How To Set Discounts For Various Related Products

18 dec 2017

Chocolate bars, everyone has at least one in their kitchen cabinets, for those rainy evenings on the couch. Yes, (nearly) everyone loves chocolate, but some companies thrive and others…well…have a harder time trying to sell their chocolate bars.

So, what makes a specific chocolate bar different or better compared to others? Why would some shelves sell out immediately and are some shelves gathering dust? Well, we can think of many reasons like flavor (caramel seasalt, yeah!), brand, but for a large part: price.

Unfortunately, a pricing strategy can be challenging, complex, and offers no shortcuts. This reality makes “winging it” an enticing option when you don’t know where to begin. Offering discounts are an extremely valuable asset to your pricing strategy, knowing consumers love discounts. And discounts stand out. But what’s the best way to place discounts on your products?

The results from Sinitsyn (2016) serve as a guidance for pricing managers on how to coordinate price promotions of multiple products within a firm’s product line. Here’s what he has found:

  •  If the brand name is the more important determinant of consumer choice than product characteristics, then you should avoid simultaneous promotions of your products to curb cannibalization effects.
  •  If the product characteristics are more important than the brand name for consumer choice, then you should consider promoting your products together. The greater the importance of product characteristics is, the more often you should employ joint promotions using larger discounts.

What Does This Mean?

In a brand-primary setting, a manufacturer should avoid joint promotions. This means that Tony’s Chocolonely shouldn’t promote multiple products at once. Just the one with caramel and sea salt…

However, if the length of a product line is large enough that it is practically unfeasible to separate the promotions of all substitute products – like the many brands of Mars or Ferrero – then the manufacturer should select products exhibiting the least substitutability with each other and promote them together.

In a product-primary setting, a manufacturer should focus on joint promotions. A brand like Milka or Cadbury could try this, but also the supermarket’s house brand. These brands offer chocolate, but the brand isn’t that important, it’s more about the product characteristics and price.

Take Home Points

  • If a category is characterized by a strong private label or if the consumers easily switch to the products in other categories, a manufacturer should shift away from joint promotions and avoid simultaneous deep discounts. Tony’s Chocolonely is very well on its way to characterize the chocolate bar market and should therefore avoid promoting multiple products at once.
  • If a category is characterized by product characteristics, then you should promote these products together. These joint promotions will put more emphasis on your products and then allow the customer to pick a product of their choosing.