Something Free or Something Off - a comparison of the effectiveness of gifts vs. price disocunts

In this blog post we will learn that give away-promotions sometimes are more effective than price discounts, that they work best for private labels as well as in hedonic categories. Happy reading!

 

Facing tough competition and a growing share of store labels, retailers and manufacturers rely increasingly on non price promotions such as giveaways where consumers get a free gift when purchasing a product.

To shed light on this problem we will look into a fairly new study that compares the effectiveness of givesaways (e.g. "get a free mug when you purchase store label coffee") and price discounts (e.g. "30% off on store label coffee"). We will reveal how these two promotions grows sales and brand choice across categories and between brands.

About the study

The researchers set up an online purchase simulation in four fast-moving consumer good categories (orange juice, cereals, margarine, and milk), involving more than 2,000 participants, and model purchase decisions in response to giveaways and price discounts.

Researchers

The study was made by a team of researchers led by Bram Foubert, from Maastricht University, KU Leuven, University of Hamburg and was published in Journal of Retailing 2016.

Findings

  • Compared to price discounts, giveaways are less likely to generate a quantity lift for the promoted SKU because the marginal value of a free gift declines with each additional unit.
  • However, whereas giveaways generally lead to smaller purchase effects than equivalent price cuts, their relative performance improves under certain conditions. Notably giveaways generate relatively higher lifts in hedonic categories, such as orange juice and cereals. It is not too for fetched to think that  consumers purchasing in a hedonic category also seek hedonic benefits, like those provided by a giveaways.
  • A giveaways effect is alsp higher for private labels than for national brands.
  • For national brands, price cuts, unlike giveaways, enjoy a very strong switching effect, because a lower price makes national brands affordable to price-sensitive consumers. These differences in relative promotion effectiveness between private labels and national brands are most noticeable in utilitarian categories.
  • Especially in utilitarian categories, managers should be careful when offering a giveaway with a national brand.
  • A giveaway's effectiveness appears to be largely independent of its relatedness to the category.
  • With this said, even under the most favourable conditions (i.e., private labels in hedonic categories), the sales effects of give aways remain smaller than those of equivalent price cuts.
  • Still, this does not mean price discounts are always preferable to giveaways. Giveaways are often cheaper than equivalent price discounts (e.g., a giveaway worth €5 in the eyes of the consumer may cost only €1) such that, even though their sales effects are less impressive, their return-on-investment may be considerably higher.
  • The analysis indicate that in certain circumstances, a retailer can afford a giveaway cost up to 87% of the giveaways perceived value before it becomes more rewarding to use the money for a price discount.

Summary

Giveaways generate lower lifts than corresponding price discounts. However, since giveaways are significantly cheaper for the retailer and manufacturer to offer (customer's overestimate the giveaway's true vale) they can still be more profitable. Particularly in hedonic categories and for private label brands. The insight that private labels benefit most from giveaway promotions may be new to many managers: inspection of store flyer data teaches us that giveaway promotions occur almost exclusively among national brands.


Stay awesome / the Formulate team

Arvid Stenback Lund