Famously, Germany has up to now severely limited the use of sales promotion in general, and offers or discounts in particular. The maximum discount has traditionally been of the order of 3%. An offer or premium could be in the value only of one-two Deutschemarks.
Recent legislation has begun the process of liberating the rules. This affords the opportunity to observe and perhaps participate in a unique marketing experiment.
The German economy is stagnating, with GDP at best flat, consumer confidence low and unemployment on the rise. As evidence, Europe's biggest retailer Karstadt-Quelle just announced a decline in annual sales by 1.7% to €15.8m (£9.9m) in 2002. Only the e-commerce division posted an increase, a significant 50%.
Can marketing play a more significant role in changing behaviour and activating consumers? What role should promotions play within the marketing mix? How will that marketing mix change in the future?
There is clearly potential, in particular in couponing. In the first 10 months of 2002, coupons amounting to €289m were distributed, mostly in-store. The volume is low compared with other markets but the redemptions are high at 26.7% -- even though the current average value of a coupon in Europe is 79 cent versus only 37 cent in Germany.
There is no doubt that the German consumer will embrace the new opportunities. Last year, a study by the University of Mannheim confirmed that only one in every eight consumers is using coupons, compared with more than four out of five in the US. The outlook is brighter, with 44.5% of German consumers saying they would change retailer to use the coupon offer and 42.3% saying they would change their brand.
The new rules permit premiums, discounts and promotions with a reasonably flexible set of criteria. Many marketers have jumped in, in particular the fast food chains and consumer marketers from companies such as P&G, Nestle, Coke and Pepsi.
The rules are still being tested. When the euro was introduced, retailer C&A offered all customers (whether in their loyalty program or not) a short-term 20% discount across the board. It was a big success, but resulted in a fine for C&A. It is still the case that in order to be legal, offers such as promotions should be either seasonal or closing-down offers.
But the German government is about to expand the laws more and more.
How should marketers take advantage of the new opportunities? How will expenditure on promotions, discounts and coupons effect other marketing channels like advertising, direct and interactive?
The opportunity open to German marketers is to avoid the twin errors of promotions as silo-ed activity, and of promotions without integration and continuity, and to establish with the German regulators a prima facie case for more freedom based on consumer knowledge. Why, and how?
In the US and UK in particular, where promotions are well established, the business of conceiving, creating and managing their execution has been an aspect of marketing in its own right. Companies have sales promotion managers and departments, and there is a whole industry category of sales promotion agencies.
Or at least there was. In the more developed markets of the US and the UK, sales promotion is gradually merging with direct marketing to form a more integrated communications offering. The trend is clear: agencies are either merging or developing wider skills. Even the representative industry organisations in direct and promotion are merging. The learning is that promotions can not operate separately from the other marketing communication disciplines.
And the underlying reason is that sales promotions that do not integrate with other communications, or drive repeat business and brand-building, are a waste of money. It is more than 25 years since David Ogilvy, in 'Ogilvy on Advertising', referred to the advertisers who wasted money on coupon distribution as 'bloody fools!'.
The key is distribution and targeting. The German legislators, attempting to protect smaller businesses from unfair competition, are attempting to retain maximum levels of promotion and discount, and their timing. The smart marketers, however, will maximise the impact of promotion and discount by targeting them to the value of the individual consumer. The science of customer lifetime value calculation enables marketers to determine, relative to the potential value of the consumer, the acceptable level of investment in a behaviour-changing campaign and so in the offer made to the consumer.
The proclamations of the regulators are irrelevant to the intelligent use of discounts and coupons. The secret to success for marketers lies in the fusion of targeted promotion with data-based marketing. Companies should not establish separate sales promotion functions. Agencies should not establish separate sales promotion divisions.
And to the inevitable question about the potential for data-based marketing in Germany given its tight data protection laws (the model for the EU directives), the answer is simple. Data protection anticipates the broad development of the idea of permission as the acceptable context in which to capture and use individual consumer data.
German marketers will be making an error if they see promotions per se as a way to activate the dormant German consumer. The solution lies with database marketers, and the opportunity to promote by customer will significantly grow the potential for direct and interactive marketing.
Please write with feedback and opinion to Stewart Pearson
Wunderman is a Y&R Group company and member of WPP.
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