more harmful for luxury brands, but those brands usually do not use price promotion (Christodoulides et al., 2008; Truong et al., 2009) and are not in the scope of the current research.

Most analyses of brand effects of price promotion have considered perceived quality and/or brand image (e.g., Darke and Chung, 2005; Villarejo-Ramos and Sánchez-Franco, 2005; Yoo et al., 2000). In the case of premium products, however, the price also has signaled prestige, representing a key aspect for the perception of a premium brand (Keller, 2009; Truong et al., 2009).

Discounting the price, therefore, may exert a negative influence on prestige, leading to a decline in brand perception, which would be even more detrimental for premium brands compared with mass-market brands. Thus, the current authors believe, when investigating the impact of price promotion on brand reputation of premium products, brand image as well as prestige both should be considered.

Types of Price-Promotion Activities

Marketers commonly use a broad variety of price-promotion activities, such as:

• direct-price discounts that lower the selling price in a specific time period (Alvarez and Casielles, 2005; Hardesty and Bearden, 2003; Silva-Risso and Ionova, 2008);

• free-gift promotion, where the price remains constant, but the product value is enriched (Laroche et al., 2003; Hardesty and Bearden, 2003; Weisstein, Monroe, and Kukar-Kinney, 2013).

These price-promotion activities are distinguished by the following two criteria:

• the “directness” of the price reduction. In the case of direct-price discounts, a price-promotion activity can offer a direct discount to a product's list price. For free-gift promotions, an indirect-price reduction can be offered, where the price remains constant but the purchase matter is extended, for instance, by adding specific products or components.

  The current study's proposed framework thus distinguishes between direct- and indirect-price-promotion activities.

• whether they apply to all purchases or only if the customer meets a certain precondition. Some promotions, for instance, only are applicable if an older product is traded in. Other activities only apply for new or existing customers.

  This second criterion that is used in the proposed framework thus is the existence of a precondition.

Although other characteristics—a promotion activity's relative discount, for instance—also may influence consumers' reactions, these factors are market and product specific. The proposed framework, however, is based on two universal, overarching characteristics (directness of price reduction and existence of a precondition) and thus allows for delineating the majority of existing price-promotion activities.

Applying this framework, four types of price-promotion activities can be distinguished (See Figure 1):

• Type 1: direct-price reduction, without any precondition, such as direct discount;

• Type 2: indirect-price reduction, without any precondition, such as free-gift promotions. In the consumer electronics industry, for instance, camera manufacturers offer free equipment (e.g., lens) with product purchase;

• Type 3: direct-price reduction, with a precondition, for example, a loyalty promotion that only applies to existing customers.

  

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  Figure 1

  Price-Promotion Categories

• Type 4: indirect-price reduction that requires a precondition. For example, a customer might trade in his old car—the necessary precondition. Instead of receiving a direct discount on the new car sales price, however, he receives higher compensation for his old car and, thus, an indirect-price reduction. As another example, a premium bicycle manufacturer could implement the trade-in of an old bicycle as a promotion for the customer.

Sales Impact of Different Types Of Price Promotions

To explain customers' reactions to price-promotion activities, prospect theory (Kahneman and Tversky, 1979) frequently is used. The theory proposes that losses are perceived as greater-than-equal gains, as the negative effect of a loss is perceived to be greater than the positive effect of an equal gain (Kahneman and Tversky, 1979). This underlying effect also is applicable for the distinction between the four categories of price-promotion activities.

Specifically, the price that a customer has to pay for a product represents a loss, whereas obtaining the product represents a gain.

Transactions with a direct-price reduction, therefore, decrease the loss while the gain (i.e., the product) remains constant. Indirect-price reduction, on the other hand, does not affect the loss (i.e., the price to be paid) but increases the gain, as the customer receives more for the same price. Assuming an equal monetary value of each promotion type, a direct-price reduction thus would be perceived as more positive than an indirect-price reduction and, therefore, should have a significantly stronger sales impact.

