6 Price-based Sales Promotion Methods: Pros and Cons
Convincing a buyer to make a purchase is not an easy task.
Before buying something, people compare different options. For some consumers, the price is important, others pay attention to the quality, and someone wants to buy goods provided with additional services. Therefore, it is necessary to carefully choose certain sales promotion methods depending on your business goals.
Sales promotion are reasonable to:
- to mitigate losses during low seasons;
- to attract attention to a company on some occasions (events);
- to counteract competitors’ activities;
- to encourage and motivate consumers.
The main goal of sales promotions is to make a buyer act immediately. In this article, we’ll describe the most effective pricing methods and consider their main pros and cons. The information will help you outline the methods to use when planning promotional activities. So, let’s start.
This method implies selling a product at a deliberately low price. As a rule, this price is lower than the market cost of a product, which is done for the purpose of advertising. By using this method, vendors expect customers to buy other products with high margins able to compensate losses and reach the general profitability benchmark.
A classic example of this method is the strategy of Gillette. Often, Gillette offers its razor blades for free, thus, attracting customers’ attention to its store where they are likely to buy other items in addition to blades.
Returning Former Customers Back
With the “Loss Leader” method, a business has every chance to return a former customer back. Promotions offering products at lowered prices always attract attention of the audience, which, in turn, may result in large profits for business owners.
For some businesses, the “Loss leader” method is a sure way to clear inventory. Unfortunately, not all products can be sold with equal success. Thus, one should choose those products that aren’t selling well and introduce them to the audience as loss leaders. Once loss leaders have been sold out, your inventory will have enough space for new items.
Improving the Image of a Company
The “Loss Leader” method also helps a company create positive image on the market. After all, customers save money when purchasing loss leaders. Thus, today companies seek to offer loss leaders of better customer value compared to their competitors.
Now, let’s talk about the main disadvantages of the method.
Customers May Clearly Understand Your Initial Intention
Not everyone may be deluded by the attractiveness of a loss leader. Some customers can clearly understand your intention to attract their attention to more expensive items.
Lack of Loss Leaders in Stock
There’s a chance that your loss leader will become highly demanded. This means that such items may soon run out of the stock. Then, your store won’t have anything to offer customers, and, eventually, they will get disappointed with the offer in general. To avoid this, you need to make sure that your possibilities allow you to replenish stocks of loss leaders if needed.
Your Products May not Appeal to the Market
Sometime it’s possible to choose a wrong loss leader and damage the entire campaign. The loss leader products should present a certain value to consumers, in other words, be appealing to the market. Selling wrong products will not attract customers to your store and, may harm your reputation considerably.
Reward Loyalty Programs
This method allows you to turn an ordinary consumer into a regular one. For regular purchases of goods or services customers receives bonus points. As a rule, they can exchange the points received for some rewards or pay them for products. Bonus programs are actively used by retailers, mobile operators, logistics companies, etc.
Loyalty programs are not necessarily based on points, but can also engage real money rewards that are still suitable for the purchases from this particular brand. A good example of this method is the “Bonus Bank” loyalty program offered by Vodafone in 2010. For every prepaid Vodafone voice service, customers received 10 percent from each payment. By doing this, Vodafone encouraged its voice customers to actively use other available products.
Loyalty programs make customers feel that they are appreciated. Therefore, they may probably want to return to your store for another purchase. A well-designed loyalty program is the guarantee of successful customer retention in any business.
Loyalty programs can help to distinguish your business from competitors. As a rule, customers have a plenty of choice among loyalty programs, so businesses should do their best in order to stand out with their bonus programs.
Once a customer has signed up for your loyalty program, the information about him or her is added to your database. Using this data, you can learn about customer’s behavior, buying habits, and preferences. Later, all this information can be used to divide your audience into various segments (depending on the age, interests, and other criteria) and then tailor offers to these particular consumer groups.
By and large, loyalty programs offer the same benefits. Thus, if you have nothing new to offer, your loyalty program promotion can be just overlooked. The point is the same one we stated earlier: plan your bonus programs thoroughly in order to offer your customers something truly unique.
