P.T. Barnum On The Importance of Promotion … Does It Have To Be Price Promotion?

Illustrating the point

It’s the make-or-break holiday season for retailers and consumer brands, and the words “promotional environment” are everywhere. Categories like footwear and apparel, which are both seasonal and often discretionary, seem to be particularly sensitive to “how promotional” to get in this environment. Even brands like Lululemon, who take pride in a “no discounting” mantra, face questions on earnings call about the impact of promotions, both theirs and their competitors. Mainstream footwear darling (and lower price point) brands like Crocs can’t get out of their earnings calls without at least 10 mentions of promotion-related topics.

What did “promotion” mean then, and what’s the relation to price promotions today?

So does this mean that timeless showman, politician and promoter P.T. Barnum had it right?  Let’s be careful here … to illustrate the point we must first agree on what the point was.  “Promotion” is not the same thing and does not automatically involve “price promotion.”  For the businessman of the 19th century, “promotion” would have meant everything that would make customers come: advertising, word of mouth, sensationalist claims combined with true entertainment value (which, in circus as well as in politics, is typically all the customer value one should expect to receive). Most likely, rather simplistic pricing with low price points to draw large crowds were also understood as “promotion.”

Though it’s been a longish time since the 19th century, the balancing act between creating customer value, influencing the customer’s “perceived” value, and charging a price that captures as much as possible the willingness-to-pay (WTP) remains. While customers today have a lot more information about quality, prices and competition, brands and retailers also have much more sophisticated tools and strategies to help them deploy “promotion” of all kinds.

To begin, some brands make price promotions an “inevitable” part of their strategy, whether in CPG, apparel, footwear, other consumer durables, or electronics. The move towards online shopping and price-comparison sites and price-match guarantees have made it harder for brands to hold the line in relatively commoditized categories or subcategories.  

Price promotions pressure in the current environment

In the current environment, several factors conspire to increase the pressure to deploy price promotions:

• Many brands have taken significant price increases in the last two years, often supported by constrained supply chains that limited supply during the pandemic, and by pent-up demand in some categories of the stay-at-home economy. Initially, consumers went along and paid up, with price elasticity softened by excess stimulus cash and decline in other spending categories in the economy supporting higher WTP.  But as some of those abnormal conditions are normalizing or reverting to the mean, consumers are less amenable, and both willingness and even ability to pay retrench.
• There’s been a inventory whipsaw, with brands and retailers placing much larger orders during the pandemic to try to gain control over enough supply, lower costs per unit, and manage down the impact of exploding freight costs. Together with shifts in consumer demand patterns and categories of focus as Covid re-opening and return-to-work took hold, this resulted in abnormally high inventory levels, often for categories or models of goods that consumers have declining need or appetite for.  Especially for perishable or seasonal goods, the pressure to mark down or face total write-offs whipsawed right back. Witness shockingly bad quarters at Target and Walmart, among others, in the last few months.
• Even premium, differentiated brands face some pressure when their lower-value competitors go into deep promo / markdown mode.  While the use value of a $100 Lululemon pair of tights should be the same, the willingness to pay will change for at least some consumers if a cheap competitor that sold passable quality tights for $40 now sells them for $20.  While Lululemon held the line fairly well on pricing “given the promotional environment”, it still had to guide lower for overall 2022 earnings, most likely driven by expected slowing volume growth.  The market promptly sold off the stock from the $380s to $320s range, a drop of about 15% from its admittedly lofty valuation.