• H1: Direct-price reduction has a stronger positive sales impact than indirect-price reduction of the same value.

From a customer's point of view, price promotions with a precondition may require additional time and effort to receive the promotion benefit. As customers generally value time and effort (Seiders, Berry, and Gresham, 2000), additional actions are necessary before a purchase can be assumed to decrease the value of a promotion activity. This effect has been shown with coupons for nondurable goods: The effort for the redemption of the coupons led to lower purchase intentions compared with other promotion tools (Del Vecchio et al., 2006).

Considering the gains and losses incurred by a price-promotion activity, the introduction of a precondition increases the loss—i.e., the time and effort required for meeting the precondition in addition to the price. When considering this assumed attenuating effect of a precondition, however, it is important to differentiate between direct- and indirect-price reduction.

A direct-price reduction makes it easy for customers to quantify the value of the time and effort required to meet the precondition. For instance, redeeming a coupon to receive $1 directly can be related to the aggravation of remembering to take the coupon along and present it on checkout. Compared with direct-price reduction without a precondition, those activities that restrict customers' eligibility, thus, can be assumed to have a lower sales impact.

For indirect-price reduction, however, such quantifications are far more difficult. Receiving additional products or product components for the same price does not allow for a direct assessment of the monetary value of the time and effort required for meeting the precondition. It therefore can be assumed that the attenuating effect of a precondition will not occur for indirect-price reduction.

• H2: The introduction of a precondition attenuates the sales impact of direct-price reduction, but it does not influence the sales impact of indirect-price reduction.

Different effects between direct- and indirect-price reduction on nondurable products have been investigated previously. Direct-price reduction seems to be the most effective price-reduction method for increasing volume (Alvarez and Casielles, 2005; Neslin, Henderson, and Quelch, 1985).

The current authors also expected a precondition to impact sales differently, considering previous investigation of different effects of, for instance, gift cards and free gifts on high- versus low-priced products (Weisstein et al., 2013).

For high-priced products, gift cards were found to be more effective than free gifts, whereas the opposite result was obtained for low-priced products (Weisstein et al., 2013):

• Customers would perceive redeeming the gift card as less annoying when the reward was higher (i.e., high-priced product), but

• customers would perceive redeeming a gift card for a low-priced product an annoyance (Weisstein et al., 2013).

Indeed, for low-priced products, the reward was deemed not to be worth the aggravation of redeeming the gift card. Meeting a precondition requires time and effort by the customer and, thus, can be related to the gift-card example. When promoting a highly priced premium product, the annoyance of meeting a precondition is small compared with the monetary value of the promotion.

Combining the aforementioned theoretical rationale, the authors believe it can be assumed that, for premium products, the directness of the price reduction has a stronger impact on sales than the nonexistence of a precondition.

• H3: The directness of a price reduction has a stronger positive sales impact than the nonexistence of a precondition.

Brand-Perception Impact of Different Price-Promotion Types

Changes in customers' brand perception because of price promotion can be explained by attribution theory, which states that individuals search for causal reasons of actions (Kelley, 1973; Mizerski, Golden, and Kernan, 1979).

When trying to justify price promotions, consumers may assume negative brand issues as reasons for a company not being able to sell the product at a regular price (Blattberg and Neslin, 1990). Because premium manufacturers heavily rely on brands, the authors of this article considered the general brand image (Low and Lamb, 2000) as well as a brand's prestige (Baek, Kim, and Yu, 2010).

Although brand image is a commonly investigated construct (e.g., Martinez et al., 2006; Montaner and Pina, 2008), prestige has not been considered in the context of price promotion. Prestige is an outcome of a premium brand's high-price position and represents the product's high status (Baek et al., 2010) and, therefore, is a key attribute of premium brands (Keller, 2009; Truong et al., 2009).

