The Impact Of Sales Promotion

Marketers of FMCG products encounter many obstacles down the road of launching a new product or when attempting to supplant the market share of a product that has already been well established in the market for a while. One of these challenges is the customer resistance to change an already tried and trusted product. This is known as customer loyalty. The customer remains loyal to such product and moreover offers favorable word of mouth publicly about the product telling friends and family, thus increasing the number of loyal customers.

A key marketing communication tool that could be employed to draw customers and eventually build their loyalty is sales promotion. It is highly effective in exposing customers to products for the first time and can serve as a key promotional component in the early stages of new product presentation. It also works especially well when consumers are in need of a jolt to take buying action. Marketers spend a considerable sum of their total marketing expenses on sales promotion to stimulate sales. This paper is a study of some previous researches that addressed the effect of sales promotion on customer loyalty as well as the customer loyalty to FMCG products. Therefore the aim of this paper is to determine the effect of sales promotion on customer loyalty for FMCG.

Key words: Sales Promotion, Customer Loyalty, FMCG, Brand Loyalty, Customer Behavior

List of Figures

Figure 1: Promotions and the Marketing Mix: An integrated model 2

Figure 2: Profitability of a sales promotion 3

Figure 3: Behavioral Segmentation 7

Figure 4: Major factors that influence Loyalty 8

Figure 5: Opinions of customers regarding Sales Promotion 9

List of Tables

Table 1: Frequency of visits during Sales Promotion 4

Table 2: Purchase during Sales Promotion 4

Table 3: Loyalty Phases 6

List of Acronyms

CL: Customer Loyalty

FMCG: Fast Moving Consumer Goods

BOGOF: Buy One Get One Free

CRM: Customer Relationship Management

VC: Value Consciousness

DP: Deal Proneness

PC: Price Consciousness

VOC: Voice Of the Customer

Table of Contents

Acknowledgements i

Abstract ii

List of Figures iii

List of Tables iv

List of Acronyms v

1.Chapter One: Introduction 1

1.1.Problem Statement 1

1.2.Importance of Study 1

1.3.Research Questions 1

2.Chapter Two: Sales Promotion for FMCG 2

2.1.Sales Promotion Tools 2

2.2.Characteristics of FMCG 3

2.3.Impact of Sales Promotion on FMCG Sales 3

2.4.Effective Sales Promotion Tools for FMCG 4

3.Chapter Three: Customer Loyalty for FMCG 6

3.1.Customer Loyalty 6

3.2.Loyalty Status 6

3.3.Factors that Influence Customer Loyalty 7

3.4.Importance of Customer Loyalty to FMCG Manufacturers 8

4.Chapter Four: Impact of Sales Promotion on Customer Loyalty for FMCG 9

4.1.Effect of Sales Promotion on Customer Behavior 9

4.2.Impact of Sales Promotion on Customer Loyalty 10

5.Chapter Five: Conclusion and Recommendations 11

References 12

Chapter One: Introduction

Problem Statement

Marketers of FMCG products are alerted and concerned about customer loyalty when introducing a new product or when trying to replace the market share of an already existing product. One of the marketing communication tools that are used in attracting the attention of customers and building their loyalty is sales promotion. By applying several sales promotion techniques and monitoring the reaction of customers to them, marketers could study the impact of sales promotion on customer loyalty for FMCG.

Importance of Study

Building customer loyalty can be a significant way to grow business, not to mention crucial to business success. Hence, creating and maintaining customer loyalty has become a strategic mandate in today’s service markets. Recent research suggests that customers differ in their value to a firm, and therefore customer retention and loyalty-building efforts should not necessarily be targeted to all customers of a firm as focusing on the appropriate customers will consequently improve profitability. Given these sentiments, it is becoming increasingly necessary for firms to have a thorough understanding of their customer base, as well as develop a loyalty strategy focused on the “right” customers. This could be achieved by studying the effect of sales promotion on customer loyalty so that customers may be evaluated more efficiently.

Research Questions

What are the key sales promotion tools?

How is customer loyalty built?

How is customer loyalty changed?

What is the effect of sales promotion on customer loyalty?

