Imagine for a moment there are two luxury car brands. Let’s call them…oooh, I dunno…Mercedes and BMW.
Let’s imagine both are facing a downturn in sales as inflationary pressures bite into household expenditure, and customers think they’ll delay renewing their existing model for another year. (No idea if this is true, by the way, but it’s not hard to imagine).
Sales fall, profits fall, and there’s pressure on both marketing departments to drive more traffic into showrooms. The marketing budget is fixed, so any investment in increased sales activation (dealer mailings, showroom promotions) has to come out of brand spend (outdoor, TV, glossy press).
Let’s imagine that one brand (let’s say BMW) cut and run – all brand spend is cut, and all the saved money goes into sales activation.
The other (Mercedes in this case, but obviously it’s just an example) maintain a balance of brand advertising and sales activation.
Question: what happens to sales, profit, and profit margins for each brand in the short, medium and long term?
My hypothesis is that in this case, BMW see an initial increase in showroom footfall relative to Mercedes. Brand advertising is great at penting up long-term demand, but sales activation is much better at releasing it. BMW’s showroom footfall is maintained and converts to sales at a decent premium. Mercedes sales stagnate by comparison. BMW win the short term.
In the medium to long term, however, something different happens.
Mercedes, through persistence in brand advertising, maintain a reputation for being an upmarket manufacturer of desirable cars, and its sales managers – whilst struggling for volume – are able to hold their price at a premium to mid-market dealership brands.
After a while, though, BMW’s dealerships find it harder to maintain their traditional margins as there is no brand advertising to fuel consumer desire.
And so over time – and it might be several years – the allure of the BMW brand becomes a little less attractive than Mercedes for those seeking a luxury saloon experience. With no emotional hook to hang its brand on, fewer and fewer consumers associate the letters B, M and W with “the ultimate driving machine”, and consumers still looking for an upmarket saloon to park on the driveway drop BMW from their brand repertoire and gravitate to Mercedes.
Eventually, BMW end up as a manufacturer of cars that are high-end in terms of cost of production, but their dealers are far less able to charge a high-end price for them.
Without brand advertising to drive headline demand, the efficacy of BMW’s short-term sales activation activity also becomes weaker, as there is less and less pent up demand to activate. Prospects who are persuaded to turn up at BMW showrooms are less inclined to pay a premium to own one.
And so in the long term BMW’s sales AND margins fall.
A company’s share price is a reflection of the stock market’s view of a company’s ability to generate *future* sales and profits.
A single quarter’s sales shortfall may not be greeted with cheer by the stock market, but I’d argue that a continued quarter-on-quarter decline in margin as a brand is unable to maintain its premium pricing position is seen as something worse. Something that is far harder to correct.
Yes, short-term promotions can shore up a hole in a single quarter’s sales figures. But for long-term margin retention, marketers need to try and hold their nerve and maintain investment in comms that persuade people to pay more than they might need to to acquire the more desirable product.
Now this is only a thought experiment: in the real world the choice of luxury car isn’t a binary one, nor are the brand vs activation budget options, and of course there are a whole range of other variables at play.
But perhaps if you’re a CMO who’s under pressure to divert significant brand spend into sales promotion, you need to remind your CFO that there’s a reason successful upmarket brands with the longevity of BMW don’t plaster the press with “Sale Now On!” ads.
It’s because they’re not that stupid.
The above thought experiment is couched in consumer marketing terms, but only because the two consumer brands I picked on are universally known.
But if you’re a B2B marketer, the same principles still apply.
At its simplest, your B2B brand is the thing that you have a market reputation for.
If you want to give your brand the reputation for being the cheapest on the market, go fill your boots. But it will come back to bite you.
Hold your nerve.
Whilst your sales managers might feel that procurement managers are always looking to beat them up on price, in truth there isn’t a procurement manager on earth who would proudly proclaim “I hired them because they were desperate!”
Investing in your brand gives your sales team a reason for prospects not to buy on price.
Give your company a reputation for offering something that creates margin for you and value for your customers. Apply sales activation wisely.
Otherwise that sale you’re planning may well be your last.
“Everything must go!” indeed.
The above is a scenario from the B2C world, but if you’re a B2B marketer and want to conduct research into what potential buyers might value in your own proposition, please do get in touch. Although based in the UK, I work with clients internationally.