In contrast to the premium-specific brand-attribute prestige, which is based on the high-price position, the general brand image is represented by a set of associations in the mind of a consumer and is built through different advertising and marketing activities (Aaker, 1991; Dobni and Zinkhan, 1990). Overall, price-promotion activities are assumed to lower consumers' brand perception in both constructs.

• H4a: Price-promotion activities lead to a decrease in brand image.

• H4b: Price-promotion activities lead to a decrease in prestige.

Additionally, consumers may perceive each price-promotion type differently, leading to a differentiated impact on brand perception. Extending attribution theory, the covariation principle proposes that individuals use patterns to build such attributions (Kelley, 1973). Only if actions and results can be observed over time (i.e., are common and/or frequent), attributions can be made with certainty (Kelley, 1973; Mizerski et al., 1979).

This leads to the assumption that if consumers are used to a certain type of promotion, causal attributions regarding negative brand reputation would be less likely than if the type of promotion is regarded as unusual. For a price-promotion activity to prevent negative brand effects, it should be perceived as relatively common. Considering that consumers will evaluate each price-promotion type on how common it is in a market, the negative attributions should vary in their intensity for the different price-promotion types.

The authors of the current study, therefore, felt it was relevant to consider the occurrence of the four different types of price-promotion activities in a market and their relationship with one another, to evaluate the specific brand effects:

• Type 1: Direct discount (direct-price reduction without precondition) was regarded as the typical type of price promotion broadly used for nondurable products as well as, for instance, automobiles and consumer electronics (e.g., Al-Sibai and Hofer, 2004; Darke and Chung, 2005). The high occurrence of this type of promotion, in comparison to other types, was informed by descriptive data of the first study with market data (See Table 2).

• Type 4: Indirect-price reduction with a precondition was not represented as often as Type 1 (See Table 2), because premium manufacturers do not use this tool broadly. In contrast, mass-market automotive manufacturers may use indirect-price reduction with a precondition more frequently (Al-Sibai and Hofer, 2004; Diez, 2006). Because mass-market automobile manufacturers communicate their promotion activities more often, it can be assumed that consumers regard indirect-price reduction with a precondition as common for automobile companies.

• Type 2: Indirect-price reduction without a precondition was described as being not as common as the two previous activities (Diez, 2006).

• Type 3: Direct-price reduction with a precondition was not mentioned in the literature but occasionally has been used by premium automotive brands and thus is considered “unusual among auto incentive programs.”¹

As Types 1 and 4 are most common (Al-Sibai and Hofer, 2004; Diez, 2006), it can be assumed that customers are familiar with these activities. On the basis of attribution theory and the covariation principle, these price-promotion types should be less detrimental for a brand than the more uncommon activities of “indirect-price reduction without a precondition” and “direct-price reduction with a precondition.”

• H5a: “Direct-price reduction without a precondition” (Type 1) is less detrimental for brand image than “indirect-price reduction without a precondition” (Type 2).

• H5b: “Direct-price reduction without a precondition” is less detrimental for prestige than “indirect-price reduction without a precondition.”

• H6a: “Direct-price reduction without a precondition” (Type 1) is less detrimental for brand image than “direct-price reduction with a precondition” (Type 3).

• H6b: “Direct-price reduction without a precondition” is less detrimental for prestige than “direct-price reduction with a precondition.”

• H7a: “Indirect-price reduction with a precondition” (Type 4) is less detrimental for brand image than “indirect-price reduction without a precondition” (Type 2).

• H7b: “Indirect-price reduction with a precondition” is less detrimental for prestige than “indirect-price reduction without a precondition.”

• H8a: “Indirect-price reduction with a precondition” (Type 4) is less detrimental for brand image than “direct-price reduction with a precondition” (Type 3).

• H8b: “Indirect-price reduction with a precondition” is less detrimental for prestige than “direct-price reduction with a precondition.”

The Data

Whereas much previous research has relied on self-reported data, the current study's hypotheses testing was based on the analysis of actual market data from a German premium car manufacturer. Generally, premium car brands—that is, Audi, BMW, Mercedes, and Lexus—are high priced and high quality.

