Promotional Pricing

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    You may have come across similar attention-catching promotions. Promotion pricing is one of the best pricing methods to attract customers. But is it always beneficial to businesses? All promotions are not the same. How do companies decide on promotional prices? Let us learn more about it.

    Promotional pricing, black friday sale, StudySmarterPromotional Pricing, Pexels

    Promotional Pricing Definition

    Businesses want to sell their products as quickly as possible. Selling products reduces maintenance costs and shelving costs. Also, businesses need to quickly sell products approaching their expiry date to avoid complete loss of resources from unsold goods. Hence, businesses usually apply sales promotions on goods to increase demand.

    For online businesses, increasing website traffic is imperative. These businesses use promotional pricing to attract customers to their websites.

    You may have noticed that not all products are sold at promotional prices. Some new products or products with high demand are sold at listed prices only. But if we look at promotional products, they are always sold at a price less than the listed price.

    Another method of promotion is adding freebies to the product. Some retailers may offer free delivery, installation, or complementary products to reduce the indirect burden on the customer. For example, a customer will prefer buying a TV from a dealer who offers free wall mounting over one that does not.

    You may have observed two critical factors in promotional pricing: adding value and short duration.

    Hence, promotional pricing is defined as follows.

    Promotional pricing is a pricing method where businesses temporarily reduce the price of certain goods and services below the listing price to attract more customers.

    Amazon Prime Days have gained popularity over the years. You may know that it happens every year and lasts only two days. Prime members of Amazon are offered additional discounts with Prime membership benefits. A tight time limit to catch the deal creates a sense of urgency in customers. They notice the product and feel that if they don't act fast, they may have to pay more later. Here, promotion pricing attracts cost-sensitive customers.

    Promotional Pricing Types

    There are many ways businesses try to attract customers. Promotions are also of different kinds. Businesses choose one, two, or various promotions per their marketing strategy. Here are some promotional pricing types.

    1. Discounts: Some items are offered at a reduced price if bought in bulk or if nearing expiry. You may observe 'reduced' prices in supermarkets on vegetables or ready meals at the end of the day. Buy one get one half price is an example of discounted bundle pricing. The customer receives a 25% discount in this deal, but a psychological effect is created by the 'half price' promotion that depicts 50%.

    2. Flash and seasonal sales: Flash sales offer discounted prices for a short time. Flash sales are random and may apply only for 2 to 3 hours. On the other hand, seasonal sales are around the same time each year and last for days or weeks. For example, Amazon runs flash sales that last a few hours daily. Similarly, most grocery stores in the UK will sell chocolate eggs and rabbits after Easter at promotional prices.

    3. Loyalty programmes: Most large businesses offer loyalty programmes. It is cheaper to maintain a customer than acquire a new customer. Loyal members of the programme get access to special deals. For example, Amazon Prime members get free delivery on Prime products.

    4. Coupons: Companies provide coupons to motivate customers to return. An example could be 10% off your shopping, above £50. Now, to grab a discount of 10%, the customer will at least provide a £50 revenue to the business.

    5. Free delivery: Free delivery indirectly reduces customers' costs. The customer does not have to arrange for transport and worry about moving goods. It is particularly attractive for customers of furniture or large home appliances businesses.

    6. Gamified promotion: Some online e-commerce websites have gamified promotions. A customer has to take part in a lucky draw or provide feedback to get discounts. Gamified promotions actively involve customers, and motivated customers may receive discounts.

    7. Multi-stage validation: Many loyalty programmes provide customers with membership cards. Customers can earn loyalty points when they shop with a brand or group of brands. Once they have accumulated a certain number of points, customers can use them to get promotional prices. Credit cards providing cashback is an example of a multi-stage validation pricing strategy. The customer qualifies for the offer if the customer holds a particular credit card.

    In multi-stage validation, only qualifying customers get the promotional price.

    Promotional Pricing Techniques

    A key to successful promotional pricing is a detailed requirements analysis and planning. The primary promotional pricing technique successful brands use is as follows.

