Cannibal pricing strategies dent quality

Price is the most important signal of brand quality and is ranked above the actual experience of consuming a product, according to a study published in the Marketing Science journal of the Institute for Operations Research and the Management Sciences (Informs).

And recurring price promotions that reduce the perceived average price of a brand can feed back and adversely impact perceived quality, which would be much more pronounced in high-end product categories.

The US researchers used data for ketchup brands from Nielsen to test quality for the study, called “A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality”.​

Simulations of the authors’ model implied that approximately one quarter of the increase in sales generated by a temporary price cut represents “cannibalization of future sales due to the brand-equity-diluting effect of the promotion”.​

The authors said: “One dominant brand (Heinz) is generally perceived as being high quality. It is also higher priced and has substantially higher advertising expenditure than its name-brand competitors, Hunt’s and Del Monte. ​

“In fact, the lowest-priced name brand (Del Monte) does not engage in any TV advertising. Thus, there is scope for consumers to use price and ad expenditures as signals of quality in this market.”​

They predict, for example, that a 10 percent permanent price cut for Heinz would increase sales by 26 percent.

But if the price cut could be implemented without reducing perceived quality, (and, hence, brand equity), the increase in sales would be considerably greater at 32 percent.

Model behavior​

In the paper, the authors develop a structural model of household behavior where there is uncertainty about brand attributes, and both price and advertising signal brand quality.

This shows that four quality signaling mechanisms are at work: Price signals quality; advertising frequency signals quality; advertising content provides direct but imperfect information about quality, and consumer experience using a product provides information about quality.

Price is the most important signal of brand quality and the role of advertising frequency in signaling quality is also significant, although less important quantitatively.

The study was by Tülin Erdem of NYU; Michael P. Keane of the University of Technology Sidney, Australia and Arizona State University; and Baohong Sun of Carnegie Mellon University.

Taste perception ​

Previous research has suggested that products with a local label enhance taste perception and are believed to be of higher quality and more authentic than those items that are mass produced or imported.

The Hartman Group Pulse Report called “Consumer Understanding of Buying Local”​, said that national brands can use the notion of local to their advantage and gave the example of a nutrition bar with an ingredient that is grown in a certain area that gives it “better taste perceptions”​.