Promotional Pricing: Advantages and Disadvantages

3691 words (15 pages) Essay in Finance

23/09/19 Finance Reference this

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Promotional Pricing

 

Table of Contents

 

 

Introduction ………………………………………………………………………………………4

Why use promotional pricing? ………………………………………………………………………………………….5

Promotional Pricing Strategy……………………………………………………………………..5

Brand Awareness …………………………………………………………………………………7

The advantages of using promotional pricing ……………………………………………………8

The disadvantages of using promotional pricing ………………………………………………..9

Promotion Types ……………………………………………………………………………….11

Promotion Cost vs. Lifetime Value ……………………………………………………………13

 

Abstract

 

In the marketing mix after the product, the second most important factor is the kind of price that is being used. Before stablishing a price, there are some factors that have to be taken into consideration and current market supply and demand, political and economic impacts and also competition levels guide those factors. The major focus should be in obtaining the correct price level during the price planning process where the sales and profits can be increase to the maximum, which will be up to your own marketing goals and objectives. There are several main types of pricing, however in this paper I will concentrate in doing an introduction of promotional pricing. Promotional Pricing is a sales promotion strategy in which the company brings down the price of an item considerably for a very small period of time. 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. At the beginning when introducing a specific product line, many companies will give a promotional pricing as a sales motivation. Giving a price discount should be an informed decision by a company on a specific items or brands. There are several advantages to business that use promotional pricing and increases the sales of those products. Bringing new buyers is the main advantage of promotional pricing, additionally, it aids in growing the cash flow of the business and also assist to increase the demand of the merchandise; promotional pricing is a very effective strategy.

Introduction

Marketing includes a very important concept that is marketing mix; it has four major components that are promotion, people, price and place. Nevertheless, in the marketing mix after the product, the second most important factor is the kind of price that is being used. This is because the distribution and the promotion mix can be modified by the kind of pricing being used. It can be an enormous job to set up the correct price for products and services while establishing a new company and it could be equally for a company that has year of existence on the market. The problem could be that if prices are set too high, the risk may be losing customer or customers may not be interested in the product at all. If prices are set to low, the risk may be not return on the investment and extremely low margins. Before stablishing a price, there are some factors that have to be taken into consideration and current market supply and demand, political and economic impacts and also competition levels guide those factors. The major focus should be in obtaining the correct price level during the price planning process where the sales and profits can be increase to the maximum, which will be up to your own marketing goals and objectives. There are several main types of pricing, however in this paper I will concentrate in doing an introduction of promotional pricing, why to use promotional pricing?, promotional pricing strategy, brand awareness, The advantages of using promotional pricing, Promotion Types and Promotion Cost vs. Lifetime Value

Why to use promotional pricing?

Let’s firs understand that Promotional Pricing is a sales promotion strategy in which the company brings down the price of an item considerably for a very small period of time. According to McCormick (2016), “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”.

At the beginning when introducing a specific product line, many companies will give a promotional pricing as a sales motivation. Giving a price discount should be an informed decision by a company on a specific items or brands. Loss suffered will be compensated for by the growth in sales amount and at the same time attracting new customers is the reasoning why giving a price discount. Therefore calculation have to be done to assess the possibility of giving a discount and for how long they can give this offer.

Often business use loyalty cards to give discounts and approve rewards, also offering discount coupons to whom is in the loyalty plan. This approach encourages customer to make more purchases so that they can earn more point.

Promotional Pricing Strategy

Promotional pricing is similar to bundling price, however, here the merchandise are put together so as to make the client use the bundled merchandise for the first time. To buy one product and get a new kind of product for free is what this kind of pricing concentrates on. Moving old supply as well as to increase brand awareness is something that promotional pricing can also be used for.  According to Bhasin (2018), “Brand awareness is actually making the consumer acquainted about a particular brand or product. The availability and existence of a specific brand in the minds of people is very important as we live in a world where people have a tendency to lean towards branded products. It has become vital that most people have at least heard about the brand and recognize it as it can prove to be an asset for the company”.

One thing to remember is that promotions are short term, therefore promotion pricing is intended to offer a temporary increase in the company’s sales by presenting more appealing terms than the regular list prices. Unlike differentiated pricing, which means that different prices for the same item is given in different circumstances. Most people are familiar with cheaper prices for las minute tickets at airports and expensive resorts. To earn greater margins in one out of two possible ways is the goal of differentiated pricing.

