The promotion effect on shifting consumer behaviour
Right now, lots of consumers want to find ways to save money. New research from KPMG shows that in the UK 55% have reduced non-essential spending, and 29% feel either much less secure or slightly less secure in March 2023 than they did at the start of January.
Non-essential spending is very much a matter of perception and prioritisation. For some people, it could mean reducing eating out, buying new clothes and accessories, doing fewer small journeys by car or taxi, but maintaining spending elsewhere. Meanwhile for others, it could mean not making any major purchases, such as electronics, home improvements and holidays. Some will do both. However, it doesn’t mean people are no longer buying, just that behaviours are changing and people are more savvy with their money.
The strategy for marketers and retailers is to identify and tap into buyer motivations. This doesn’t mean entering into a continuous spiral of discounting, because while a 10% discount might generate a little sales high, it dents margins and neither creates repeat business, nor loyalty.
What motivates your customers?
What the KPMG research has discovered is that when consumers are considering a purchase, they are likely to look for value and incentives. The data shows that 36% of consumers are buying more promotional items and this is where marketers and retailers can shift consumer behaviour.
Imagine the family home is in need of a new sofa and the purchase has been put off for a few years, first because Covid restrictions made shopping impossible, and then as a result of the downturn squeezing spending on essentials. But the sofa money is squirrelled away.
The right promotion can drive the consumer to action. For example, a promotional offer that includes vouchers for days out for the family might be the right incentive to show how they can spend money on an essential purchase and afford non-essentials at the same time.
This is just one example of how promotions can really help a retailer. There is a persuasive benefit and time-based incentive in the promotion that’s tied to an emotional response, tapping into the consumer’s motivation. If a consumer is ready to buy that sofa, but not feeling financially confident, they’ll be looking around for deals. The retailer who understands the mood of the moment, can win the sale. Achieving this can be very time-specific. Those family day out vouchers will be more attractive if offered at the start of the long school holidays rather than the start of a school term.
While that example is fairly obvious, getting the promotional setup right is often a complex matter. It’s not just about securing a deal that will appeal to consumers. Remember, when times are tough, the consumer’s primary motivation may well be not to buy that sofa, even if the money is earmarked for it.
And yet Opia’s own research has shown that customers are influenced to purchase by sales promotions. In early 2021, Opia analysed a sample of circa 500,000 claims submitted across more than a hundred sales promotions across multiple markets and sectors to determine customer behaviours towards promotions.
More than eight out of 10 (84%) of customers say they are influenced by promotions to some degree, with 40% either strongly or very strongly influenced. Customers who respond to promotions tend to be those who are generally very engaged; they are actively looking for deals and can be influenced by an appealing offer. In today’s market, this is most consumers, which means there’s a receptive audience for brands embarking on new sales and marketing initiatives.
Promotions that have the most appeal, such as a gift with purchase where an attractive and relevant gift is offered with the product (a perfect example is a pair of high-end wireless headphones with a flagship smartphone) tend to drive significantly higher engagement and sign up to marketing communications (close to 50%) versus campaigns that may come across as more ‘transactional’ or even ‘cheap’, typically with a cash reward. The simple cashback offers show less brand engagement with sign up rates for future marketing coming closer to 25%.
Put customers front and centre
It might sound strange to advise retailers to take a customer-centric approach, but we see far too often that this key point gets overlooked. Understanding customers means understanding what motivates them, and this can make all the difference between promotional success and failure. No one size fits all and buyers in different parts of the world can respond differently to incentives. As such, there is no magic formula beyond the essential considerations to match the right kind of sales promotion to the sector/consumer/geography is of course essential.
Sales promotions are often most effective when multi-layered, and adapted to a commercial need: sales volumes are all very well, but not at the expense of margins that do not make commercial sense; if it’s a new product promotion, ‘buy or try’ often works best; the higher value promotions will benefit from an expensive gift or higher cashback; if the objective is centred around increasing market share, then trading in a competitor’s brand for a new model of your own might also be an option.
You could decide to use different incentives, promotions or marketing strategies for different types of customer, for example those who are active and loyal, those who have recently switched to you from somewhere else and those who you think are prospects and might be in their research phase.
This strategy could be coupled with an understanding of the top consumer concerns of the moment – If you’re selling an electrical item, might some bundled smart energy management kit be a worthy promotional item as energy costs continue to be high, for example. Or if you are selling a TV, maybe bundling streaming services is a better option. Whether your promotion is a physical item or something delivered online, reliable fulfilment is paramount: a customer whose promotional items turn up late or don’t arrive is a very unhappy customer.