Chapter Two: Sales Promotion for FMCG

Sales Promotion Tools

Sales promotions are a key marketing tool for marketers to increase their sales. Kotler & Keller (2009) defined sales promotion as short-term incentives designed to stimulate quicker and/or greater sales of particular products or services. Marketers use sales promotion tools to draw a stronger and quicker buyer response, including short-run effects such as highlighting product offers and boosting sales. Sales promotions are instruments which stimulate the sales of products and brands, especially in consumer-packaged goods. Frequently, over 20% of the sales in a product category occur under sales promotions (Teunter, 2002). Moreover, Meyer-Waarden & Benavent (2006) found that approximately 90% of promotional purchasers were clients of the brand at least one year before

Sales promotions can be classified as price-based or non price-based. The price-based are ‘promotions such as coupons, cents off, refunds and rebates that temporarily reduce the cost of the goods or services’ whereas non price-based ones are ‘promotions such as giveaways or contests in which value is added to the product at full price’ (Schneider & Currim, 1991). As for Kotler & Keller (2009), sales promotion tools are classified as consumer franchise building tools and non brand building tools. The former impart a selling message along with the deal, such as free samples, frequency awards, coupons when they include a selling message, and premiums when they are related to the product. Sales promotion tools that are typically not brand building include price-off packs, consumer premiums not related to a product, contests and sweepstakes, consumer refund offers, and trade allowances.

Baker (2003) states that sales promotion has an important role in the marketing mix. The capabilities of promotions to build relationship is just one of several factors causing a re-evaluation of what promotions can achieve for marketers. Awareness of the potential strategic impact of promotions leads to a more integrated approach to their management and their role within the marketing mix. The intertwining of promotion with the rest of the mix is demonstrated in Figure 1. The model’s ‘nine Ps’ are less memorable than the classic four, but they demonstrate the difficulties of isolating promotions within the mix.

Figure 1: Promotions and the Marketing Mix: An integrated model

Whatever the motivation for sales promotions is, their profitability should always be an important concern. This was studied by Wierenga & Soethoudt (2010) as shown in Figure 2; two parties in the distribution channel determine the sales promotions; the manufacturer and the retailer. Their decisions affect the characteristics of a sales promotion, such as its type, the amount of the price discount, announcements in flyers, point of sale displays, etc. These, in turn, determine the effect of the sales promotion in terms of extra sales. However, a sales promotion usually also involves extra costs (planning, logistics, sales promotion materials such as flyers and displays, etc.). The extra sales (and the margins on these sales) together with the costs determine the profitability of the sales promotion, for each of the channel parties separately, and for the channel as a whole.

Figure 2: Profitability of a sales promotion

Characteristics of FMCG

Fast moving consuming goods are products which are sold quickly and at a relatively low price. Though the absolute profit made on FMCG products is relatively small, they are generally sold in large quantities, so the cumulative profit on such products can be large. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soaps, cosmetics, teeth cleaning products, shaving products and detergents, as well as other non-durables products such as glassware, light bulbs, batteries, paper products and plastic goods (Khan, 2010).

On the other hand, according to Vaishnani (2011), FMCG industry primarily deals with the production, distribution and marketing of consumer packaged goods. The FMCG are those consumables which are normally used by consumers at regular intervals. In FMCG, brands are viewed as the key assets of the company, and all investments are made to create brands (Schuiling, 2004).

Impact of Sales Promotion on FMCG Sales

Sales promotion has always been a very powerful tool of enhancing sales as well as an efficient vehicle to reach the customers that has a great impact on the consumer purchase behavior. Price promotions come in different formats such as discounts, coupons, rebates, and free gifts with purchase, etc. While most promotion forms involve monetary savings, some promotions are non-monetary. One type of non-monetary promotions often used is offering consumers a free product or gift instead of a price discount (Vaishnani, 2011). Table 1 shows the results of a study done on 106 customers and the frequency of visits on FMCG stores during sales promotion. The increase in the number of visits to all stores during the sales promotion period is highly noticeable. This reflects the impact of various sales promotion strategies on the customers overall shopping experience and their response to such promotion tools, as offered by the different FMCG stores (Sathish & Naachimuthu, 2011).

Promotions can spur purchases by established customers, reel in new customers, draw customers from competitors, get current customers to buy differently, and stimulate business during slow periods. According to Sathish & Naachimuthu (2011), it can be inferred from Table 2 that Price Discounts and Buy-One-Get-One are the most effective types of sales promotion for FMCG. Kannan departmental stores is more patronized by the public as it has understood the psychology of the consumers and provides them more value for money without loading them with unnecessary/unwanted gifts, and thus keeping the cost of sales promotion less.

