Imagine your the marketing manager for a frozen convenience food product in a highly-competitive sector. You know there is a customer segment which accounts for a high proportion of sales. This group are also very sensitive to price. So when planning a new campaign involving an online ad with a money-off coupon for your product, do you target it to a) your loyal, but price-sensitive buyers, b) buyers who may splash out on products in parts of a grocery store, but look for savings elsewhere, or c) to the least price-sensitive shoppers?
In a classic example of the counter-intuitive findings which can emerge from careful data analysis, a real-life frozen sandwich brand in the United States achieved a 23.31 per cent sales uplift from group c). By contrast, group a) of very price-sensitive shoppers only increased their purchasing rate by 1.45 per cent.
This is one of the examples cited in a new whitepaper by dunnhumby, “Using advertising to engage the price sensitive consumer,” based on a series of case studies by the company across the 60 million consumers whose in-store purchasing behaviour it has linked anonymously to their advertising exposure.
Justin Petty, VP global partnerships and media, dunnhumby, says: “In the frozen sandwich example, we hypothesised why this was the case - if the product is highly penetrated in one group who were buying it regularly, it is hard to move the sales dial with them. But any extra purchase in another group really does move it. That might be down to the messaging and creative.” It also demonstrates that price can be a powerful way to gain trial of a product by new users.
Promotions are the most heavily-used marketing technique in FMCG (or CPG as it is known in America) and retail, with just over half of consumers saying price matters more to them than brand name. This price sensitivity has been increased by the economic slowdown which has decreased consumer buying power, making coupons and discounts a central part of more shoppers’ buying behaviour.
To understand how effective price really is and whether it works better on some consumer groups than others, dunnhumby ran a number of analytical passes on its data. “We have a lot of media channels and partners through which we evaluate different propositions for consumer packaged goods clients. Over time a pattern emerged around price sensitive segments - some where you might have guessed, but others less so,” explains Petty.
It identified four segments ranging from the least price sensitive who tend to buy above the average price, through “Splurge and Save” who splash out on some products but look for savings elsewhere in the store, to the price sensitive and the very price sensitive who are heavy users of coupons. These segments have been identified and flagged in the company’s database. Says Petty: “We can select against price sensitivity so our clients can target specific segments.”
“The main counter-intuitive finding is that you might expect a high correlation between demographics and price sensitivity, but it seems that is not the case. Also, there are products that you would not expect to be price sensitive, yet there are people who respond very strongly to price offers,” he notes.
Income, age, ethnicity, gender or interests do not define which consumers will be price sensitive. Equally, the most price sensitive shoppers may be cost conscious, but they are not disloyal or low spenders. Among women aged 25 to 50, for example, 38 per cent are price sensitive but 33 per cent have low sensitivity to price, while the number who are very price sensitive is only slightly higher than the “Splurge and Save” cohort. As dunnhumby points out, a brand that targets a TV ad at mums as a generic group will be wasting a lot of its advertising spend.
There are some variations with age, however. “We have done a lot of work looking at age segments, such as Generation X, Millennials, Baby Boomers,” says Petty. “Millennials do tend to be more price sensitive and they also spend more on groceries than any other segment because they have new families and growing kids.”
He adds: “It is a very interesting segment that marketers are starting to focus on. They have grown up with the internet and Facebook, so they have been exposed to a lot of special deals, rewards and loyalty programmes which may be driving that price sensitivity.”
Perhaps the most counter-intuitive finding from the study relates to the use of coupons among loyal customers. “Marketers are always concerned about rewarding their best customers, but we have shown over and over that if you reward your best buyers, it produces the best return on investment and lifetime value, rather than trying to get other brands’ buyers to switch,” says Petty.
The study found that consumers who are part of a CRM programme are 19 per cent more likely than the average to be very price sensitive, making them responsive to coupon offers, although they are not the most avid users of such discount offers. Notably, these loyalty programme members are 70 per cent more likely to buy the brand using a coupon than other consumers.
According to Petty, this disproves the theory that price offers erode the value of regular buyers: “If you send a coupon to somebody who is a loyal brand buyer, CPG brands think that is giving away margin because that person would buy anyway. We’ve seen that even the most loyal buyers do also buy other brands if they are on price promotion, so rewarding them keeps you top of mind and rewards loyal behaviour. We have seen a positive ROI for that time and again.”
Anybody in the UK who has a Tesco Clubcard will recognise the truth of this statement - reward and redemption have become embedded in shopping behaviour as drivers of loyalty, rather than switching. Dunnhumby’s research shows that these loyal, very price sensitive shoppers actually spend 14 per cent more than average and are 36 per cent less likely to switch.
This is not a theory, it is a finding that has been proven time and again. “We always take a test-and-learn approach to look at what is working or not,” says Petty. “We get to see that quickly because people are in store every week and are buying regularly. That allows us to extract the data, analyse it, give the results to the client and re-run a campaign in a short period.”
In a further finding that runs against what most marketers would assume, consumers who seek deals via Twitter and Facebook may be price sensitive, but they are also some of the brand’s best customers. Those who are advocates of a brand in social media are more loyal and spend more, despite looking for the best price. Rather than seeing promotions and social media as tools for getting switching, it seems as if they may be a new tool in the ever-challenging CRM process for highly-competitive brands.