Find the right promotions partner
Once a retailer understands that discounting is a sub-optimal strategy, and promotions a good one, the next step is to put a promotions strategy in place. This is not without challenge for those who try to go it alone. We have touched on some aspects of the job, including the value of segmenting consumers by their relationship to the retailer, understanding different consumer motivations, sourcing promotional items, and getting both marketing and fulfilment right.
Moreover, promotions are unlikely to be a one-off for retailers. As they look to the short and mid-term futures, retailers may consider the market such that they need to think of promotions as a regular part of their business. Partnering with an experienced third party who can advise, source the right promotions at the right price, ensure fulfilment, manage the customer relationship, help with metrics analysis and act as a true partner could be the ideal strategy. Make the right partner decision and your promotional activity will bring profit and nurture customer loyalty.
Financial Frugality and the Technology Device Market
The global economy is not having a great time at the moment. In January 2023 the International Monetary Fund (IMF) forecast that global growth for the year would be 2.9%. The predicted rise in 2024 is slight at 3.1%. Advanced economies will be hit hardest says the IMF, with growth forecast at just 1.2% this year, down from 2.7% in 2022.
When this trickles down to individuals, it is often in the shape of rising costs across many sectors: energy, food, fuel, entertainment, and the purchase of essential and non-essential items. Not surprisingly, consumers are hunkering down, budgeting carefully, and in many cases wondering where they can cut back.
What this means for technology sales
When it comes to the tech sector, people are holding onto devices for longer and postponing upgrades. Some reports already put the average age of a phone at trade-in at over 3.5 years and the next year or more will be a tough market. Canalys figures for Q4 2022 show worldwide smartphone shipments fell 18%, the wearable band market fell 18%, smart personal audio fell 26%, and PC shipments (desktops and notebooks combined) fell 29% (and down 16% across the year).
With so many consumers taking a much more careful approach to spending, it is important for technology vendors and retailers to consider the margins and value of products they offer, providing the right mix from an affordable ‘value range’ through to premium products, avoiding any duplicate ranges between price points. Significantly, GFKsays that in the tech and durables sector across Europe both high and low income customers rate price as the most important purchase factor (70% and 78% respectively), with product features running a close second (67% and 61%). Desirability characteristics might relate to a strong feature set, filling a gap in what is already owned, or providing a necessary upgrade.
Those involved in technology product marketing and sales will need to work hard in this environment. While they can’t change the wider economy, they can adopt strategies that can help maximise sales volume and revenue. Slashing prices can stimulate customer interest and action, but it can also create immediate impacts elsewhere that are hard to recover from, such as price competition and devaluing brand perception.
Develop laser-focus and pare down the offer
During any downturn, products benefit from a strong focus on value. Marketing and promotions must articulate a straightforward value proposition of product benefits in relation to cost.
Sensibly priced promotions can help shift inventory that is unsold, even as consumers reduce spending. But the strategy needs to be thought through. For example, it can be effective to bundle low margin, high stocked items alongside other products to show value and create demand.
Paring down the offer might also be helpful for vendors in some technology sectors. For example, instead of having five or more price points for different offer combinations or service levels, bring it down to three – entry, mid-market and premium. Work out where the main profit will come: premium ranges often remain resilient in downturns.
Make informed, strategic decisions on whether to offer discounts, trade-in offers, reward vouchers, loyalty bonuses, or use other means, targeting specific segments with the most appropriate offers – and be very realistic about both likely take-up and margin per transition. Know what inventory sits unsold, the cost of storage, and decide on the mix of profit, dispose at cost or loss lead as the way to go. Now more than ever it is also important to be agile. Fail fast may be something of an overused phrase, but deploy the strategy wisely. Watch competitors and react where that seems appropriate by tweaking your own strategies. Understand potential cross sell opportunities.
Technology vendors must avoid empty messages that fail to resonate or turn-off consumers, such as a derisory discount in the face of the headline inflation rate, of which consumers are well aware thanks to their personal cash flow and the media. If a gift is offered, keeping it super-relevant to the purchase item and marketing it well might mean an item sourced at a relatively low cost brings in a high take-up and strong profit. On the other hand, you might consider a strategy is successful if it helps more with brand-building than profitability.
Avoid over-reacting to competitor discounts
84% of customers are influenced to purchase by sales promotions, according to Opia’s research, and promotions bring on board both brand switchers and new customers as well as providing existing customers with an incentive not to switch.
While of the many options available, discounting sits in the mix, at all costs avoid a “fire-sale” mentality. Huge price reductions can suggest to consumers that the seller is struggling or that their profit was vastly inflated before the reduction – or both. Brand loyalty can take a nosedive in this situation. As the old saying goes, trust takes years to earn, minutes to lose.