The investigation, thus, represented a quasiexperiment (Campbell, 1969). Using such data requires consideration of the following two characteristics:

• The majority of mass-market automobiles are built to stock. In contrast, the majority of premium cars are built to order, as customers choose their vehicles—with their specific configuration—which only then are manufactured. As customers consider very different car configurations, the purchase decision process is longer.

• Price-promotion activities for premium cars thus usually last for about three months, compared with only one- or two-week periods for mass-market cars (Thompson and Noordewier, 1992).

The dataset analyzed in this study consisted of price-promotion activities that a car manufacturer had conducted between 2004 and 2010. In a first step, each promotion activity in a specific time period was classified to a category of the proposed price-promotion types (i.e., direct- versus indirect-price reduction; with versus without precondition promotions). Furthermore, the authors were able to secure information about

• the sales of the promoted product;

• the relative price discount;

• the number of cars sold with the promotion;

• competitors' market launches during the promotion period;

• extent of push advertising campaigns;

• occurrence of parallel promotion activities.

To minimize life-cycle effects, the current researchers only included data from products that had been on the market for at least one year before the start of a promotion activity and were still on the market at least half a year after the promotion ended. The analysis took into account monthly sales of a car model before, during, and after a price-promotion activity was conducted (See Figure 2).

Study Design

Complementing the analyzed sales impacts, Study 2 investigated the effects of different price-promotion activities on consumers' brand perception. Because changes in brand perception of an established brand, caused by a one-time event, may appear only in small units, pretests were performed to ensure adequate measurement.

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Figure 3

Sales Results by Existence of a Precondition for Direct- and Indirect-Price Reduction

The pretests showed that a large and intuitive scale to measure the dependent variables was necessary to capture small changes in brand perception. Further, to measure a change in perception, the data collection needed to be conducted in multiple steps, with several days in-between each session.

A two-step study was used to collect data of consumers' brand perception with and without a price promotion. Respondents participated in two separate online surveys:

• In the first survey they were faced with a premium car purchase situation, shown an advertising video for a specific model, and asked to rate their perception of the car brand. The dependent variables assessed in the survey were brand image (Low and Lamb, 2000) and prestige (Baek et al., 2010); (See Appendix B, p. 283). Each dependent variable was measured by multiple items on a semantic differential scale. Participants responded to each item on a sliding 50-point scale.

• The study's second step was initiated three days after completion of the first survey. Respondents randomly were assigned to one of the four experimental conditions representing the four price-promotion categories. They again were faced with the same purchase situation, but this time a price-promotion activity was advertised. The advertised car was the same that was analyzed in the first survey and was held constant across all experimental conditions. Additionally, the magnitude of the price promotion was held constant across groups. Subsequently, the dependent variables were assessed again.

A sample of 554 respondents was recruited through a market-research firm's online panel. Quota sampling was used for the sample to be representative to German premium-car customers regarding gender (male = 80 percent) and age (25–74 years; M = 51). Furthermore, only subjects who had purchased at least one car in the past were accepted to participate in the survey.

To ensure that the change in perception between the first and second step was caused by the stimulus of a price promotion and not an external factor, a control group with 25 respondents and no manipulation additionally was employed to the described sample.

Two types of analyses were conducted for hypotheses testing:

• The change in brand perception (H4) was investigated with a within-subjects multivariate repeated-measures technique. The dependent variables were brand image and prestige. The change in each dependent variable was reported for all four price-promotion categories.

• To analyze the different effects between price-promotion types (H5–H8), a 2 (price reduction: direct, indirect) × 2 (precondition: without, with) multivariate between-subjects ANCOVA was used. In this approach the differences between the first and second measure constituted the dependent variables. In all analyses, consideration of whether or not a respondent owned the focal car brand was used as a covariate, to control for potential confounding effects.