Customer Loyalty

Customer loyalty is considered as the foundation of competitive advantage and has a strong influence on a company’s performance (Ishaqa, 2012). Sun & Lin (2010) stated that consumer loyalty is indicated by an intention to perform a diverse set of behaviours that signal a motivation to maintain a relationship with the focal firm, including allocating a high share of the category wallet to the specific service provider, engaging in positive word of mouth, and repeat purchasing. While, Oliver (1999) defines loyalty as “A deeply held commitment to rebuy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.”

Jones & Sasser (1995) indentified three parts of consumer loyalty: re-buy intention, primary behavior and secondary level behavior. According to him, re-buy intention refers to the future intention of the consumer to re-purchase the product or service; primary behavior means the practical re-visiting behavior of a consumer; while secondry behavior refers to customer referrals and spreading the world of mouth. Whereas Crosby & Johnson (2004) stated that understanding customer loyalty involves measuring, modeling and management. The measuring aspect is for identifying the areas of non-financial performance, whereas the modeling is for understanding how variables are linked together in a chain of effects from touch points to loyalty and attempts to rule out other explanations of why customers might be attached to the brand or the company and finally the management aspect in order to set goals, make management accountable, provide the tools needed for decision making and thus build customer loyalty.

Loyalty Status

When a consumer deals with a particular brand for a certain period of time, he naturaly displays a degree of loyalty towards it. Oliver’s (1999) framework introduced the cognition-affection-conation-action pattern where consumers can become “loyal” at each attitudinal phase relating to different elements of the attitude development structure. This is clearly shown in Table 3

Stage

Identifying Marker

Cognitive

Loyalty to information such as price, features, and so forth.

Affective

Loyalty to a liking: “I buy it because I like it”

Conative

Loyalty to an intention: “I’m committed to buying it”

Action

Loyalty to action inertia, coupled with the overcoming of obstacles.

Table 3: Loyalty Phases

While Kotler & Keller (2009) points out that marketers usually envision four groups based on brand loyalty status. These include hard-core loyals: who buy only one brand all the time and make repeat purchases of a particular product irrespective of the premium price of the brand. In other words, hard-core loyal consumers are less price sensitive. There are also the split loyals: who are loyal to two or three brands, shifting loyals: who shift loyalty from one brand to another and switchers: who do not show loyalty to any particular brand. Figure 3 depicts one possible way to break a target market by various behavioral segmentation bases.

Figure 3: Behavioral Segmentation

Factors that Influence Customer Loyalty

Customer loyalty is widely accepted by marketers as being something that’s worth nurturing, with many renowned analysts and researchers repeatedly showing the value of loyalty programmes in terms of greater spending and satisfaction, more profitable customer behaviour, reduced defection levels, and unique competitive advantages. To that end, the various factors that affect customer loyalty must be considered. Trust is thought to be one key component of a lasting exchange relationship, for it is what drives customer loyalty. When customers trust a company to act in their best interest, they become more loyal, and they want to do more business with that company (Peppers & Rogers, 2006). Whereas Forbes (2001), defined some key points for building customer loyalty: (i) Developing a clear strategy for enhancing customer loyalty, Emphasizing activities that represent high value, (ii) Capturing the VOC where customers define the criteria for quality, price, and value and (iii) Maintaining company’s image by such “soft” issues as commitment, partnership, and integrity.

According to Clark & Clark (2006), there are six major factors that play key roles in influencing the loyalty and commitment of customers; (i) Core offering: It is the solid dependable core that appeals to the customers thus acquiring their loyalty, (ii) Satisfaction: Though essential, it is not an accurate measure of the level of loyalty, (iii) Elasticity level: It expresses the importance and weight of a purchasing decision, (iv) The marketplace: It involves two elements that are key for the development of loyality; opportunity to switch and inertia loyalty, (v) Demographics: The more affluent and better educated customers are, the less likely they are to be committed to a specific brand and (vi) Share of wallet: It is cheaper and more profitable to increase your share of what the customer spends in your sector, than to acquire new customers. Those factors are demonstrated in Figure 4.