One company taking a fire-sale mentality is bad for the company. Another following suit, and then another in a fight to win customers is bad for the sector. In a race to the bottom like this nobody wins. Short term financial gains for the consumer quickly turn into long term profit erosion, reduction in product and service quality, consumer dissatisfaction and a sector in freefall.
The coming months won’t be easy for technology vendors and their industry partners selling the goods. Those with well formulated promotional strategies, who are prepared to be agile in the face of customer response, and who understand the consumers they are selling to as well as the nuances of profitability and brand-building to a granular level with each promotion they run, have the greatest opportunity to manage inventory and remain profitable.
Effective Promotions in a Downturn
Hitting commercial objectives in retail has never been easy and there’s no doubt that it’s harder right now. According to global retail analysts GfK in its State of Consumer Technology report, only 20% of consumers consider it is a good time to make a purchase; almost half (43%) believe it’s better to wait.
Globally, there are tough times across all market segments and the ‘non-essential’ or big-ticket items in the Slow Moving Consumer Goods segment face some particular challenges. The total sales value of consumer technology declined 5.5% in the first half of last year, compared to the same period in 2021[1], sowing the seeds for a downward trend that has maintained since then. Likewise, industry analysts Gartner said worldwide PC shipments declined 28.5% in Q4 2022, its steepest decline since Gartner began tracking the market in the mid-1990s[2].
Despite some recent glimmers of hope that show UK and EU consumer confidence is improving, though US confidence fell again in recent months, many retailers are gloomy about their prospects. However, the bottom line is that though confidence is low, consumers are still willing to invest in products and brands and retailers must learn to navigate this landscape through relevant sales strategies.
There are three main business pressures facing them:
- Bigger drop in demand than expected
- Unrealistic expectations to perform in comparison to the post-Covid boom
- Stock and Inventory build-out in the channel while corporate HQ Is considering new / adjusted products to launch to the market to respond to change in demand.
The danger is that as demand drops it can be tempting to resort to fire sale discounts and huge price drops. Brand managers and retailers must resist. Consumers often don’t realize the magnitude of the price cut or they don’t even notice the reduction at all. What’s more, price drops risk squeezing margins even further as inflation pushes costs up from manufacturing and throughout the supply-chain. In this sense, fire sales are a race to the bottom, often sparking a price war, with a consequential and unsustainable impact on revenues and profitability.
Instead, sales and marketing teams within brands and retailers need to look at the mix of levers they can pull to get customer attention, stimulate interest and desire, and lead the customer to take action and purchase. The successful brands will be the ones that take a consumer-centric approach to the value they offer. The message is simple: if consumers are going to spend, give them reasons to spend with you.
Retailers can drive demand by focusing on affordability solutions, such as trade-in of old devices to reduce upgrade costs, bundling accessories, or offering rewards which help towards food, fuel and energy bills or even holidays, gift cards or cashback. And they can provide greater reassurance to customers with solutions that don’t impact on margins, such as reliability promotions, warranty upgrades and satisfaction guarantees, which can all drive differentiation and offer peace of mind to customers.
- Cashback promotions highlight the discount, not the reduced price point, creating an irresistible promotional prospect for customers: a specially reduced and time-limited deal, which motivates purchases and delivers a substantial increase in product sales over the longer term.
- Gift with purchases and bundles are a great mechanic in a challenging economy to drive down stocks and uplift sales.
- Buy and try promotions reassure potential buyers that the risk of purchasing is reduced by giving consumers a risk-free, no-obligation trial period. It is proven to drive action and increase average unit prices.
- Trade-ins incentivise customers to upgrade their old equipment via a conditional, time-limited reward in cash or as a gift.
- When bought with… promotions give consumers a credible percentage discount at the point of purchase to drive uplift in sales of accessories, increase the total order value and inventory turnover.
Getting the right approach to incentives is a careful mix of art and science. There has never been a single lever. One incentive-based sales campaign might be part of the long-term strategy, and another might be set up, managed and closed over a short period to take advantage of an unexpected opportunity.
The major benefits of these promotions during a downturn are that they can generate demand and trigger customers into action. More than that, they enable you to be relevant to customers right here and now and show that you understand why they might otherwise delay a purchase.
If we have learned anything from previous recessions, it’s that over-relying on price discounts is a one-way street to lower margins and brand perception. There may need to be changes to the product mix or prioritising different audiences to protect margins, but by pulling these promotional levers we can reassure customers, demonstrate added-value and stimulate demand. All of which puts brands and retailers in a much better position to outperform against market expectations and emerge stronger as the economy recovers.
[1] Source GfK State of Consumer Technology and Durables report (November 2022)
[2] Source Gartner PC Quarterly Statistics Worldwide by Region (January 2023)