    1. Decide the objective of promotional pricing

    A business must decide what it wants to achieve by implementing promotional pricing. Is it to clear inventory or attract more customers?

    Many businesses use promotions to keep customers engaged.

    Not all businesses can have the same strategy. As per the type of industry, the organisation needs to answer some questions like:

    • Will promotional pricing affect brand value?

    • Do I have enough resources to implement a promotion?

    2. Plan implementation of a strategy

    The first step of the planning stage is to self-examine - decide what products need promotional pricing. Is the product new and wants to secure a place in the market or old and needs stock clearance? Will the promotion be national or local? Once marketers have answers to these questions, the business must decide on the promotional channel. Will promotional pricing be available in online shops, physical stores, or both? What kind of promotional pricing will we use? Will it be free shipping, buy one get one free, or another type of promotion?

    3. Choose the right time

    Festive seasons and holidays are usually times when many businesses offer promotional pricing. Some companies may swim in the opposite direction and offer promotions when no other competitor is. Along with the time of promotion, businesses also need to decide the duration of the promotion.

    4. Select the correct customer segments

    Promotional pricing can damage relationships with old customers if the business regularly targets new customers via promotions. You may have seen that some companies have a condition for getting a discount, e.g., 'new customers only'. A loyal customer may want to switch to a competitor if he sees regular promotions like this.

    Another important point businesses need to remember is how continuous promotions represent them. If a business positions itself as a premium one, ongoing promotions may harm brand value, and the brand may lose customers from the high-income segment.

    5. Decide a fixed budget

    Businesses need to decide how much they can spend on promotional pricing. Costs vary according to the type of promotional pricing chosen. Generally, they include the marketing costs of promotional pricing, new customer acquisition costs, etc.

    6. Collect feedback

    Last but not least, businesses should collect feedback to gain insights. Companies can collect data during the promotional period and decide whether to cut it short or extend it. Other valuable metrics that analysts can track are revenue generated, frequently bought items, the time it took to make a decision, etc.

    The Advantages and Disadvantages of Promotional Pricing

    Almost all brands use promotional pricing in one way or another. Here are some advantages and disadvantages of promotional pricing.

    Advantages of Promotional Pricing

    1. Motivates buying action: Promotions create a sense of urgency because of the strict time frame. Hence, customers are motivated to buy the product out of fear of missing out.

    2. Attract new customers: Promotions are the best way to attract new customers. Customers are motivated to try new products and services without any pricing barriers.

    3. Competitive advantage: Low prices give a brand a competitive advantage. Most customers will always choose a discounted price for a similar product if given a choice.

    4. Clear inventory: Promotions are a great way to clear old stock. Old merchandise may need to be destroyed if not sold over a specific time, leading to a loss in revenue.

    5. Improve customer loyalty: Businesses offering special prices to frequent buyers are likely to have a high customer retention rate.

    6. Publicity for a new product: Promotions attract new and old customers. If newly launched products are on promotion, products will gain popularity quickly.

    Disadvantages of Promotional Pricing

    Promotional pricing is a pricing strategy. If not exercised carefully, strategy can adversely affect customer relations. Here are some disadvantages of promotional pricing.

    1. Changed price perception: If offered promotions regularly, customers may think that actual prices are low, and promotions are used as a trick to force customers into buying.

    2. Affect brand loyalty: Loyal customers may feel betrayed if the brand stops offering regular discounts. They may switch to another brand or wait until the business introduces a promotion. Additionally, if a company fails to keep its promise, it may lose customers and face legal action. Promotional pricing is not illegal, but using promotional prices to trick customers into buying is. Hackers use phishing attacks in the disguise of promotions.

    3. Demographic confusion: Consider a brand with a target demographic of high-income individuals. If that brand starts offering discounts, customers may perceive the brand as serving low-income individuals. Hence, the brand image becomes hampered.

    4. Price over quality approach: A brand that offers regular promotion may be perceived as a low-quality brand. Customers may not value the brand's quality if it provides constant discounts.

