As we complete this series of blogs on product pricing strategies, I want to address the area of promotion pricing. I have included this as a subset of Market or Brand Based strategies, but certainly discounting is a widespread tactic which may also be seen within Cost Based, Competitor Based, or Customer Based strategies.
I felt promotion pricing deserved a special mention, as I’ve known companies (and indeed industries), which have gotten hooked on this form of brand support. It often produces a euphoric volume related high, followed by the pains of margin sucking withdrawal!
This technique strives to increase sales volume by attracting customers through a temporary price reduction for the product or service. Manufacturers, distributors, and retailers practice discounting in most industries.
Promotional pricing would also appear to be very versatile, as it has been tagged with fulfilling objectives as diverse as building awareness, developing brand loyalty and repeat business, increasing profit, and insulating against competitive threat. How realistic is it that one singular tactic can fulfill that many business objectives?
Pros and Cons
Price discounts are generally a great short-term tactic to generate quick volume, particularly for an established brand. For new products, promotional pricing can certainly help stimulate consumer interest and trial, but cannot be solely relied upon to communicate specific product attributes, or an ongoing value proposition.
Promotional pricing is usually not the best long-term strategy. Ongoing discounting is either not financially sustainable or is often at the expense of other marketing tactics that may deliver a higher perception of product value. For example, there was a time in the consumer packaged goods arena where advertising and consumer based activities far outweighed discounting as a percentage of the P&L. Over time, discounting became a volume crutch to deliver quarterly or annual targets. Great brands saw their marketing budgets decline as ‘trade spend’ increased, while corporate resources had to be re-tasked to better manage this growing line on the financial statement.
Ideally, our brands provide a promise to the consumer that is unique and compelling, and the products deliver on that promise in a way that customers value and become loyal to. An over reliance on promotion discounting tends to attract price sensitive customers with a resistance to purchasing at regular price. A related issue is the subsidization factor ongoing discounting has on consumers who would be willing to pay regular selling price. Limiting discounting tends to stabilize a higher perception of market value, with increased brand loyalty based on product differentiation rather than price.
Price is rarely considered a true competitive advantage since it is so easily replicated by the competition. Moreover, once competition advances on the price front, there is a risk to market or category margins, along with a range of other potential difficulties.
For example, another challenge associated with promotion pricing is sales forecasting. Someone in the organization needs to make the call on how many of the promoted product to manufacture. Despite sophisticated forecasting techniques and powerful computing platforms, often the forecast will be wrong. Think of the challenges forecasting sales of hot dog and hamburger buns during long weekends, including the impact of weather, competitive prices, and other non-controllable factors.
The issue of supply and demand also brings plant efficiencies and use of capital into play. Promotion pricing that generates significant peaks and valleys in demand may require production overtime, along with additional inventory carrying costs and warehousing fees. This is obviously a drain on profitability, as well as challenging to relationships with plant and logistics personnel. Not producing to demand would negatively impact customer trust and consumer loyalty.
The use of promotion pricing has long been used to generate much needed volume. While discounting may have its place in your business, there are some inherent risks. These include using price to the exclusion or limitation of other marketing variables that could better communicate product value, ‘training’ your customers to anticipate future discounts, and potential ‘hidden’ costs in balancing supply and demand.
If you would like to discuss your current approach to pricing, please contact Boardroom Metrics 1.905.709.4031