The good thing is that promotional prices are open to all customers, unless there is a feasible exemption due to a credit check for an offer requiring better credit status. Nevertheless, promotional and differentiated prices posed the same question: is the extra sales valued more than the cut-price margin per sale? Companies continually test their promotion pricing in order to answer this key question. According to Gray, Thomas (2012), “They introduce it for a narrow slice of the market or products, publicize it, track the additional sales, and assess whether any profit improvement resulted from the discount. When testing, the same cautions apply: be sure to publicize the promotion; be sure to track it fully, and try to determine whether the customer would have bought anyway at the original price”.

 

Brand Awareness

Brand awareness is very important with in promotional pricing strategy because consumer decision about buying a product or not, may very well have to do with the customer’s awareness about that specific brand. More likely, when a customer goes shopping at the market place, the customer may see different brands for a specific item but the customer may definitely buy the item, she/he is more customary with and more recognizable item. Except buyer are aware of a specific brand and its merchandise, it is very difficult for a company to function successfully. Very well-known brands make larger sales amounts compare to ordinary brands selling the same product a cheaper price. This is because buyers are more incline to buy from reputed branded products although their products are priced a little higher, The awareness that has been generated in the buyer’s mind about the brand, it’s the reason why. The greater the brand awareness, the more the buyer will desire to buy that specific item.

 

The advantages of using promotional pricing 

There are several advantages to business that use promotional pricing and increases the sales of those products. Bringing new buyers is the main advantage of promotional pricing, additionally, it aids in growing the cash flow of the business and also assist to increase the demand of the merchandise; promotional pricing is a very effective strategy. Following are some of the advantages of using promotional pricing.

Increases customer traffic – To draw the budget-conscious customer, promotional pricing is used as a strong incentive. To attract customer footfall expecting that they will buy more merchandise due to the deals that businesses frequently offer store-wide as promotional events in the hopes that buyers will become regular clients. 

Increases value perception – There is a heavy psychological influence in the value-oriented market that promotional pricing strategy has. A good number of customers perceive that an item is cheaper than they could buy somewhere else by business placing a red sales tag on an item, which is certainly less than the original price they were asking for. But the truth is that the promotion given was only slightly less the original price, which in reality was higher than other competitors. The reality is that is discounted price is perceived as a good value, it will bring is more sales, which would allow for a good profit margin.

Revenue Growth – To drive more revenue and to increase cash flow in little time into a company, promotional pricing is frequently used. Businesses regularly look into promotional discounts if they need a boost of cash in order to cover short term expenses or debt obligations. Business will maintain consistent and steady revenue growth by also using promotional pricing to keep owners, analysts and shareholders appease. Businesses expect that customers will continue on coming back once the promotional discounts have been eliminated.

Retention and loyalty – In order to reward loyal customers for recurrent purchases and also to motivate their future buys, business use promotional pricing tactics that will assist them to maintain customer loyalty. Money off offers with coupons and customized discounts on products that are especially for specific customer, augments on their loyalty cards. The thought is to entice buyers to continue on coming back for more through reward programs that motivates more purchasing to obtain future perks, promotional gifts and/or discounts.

The disadvantages of using promotional pricing 

Customers would rather wait for a sale than buying a product at full price when they know that their favorite product is put on sale every two weeks. The sales price generates a new margin for ordinary sales of that item, even though the item retail price remains the same. Once the price goes back to the usual, consumers become sensitive to the cost, and this apply to product like televisions to cereal. Also, a great number of buyers who would like to buy high price products as electronics will wait for the holiday sales season. Once a sales promotion worked for one item, it is not difficult for a business to fall into the trick and want to do it again.

But company leaders should consider using different promotion types and strategies and know how to combine them so that they can keep the overall profit margins on products. Following we will see some examples of these disadvantages.

Tarnished Product Brand – Customers will question about an item’s quality if they see that item is always on sale. Every product that sells has a Manufacturer’s Suggested Retail Price (MSRP). So, if the MSRP price is for instance $89.99 for a pair of boots that the buyers see they are always on sale for $29.99, the buyers will question if the boots are truly worth $89.99. Customers do not like to be deceived with inflated price mark ups, they are knowable and that promotional price makes the buyer question the value of that specific item that when that item is not on sale any more, the buyer may not even consider it anymore. Good sales promotions do not merely place a product on sale, and as a company’s owner, you do not want consumers to say, “if it was half price, I would buy it for sure”.  The real value of an item is market by a good sales promotions, as a result consumers think that they are receiving a genuine deal at that promotional sale.