Figure 4: Major factors that influence Loyalty

However Oliver (1999) states that some vulnerabilities affect customer loyalty. These include either (i) Deterioration in brand features, quality or price or (ii) Enhanced liking for competitive brands, perhaps conveyed through imagery and association or (iii) Persuasive counterargumentative competitive messages or (iv) Induced unavailability (e.g., stocklifts – purchasing the entire inventory of a competitor’s product from a merchant).

Importance of Customer Loyalty to FMCG Manufacturers

Dowling & Uncles (1997) suggest that customer loyalty programs which (i) Directly enhance the product/service value proposition, or (ii) Broaden the availability of the product/service, or (iii) Neutralize a competitor’s program, may be worthwhile. On the other hand, Oliver (1999) points out that the returns to loyalty are in double-digit categories. These figures, however, speak more to retention than to psychological loyalty states. Although there is an unquestionable correspondence between the two, there are situations in which individual consumers do not have the opportunity or need to reconsume but remain loyal nonetheless.

Chapter Four: Impact of Sales Promotion on Customer Loyalty for FMCG

Effect of Sales Promotion on Customer Behavior

Sales promotions have a significant effect on the behaviour of consumers. As sales promotions are mostly announced for a short period, customers may feel a sense of urgency and stop comparing the alternatives. According to Rao (2009), the dimensions of price perceptions (as measured by VC and PC) and DP are important variables that cannot be ignored by marketers while designing pricing and promotional strategies. Respondents differed in terms of their VC, DP and PC when compared with buying intention. Store and brand preferences were associated with VC, PC and DP. Differences across demographic variables were minimal given the fact that the dimensions of VC, DP and PC are universal. Consumer preferences for monetary and non monetary promotions that were presented too did not reveal significant differences excepting in terms of price consciousness. However, Chaharsoughi & Yasory (2012) concluded that sales promotion has a direct impact on the consumer behavior and that culture has significant effect on the behavior of individuals as well. He added that, sales promotion act as a moderator of the effect of culture on the consumer behavior and may effect consumer behavior independently of culture.

Das & Kumar (2009) carried out a study which included 100 customers who were asked whether they would wait for a promotional scheme to purchase a product or not. The result of the analysis is shown in Figure 4.

Figure 5: Opinions of customers regarding Sales Promotion

He concluded that sales promotion plays a limited role in the buying behavior of consumers. Only a small percentage of the customers are attracted to such sales promotion and wait for it. Store loyalty may not play a role in sales promotion. Retail sales promotion has to depend on others factors to positively impact the buying behavior.

Impact of Sales Promotion on Customer Loyalty

Sales promotion is an important tool in creating loyalty because sales promotion does not only bring the product to the attention of the buyers but also provides incentives to encourage purchase. The impact of sales promotion on consumer behavior reveals mixed results. For example, the study done by Lau, Chang, Moon & Liu (2006) shows that sales promotion is an important factor in differentiating hardcore loyal consumers from brand switchers and that sales promotion is the most important factor that attract brand switchers.

Sathish & Naachimuthu (2011) found out that customers do not switch stores based on the sales promotion provided by FCMG stores. This can be perceived as customer loyalty because they do not switch to other stores even when those stores provide better promotional offers. The customers’ attitude towards the sales promotion is different. They perceive that quality is compromised during sales promotion and that’s why they remain loyal. Moreover, Sun, Neslin & Srinivasan (2003) added that consumers with intrinsically higher preference for a brand are more likely to take advantage of a promotion for their preferred brand.

Chapter Five: Conclusion and Recommendations

The study concludes that sales promotion plays a limited role in consumer buying behavior and thus has a modest effect on customer loyalty. Only certain types of sales promotion (price discounts and BOGOF) are effective for FMCG because these tools provide customers with more value for money without loading them with unnecessary/unwanted gifts. However, only a small percentage of customers are attracted to such sales promotion given the fact that most customers do not switch stores based on the sales promotion provided by FMCG stores. They perceive that quality is compromised during sales promotion and that’s one of the reasons why they remain loyal. Nonetheless, sales promotion proved to be one of the main factors that attract shifting-loyals and switchers who are willing to try several brands, when a single brand doesn’t satisfy all their needs.

It is recommended to do a comprehensive market research to determine a specific target segment. In addition, a thorough study of the psychology of the consumer must be done, in order to develop the appropriate sales promotion strategies conducive to building and enhancing customer loyalty.