Profit. Businesses exist to create it. Marketing exists to maximize it. And, if the rapidly declining lifespan of companies, down from an average of 61 years in 1958 to just 18 years today, is anything to go by then profit is getting harder to make and sustain.

Perhaps because of today’s heightened pressure to survive, companies are increasingly focused on quarter-by-quarter performance. This appears to correlate with a shift in the allocation of promotional marketing spend away from long-term brand building. In 2006, before the financial crash, only 7% of communication campaigns had short-term objectives. By 2014, 31% of promotional marketing spend was allocated to short-term sales activation campaigns. Today, that figure has hit 47%. That means spend on discounting, ‘buy now’ offers, personalized retargeting ads and the many other tactics that motivate quick sales, is at record levels.

Brand choice is not just about price and is certainly not entirely rational

There’s no doubt sales activation tactics work. For example, imagine being in the toothpaste aisle — your normal brand is full price, but there’s a two for one offer on another brand you recognize (brand T). As you reach for brand T you do a quick shelf-scan and see there’s a toothpaste that’s even cheaper, but you don’t recognize the brand. You consider the saving which is minimal compared to the offer on brand T. Overall, you feel you are probably getting a better deal with brand T so that’s what you pick.

In this case, the sales promotion worked — brand T got the sale. It came at a higher cost than a regular sale, but it still counts towards hitting those quarterly targets. What’s more interesting is that even when the price became a significant driver of choice, the absolute cheapest possible option wasn’t selected. In this case, the buyer didn’t recognize the cheapest brand and had no existing mental associations with it. In contrast, they recognized brand T. The buyer made the connection between many years of TV ads and the brand on the shelf. The result is a slightly more positive and familiar feeling about brand T. This is the mildest of preferences but it’s enough to justify a very small difference in price.

Building mild preference is critical to profitability

It’s the creation of mild preference at the point of purchase that makes long-term brand building so critically important to profitability. Without some past brand building activity, the likelihood is that the two-for-one deal would not even have been noticed. An interesting way to think about this is to imagine you are on a trip to rural China and you forget your toothpaste. You go to the store and can’t recognize a single brand, nor can you read the packs. Deciding is a nightmare as you have nothing to inform your choice. Now imagine the same situation but your current brand of toothpaste is there amongst all the Chinese brands. How much more are you willing to pay for that simple and reassuring moment of recognition?

The same simplicity of choice principle applies, albeit less dramatically when selecting a toothpaste in your local store — and that allows for a wide range of price points to be viable. Search any online supermarket, or look at the shelves, and you will see own brands are as cheap as £0.50 per 100ml. Various versions of the big brands charge anything from £2-5 per 100ml and the most expensive ‘professional’ option comes in at £13.34 per 100ml (Tesco online. Toothpaste section. Prices accurate as of 30/07/12).

Fundamentally, these products are all similar in terms of their ingredients. However, through many years of building consistent memory structures in the minds of customers, some brands have created a significant price premium. Sensodyne toothpaste is a good example. Even if it’s not what you use yourself, you probably have a picture of who it’s for — people with tooth sensitivity. Years of delivering the same message, with the same very distinct white pack and blue logo, mean it’s the automatic and simple choice for people who define themselves as having sensitivity to hot or cold foods. You could put Sensodyne prices up 10% tomorrow and it is unlikely that its market share would be affected — such low-price sensitivity is a real marker of brand value.

Balancing brand building and sales activation

Investing in brand building is very much a long game. It’s unlikely to directly convert people from their current preferred brand in the way a sales tactic might (albeit temporarily in most cases). And, it tends to require expensive mass-reach media with effects that are difficult to measure and can take years. However, without it, it’s hard to deliver sustainable profitability. This is demonstrated in several studies:

Both sales activation and brand building have a role to play in increasing the number of people selecting a brand, and both approaches should be implemented for most brands. Research by Les Binet and Peter Field for the Institute of Practitioners in Advertising provides a basic formula showing B2C businesses grow most effectively when they devote 60% of their budgets to mass-reach brand advertising, and 40% to narrowly targeted campaigns focused on immediate sales. For B2B the principal is the same but with a 50/50 split between brand building and sales activation.

Walking the tightrope between success today and surviving tomorrow

Overall, companies are steadily increasing the percentage of marketing communication spend on short-term sales activation. This is understandable in the current business climate but comes with significant long-term profit risk. Data from the Institute of Practitioners in Advertising shows overall marketing effectiveness falling in the last few years. They draw a clear link between this fall and the increased use of sales activation tactics. Maximizing the profitability of brands has always been a tightrope. However, as marketing teams put ever more weight behind short-term sales activation, they’re increasing the chances of overbalancing beyond the point of no return.

Image source: Boxed Water Is Better