Answer:
Promotional pricing is a sales strategy in which brands temporarily reduce the price of a product or service to attract prospects and customers. By lowering the price for a short time, a brand artificially increases the value of a product or service by creating a sense of scarcity. Promotional pricing can help with customer acquisition by encouraging cost-conscious shoppers to buy. It can increase revenue, build customer loyalty, and improve short-term cash flow.
A promotional pricing strategy works best in the short-term. Used excessively, it costs brands money by eroding profit margins. Customers become accustomed to lower pricing—so-called “price orientation”—or they may stock up during the promotional period. It also adds to the noise in an already-crowded marketplace where promotions and discounts are commonly used.
How Is Promotional Pricing Used—And by Whom?
Promotional pricing is a popular strategy for consumer brands, including retailers, airlines, gyms, restaurants, and service providers. B2B companies also use their own variety of promotional pricing. Brands use promotional pricing to:
- Create buzz when launching a new product or service.
- Reward loyal customers.
- Increase customer traffic.
- Encourage repeat business.
- Move excess inventory.
Promotional pricing is a popular sales strategy. In fact, 80% of marketers say that promotions and discounts are important in their customer acquisition strategy.
Yet the popularity of promotional pricing actually devalues a brand when it’s overused. Most marketers use mass discounting tactics—they offer the same promotions to everyone, creating even more noise in a crowded, competitive marketplace. Instagram has 2 million active advertisers, and digital marketing experts estimate that most Americans are exposed to 4,000 to 10,000 advertisements a day.
A survey found that when it comes to customer acquisition, nearly 1 in 4 marketers—the most respondents among six categories—say differentiation from competitors is their most challenging problem. The urgent need to stand out is driving more frequent promotions across industries, but in a marketplace overrun with competing ads, they’re inadvertently adding to the noise.
Promotional Pricing Types & Examples
A promotional pricing definition or promotional discount definition covers a wide range of promo pricing tactics, including:
- Buy One Get One Free (BOGOF). To celebrate Youth Soccer Month, Chipotle customers who wore a youth soccer jersey could “score” a buy-one/get-one-free entree or kid’s meal during Labor Day weekend.
- Coupons. A coupon is a voucher entitling the holder to a discount for a particular product. TackleDirect, a brand that sells fishing gear, offers coupons to people who abandoned a shopping cart. Researchers found that the average cart abandonment rate is nearly 70%.
- Flash Sales. For a very short time—sometimes just hours—brands will slash their prices to unload excess inventory, acquire customers, or lift profits. Travel brand Globus boosted flash sale success by 20% by offering personalized promotions to the military. The company’s personalized promotion strategy reduced coupon abuse by 35% and took 75% less effort and resources to implement.
- Loyalty Programs. A loyalty program is a rewards program a company offers to its customers who frequently make purchases. Since it costs five to 25 times more to acquire a new customer than it does to retain an existing one, loyalty programs are a popular type of pricing promotion. The Virgin Atlantic Flying Club allows members to earn points that move them up to different tiers. The higher the tier, the greater the benefits.
- Seasonal Tie-Ins. Certain times of the year, such as Black Friday, Cyber Monday, or Veterans Day are a good fit for promotional pricing. U.S. News & World Report offers a shopper’s guide on the best months to find the best deals.
(Hint: Memorial Day is prime time for appliance shopping.)
- Segment-Specific Promotions. An effective promotional pricing example targets certain buyer segments, such as students, teachers, seniors, or the military. Cheap Caribbean, a travel company that provides low-cost luxury vacation packages in the Caribbean, Mexico, and Central America, offers gated, personalized promotions to nurses. When the brand launched its first nurses program, it brought 8,000 new nurses into its travel club and reduced fraud by 36%.
How to Calculate the Best Promotional Pricing for Your Business
To avoid devaluing their brand, marketers should assess the feasibility of a discount and the length of the offer before setting a promotional price. A New York Times article lists three factors for determining if Groupon—possibly the most extreme form of promotional pricing—is a good strategy for brands:
- The Type of Business. Is there the capacity to support a huge spike in business? Does discounting align with your brand position? If you are a premium brand like Apple, you only discount select products at certain times of the year, such as laptops for during the back-to-school season. If you are a value brand like Kohl’s, a discount strategy might be one of your brand’s core attributes.
- Branding. Would offering a large discount damage the brand?
- The Math. How do the numbers add up? Eight critical calculations include:
- The incremental cost of sales (the actual cost percentage for a new customer)
- The amount of the average sale
- Redemption percentage
- Percentage of coupon users who are existing customers
- Number of coupons each customer buys
- Percentage of coupon customers who become regular customers
- The advertising value of promoting the business to a large number of people
- The normal customer acquisition cost through advertising
Another key calculation is the repeat purchase rate of a newly acquired customer. Frequent discounts condition a brand’s consumers to wait for a reduced price they know will eventually come. A promotional pricing strategy is successful only when it helps a brand acquire high-value, repeat customers who aren’t conditioned to expect discounts. The best promotions are selective, targeted, and strategic.