    5. Promotion cost: Businesses need to market promotions to work effectively. People will not buy the product if they don't hear about the promotion.

    Promotional Pricing Examples

    Some businesses have successfully implemented a promotional pricing strategy. Let's take a look at some examples.

    Amazon Prime Day

    Promotional pricing, Amazon prime, Genuea pig, StudySmarterAmazon promotional pricing, Pixabay

    Amazon Prime Day should be considered as significant as Black Friday Sales. Amazon started Prime Day in 2015, and since then, Prime day sales have increased yearly. Amazon said that it sold around 300 million items worldwide in two days. An estimate is that In 2022, Amazon Prime day sales will reach $12.09 billion, a modest growth from last year's $11.19 billion1. So, what did Amazon do right?

    1. Amazon has revolutionised the way people shop. Amazon has offered massive discounts on their own branded products like Alexa, Kindle, and Amazon Music but also features marketplace sellers in Prime Day sales. Marketplace good sales have increased by 11.7% over the year compared to a 6.7% increase in Amazon's own branded and private-label goods.1

    2. Another critical aspect of Amazon Prime Day is only Prime members can get access to these deals. Amazon rewards loyal customers and motivates new customers to become Prime members.

    3. Amazon had probably anticipated a surge in orders during Prime Days. The company prepared and delivered orders in the promised timeframe.

    Udemy

    Udemy runs promotional pricing at least nine times annually for 2 or 3 days. Apart from that, new customers get a joining offer. Udemy offers almost 80 to 90% off on course fees as a promotional price. Even so, Udemy has 40 million learners in 180 countries worldwide. What did Udemy do right?

    1. Udemy decided to sell in quantities rather than price. A student who wants to learn a new skill may not spend £200 on an online course but will take it for £20.

    2. Udemy captures new customers with offers and continues offering similar deals to old customers.

    3. Udemy instructors can put a course on discount, meaning instructors can participate actively in promoting their courses, which in turn stimulates the Udemy platform.

    Once a business has a solid foundation of market research and competitor analysis, it can form its personalised promotional pricing strategy. Learning from feedback is essential. Once a business masters its strategy, this short-term pricing strategy can become long-term, like for Amazon and Udemy.

    Promotional Pricing - Key takeaways

    • Promotional pricing is a pricing method where businesses temporarily reduce the price of certain goods and services below the listing price to attract more customers.
    • A tight time limit to catch the deal creates a sense of urgency in customers.
    • The types of promotional pricing include:
      • Discounts,
      • Flash & seasonal sales,
      • Loyalty programmes,
      • Coupons,
      • Free delivery,
      • Gamified promotions,
      • Multi-stage validation.
    • It is cheaper to maintain a customer than acquire a new customer.

    References

    1. Young, Jessica (July 14 2022)- Amazon Prime day 2022 sales top $12 billion- Digitalcommerce360
    Frequently Asked Questions about Promotional Pricing

    What is an example of promotional pricing?

    Promotional pricing can take various forms. For instance, discounts, flash sales, seasonal sales, coupons, gamified promotions, etc., are all examples of promotional pricing. 

    What is the advantages of promotional pricing?

    The advantages of promotional pricing are as follows; it motivates buying action, helps attract new customers, can create a competitive advantage, may increase customer loyalty and could also provide a source of publicity for new products.

    What does promotional pricing mean?

    Promotional pricing is a pricing method where businesses temporarily reduce the price of certain goods and services below the listing price to attract more customers.

    How are pricing promotions used to change demand?

    Pricing promotions are used by businesses to increase demand for a product in the short term. Promotions can be used to motivate customers to act quickly and purchase before the promotion expires. 

    Is promotional pricing illegal?

    Promotional pricing is not illegal, however, companies should always make sure to use ethical promotion tactics and adhere to local marketing laws and regulations when employing promotional pricing. 

    Test your knowledge with multiple choice flashcards

    Promotional pricing is a ________ pricing strategy.

    Which of the following is not a type of promotional pricing?

    Which of the following tasks are not necessary for the promotional pricing strategy?

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