Promotional pricing is one of the most powerful sales strategies there is. Prices can be reduced by a percentage amount for a limited duration and an item is therefore deemed to be in a Sale. This helps to increase the demand for the product from price sensitive consumers. Many businesses will offer promotional pricing as a sales incentive when initially launching a particular product line.
It should be an informed decision by a business to give price discounts on particular products or brands – and not one to be made lightly. Calculations must be done in order to assess the feasibility of any discount and the time period for the offer. The rationale behind giving a price discount is that any loss experienced will be compensated for by the increase in sales volume and attracting new customers.
Retailers often use loyalty cards to manage discounts and promote rewards. The strategy here is to encourage more purchasing in order to earn points. They may also offer discount coupons to those in the loyalty scheme – or to all their customers.
Types of Promotional Pricing
Buy one get one free
A common retail promotion is buy-one-get-one-free, or BOGOF as it is colloquially referred to. This strategy is widely used both by manufacturers and retailers to gain market share and attract customers to a product, shop or a brand. Manufacturers use this technique to make customers aware of a particular product line or service.
For retailers, instead of one particular product or brand, the offer may be given on many products throughout the store so as to get the consumer to buy a variety of things from the shop that perhaps they had not initially intended to buy – and encourage future loyalty. Similarly, companies may offer promotions such as buy two, get a third one free
One flaw associated with this technique is that consumers may stock up on the product during the promotional period and be able to "survive" without making a new purchase for some time. The price promotion might also affect the brand equity as well – in the eyes of the consumer it loses its premium status and becomes just like any generic product.
Money off coupons have long been and remain the most commonly used form of price promotion. The coupon will be offered to consumers through newspapers/magazines, the Internet or via email.
By offering the discount in this format, the company only provides the discount to customers who produce the coupon. When customers come into a shop without a coupon they don't get the deal. Coupons are another way to introduce loyalty to a brand at its early stages.
This is the most simple type of price promotion method. A shop will simply advertise an amount-off or percentage-off point-of-sale discount. Once a discount has been decided upon, employees change the product barcode price and/or the price tags - and probably signage throughout the store. The point is to convey better value because of the lowered price. Companies often promote an in-store discount through email or newspaper inserts, as well as posters in shop windows. In some cases, the deals are offered as a surprise in-store special to encourage more spending.
Rewards are offered for being a part of the scheme and the more the customer spends the more points they accumulate, which leads to greater rewards. Sometimes the reward sheme is tailored/customised to the individual customer, e.g. SPARKS at M&S, with offers on goods and services which that customer is most likely to want, need or purchase.
Tiered loyalty schemes work best for high commitment, higher price-point businesses like airlines, hospitality or insurance companies.
What about the B2B market? Well, it should come as no surprise that price promotions are also offered here. Businesses that buy for consumption receive similar incentives to consumers. Trade buyers that purchase products from suppliers for resale receive several distinct price promotions. Percentage off promotions are offered on a given order and bulk buys are a common trade market incentive. Companies that order larger quantities get volume deals, such as 10 to 20% on a certain minimum order size.
Additional Forms of Price Promotion
Sales promotion can also use more subtle forms of price discounting, such as offering free financing.
You might run some form of competition to draw attention to your product. Free gifts can work well - the trick is to find a gift that is inexpensive but at the same time attracts customers. A related form of sales promotion is based on a tie-in with another product (such as a new film) or a good cause.
The Benefits of Promotional Pricing
Increased Customer Traffic
Promotional pricing can be a strong incentive to attract the budget-conscious customer. Retailers commonly offer store-wide promotional events intermittently or periodically to attract customer footfall in the hope that these customers will purchase more because of the deals and will hopefully maintain an ongoing relationship with the store beyond the promotional period.
Increased Value Perception
A promotional pricing strategy also carries strong psychological weight in the value-oriented market. Placing a red sales tag on a product causes a good proportion of customers to perceive that it is cheaper than they could buy elsewhere – and that it is definitely less than the original asking price.
The reality is that some sales promotions offer only slight discounts off the usual price – which might have been higher than what a competitor charges anyway. However, if the price is perceived as good value it will allow for more sales and provide a decent profit margin.
Promotional pricing is often used to drive more revenue into a business and to improve cash flow in the short term. If a business needs an injection of cash to cover short-term expenses or debt commitments, they often turn to promotional discounts.
Sometimes they use promotional pricing to maintain consistent and steady revenue growth to appease company owners, analysts and shareholders. Retailers hope that the influx of new customers will continue when the promotional discounts are removed.
Retention and Loyalty
A promotional pricing tactic can be used to retain customer loyalty – to reward loyal customers for frequent purchases and to encourage their future purchases. Coupons with money-off offers, increased points on their loyalty cards – and customised discounts on items that are specific to particular customers. Rewards programmes encourage more-frequent buying in order to gain future perks/discounts or promotional gifts. The idea is to keep a customer coming back for more.
Pricing incentives are generally intended to bring in customers, drive revenue and cash flow and turn over stock. They should usually be considered as a short-term approach for companies, though some retailers use recurring promotional pricing as a way to maintain ongoing purchases from price sensitive buyers.
While excessive use of sales promotions and discounts can cause a price orientation in customers, this technique does offer many benefits when used effectively. Clear objectives can help you understand which sales promotion ideas will work for you and how they fit with your other marketing activities such as advertising.
You should also think carefully about how sales promotions affect your brand. Too frequent price discounting or a poor quality free gift might devalue your brand. On the other hand, a well-planned loyalty scheme could both strengthen your image and provide you with useful data on your customers' purchasing behaviour.
- Pricing Strategy: how to price a product, Bill McFarlane 2012.
- Pricing Strategy: setting price levels, managing price discounts and establishing price structures, Tim Smith 2011.
- Pricing with Confidence: 10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton 2014.
- Pricing Strategy: tactics and strategies for pricing with confidence, Warren D. Hamilton 2014.