Ineffective Long-Term Success – In reality promotional pricing are only effective as short-term strategies due to the risk that sales promotions could tarnish the brand and also create price sensitivity among consumers. In order to bring in more customers, numerous companies apply sales promotions and this can be a problem because once the promotions are over with, the customers are gone too. One thing to remember is that initiating a promotion takes some time, capital investment and energy. If during the promotion the margins on products are considerably reduce and the promotion has not been incorporated in the long-term sales strategy, the long term business goals fail because of the promotions. If consumers come in with the idea of buying a low-cost product and realize that it’s not on sale, they may leave and come back when there is another sale. How promotions catch the attention of customers and at the same time how to maintain the attention for the long term success of the company, is something that companies’ leadership need to really look into. If not, it may seem as if the company’s promotional pricing strategy is been successful, when in reality in not creating the desired results.

 

Promotion Types

Currently there exist so many kinds of promotions, since companies create promotions in accordance with market demand and merchandise profitability, in which their only limitation is their own creativity. Some examples of promotion types are:

  1. Special-Event Pricing: Here businesses present a discount and rebate throughout the off-seasons with the objective to attract as many buyers as possible.
  2. Cash Rebates: These rebates are well-liked among buyers and manufactures that furnish them. You are supposed to get all or part of the purchase price of the item back once you have completed the required form and send it back together with the receipt. The tricky part is that most customers forget or send the form to late and therefore they don’t get any money back.
  3. Loss-Leader Pricing: In this promotion big business or retailers frequently bring down their prices on a famous brand with the objective to generate extra store traffic. This way the retailer attempts to make up for their margin loss from the extra sales done from those additional buyers.
  4. Low-interest financing: Currently many cellular business are using an easy EMI scheme with lower rate interest in order to elevate their sales on cellular phones.
  5. Warranties and service contracts: Here customers receive longer warranties and free amenities for the item from the company as an offer.
  6. Psychological Discounting: In this promotion, companies falsely place a high price on an item and then give a significant saving. For example, a smart TV was $855 and now is selling for only $450. These days, this kind of promotion is very popular.

The table below depicts types of promotions in a more simple way.

Promotion Type

Definition

Objective

Buy one get one free (BOGO)

Two for price of one

Increase unit sales; useful when production cost is a small % of total cost

Loss leader

Price below cost

Attract new buyers to the product line; sell more high margin accessories or tie-ins

Special Event pricing

Limited time sale price

Attract more buyers now who will return later and/or buy accessories or tie-ins

Cash rebate

Sell for list price but offer discount via cash back

Maintain list price; offer appearance of a deal; reduce cost of discount by % of buyers who do not pursue the rebate procedure

Low interest financing

As stated

Maintain list price; attract more buyers via lower monthly payment; Seller pays part of interest cost

Longer payment terms or no payments until (delayed start)

As stated

Maintain list price; attract more buyers via lower monthly payment; seller may borrow working capital to replace delayed cash flow

Longer Warranty

As stated

Maintain list price; attract more buyers by reducing their perceived risk; useful when most warranty issues occur early in the life of the product

Free component (free razor; pay for blades)

As stated

Attract more buyers; useful when most margins result from sale of consumable accessory (blades)

 

Promotion Cost vs. Lifetime Value

When considering the lifetime value of one’s business, promotions make financial sense. In order to acquire a loyal customer who may make later purchases that will produce a high margin, it is worth incurring the cost, meaning lower margin. Just to mention some examples, credit card interest, the automobile servicing, e-book purchase vs. e-reader deices, replacement parts and blades for razors. One has to estimate the cost and the gains in order to do the math. Those who would have eventually purchased an item anyway at the regular price, and promotion publicity costs, are included in lost margin of the cost. The margin on the promotion sale form those who would not have bought from us, and the margin form all their following buys for  as long as they continue to buy from us, are included in the profit.

How long does your average customer buy from you?

According to a credit card company, it is eight years the average customer life. In order to obtain new clients where costs of the promotion is less than the entire margins they make from those new clients, this credit card company uses promotion pricing through the next seven years.

CONCLUSION

As we have already learned, promotional pricings are incentives that are generally meant to bring in buyers, to turn over stock and to drive revenue and cash flow. Although some businesses frequently use promotional pricing as a system to keep continuing purchases from price sensitive shoppers, promotional pricings should mainly be used in a short time technique. This technique provides really great benefits when companies use it efficiently, while using to many sales promotions and discounts may cause a price orientation in buyers. Having well defined objective will assist you to know what sales promotion strategies would work better for your company and how they suit better the company’s marketing responsibilities like advertising.

 It is also very important that a company takes into consideration how sales will affect the company’s brand. So many recurrent discounts on prices or a low quality free gif may reduce the brand value. However, on the other side a well thought out loyalty plan would both boost the company’s image and supply you with data on your customers purchasing behavior that may be useful for the company

 

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