Loyalty Programs Can Affect Profits
If your business uses loyalty programs to attract customers, it means that it loses some part of its profits. Imagine what it will result in if you provide loyalty programs for all visitors without exception. So, your loyalty programs should be balanced and make their best to encourage repeat purchases.
Customer Data is Not Sufficient
The data about the customers who signed up to your loyalty program cannot give you a holistic picture of their overall purchase behavior. For example, this data does not allow tracking purchases that customers make from other stores. Moreover, the fact that a customer makes a purchase in your store, doesn’t necessarily mean that he or she is truly loyal.
Discriminatory (selective) Discounts are provided when a consumer fits a certain condition. The condition itself depends on the ultimate goals of the advertising event. If the goal, for example, is the “word of mouth” promotion, then the discriminatory condition may not be particularly serious. For example, the owner of a pub in one of the German cities provides the 50% discount on sausages to all bald visitors. He explains this by saying that “bald people have a very difficult life.”
Discounts Depending on the Time of a Purchase. To minimize losses from the sale of numerous goods at a discount, retailers limit the validity period of discounts. It can last, for example, a few days. Usually, the events related to such discounts are not announced, so that buyers need to follow the latest news from the store. This practice is called “flash sales”. For example, the BuildASign resource often organizes flash sales, such as “48-hour flash rate” offering 25% off plus free shipping.
Seasonal Discounts. One of the main types of discounts is the discount on the goods with the season running out. The most common types of goods for seasonal sales are clothes and shoes. However, the widespread use of seasonal discounts is also connected with national characteristics of purchasing behavior. In Sweden, for example, it is customary to update a wardrobe every 6 months, but in USA, it happens more often. Seasonal discounts often coincide with the discount on unfashionable and outdated goods. For example, in Toronto, ice cream sellers offer their products at lower prices during winters. Let’s agree that ice cream is not something that we are very keen about in winter.
Discounts on Unfashionable, Morally or Physically Obsolete Goods. The main criterion for this discount method is the end of life cycle of a product due to its ageing. Such discounts can be up to 99%. A fixed discount is applied to all the goods that are approaching their expiry date. For example, in Swedish food supermarkets, the promotion “All goods for 10 SKr” is very popular. Actually, all the offered goods cost much more than 10 SKr, but to sell unprofitable goods, supermarkets set the same low price for each of them.
Holiday Discounts. Providing discounts on holidays is a way to attract shoppers in a store at the time of enhanced demand for gifts. Buyers are accustomed to this and are more likely to buy goods in stores that offer goods at reduced prices. However, many store owners believe that on holidays, it is not necessary to provide discounts since goods are going to be bought in any case.
The situation with holiday discounts can be arranged in another way. You can give discounts in honor of Teachers’ Day, Cosmonautics Day, Birthday of the Queen of England, etc. The main goal here is to come up with the occasion that can be called a holiday.
Discount on Large Amount Purchases. The cash & carry stores traditionally use volume discounts. For example, the Cash & Carry Smart Foodservice, a popular American chain of grocery stores, always offers food packages for service operations (restaurants, cafes, etc.) at regular discounts.
Attracting Customer Attention
Offering products at reduced prices businesses encourage customers to make more purchases. Customers love bargains, and the more advantageous your offer to a customer, the more sales it will bring to your business. Moreover, limited time for discounts creates a sense of urgency, which may become an additional stimulus for customers.
Increasing Brand’s Visibility
Using various marketing channels, such as social media, search engines, banner networks, and other internet ads to announce discounts, your business increases its visibility on the market. Moreover, internet marketing contributes to raising awareness of your brand and its products, and the “limited time” factor, in turn, helps to increase the effectiveness of this marketing strategy.
Strengthening the Relationship with Loyal Customers
Discounts can attract new customers, but what’s more important they can help your business to retain the loyal ones. For those clients, your discounted offers mean perks and benefits. Let’s agree that a store that offers regular discounts for its products and services creates a good impression among potential buyers and, thus, makes regular customers even more loyal.
Endangering Profit Margins
Large discounts can put your profit in danger, as you may offer products at a price which is less than you can afford. Planning discounts consider that, say, a 99% discount may not be a good idea for your business.
Causing the Feeling of Animosity
If you know that you are making less money, you may offer a discount for unprofitable products, which is often a great mistake. Customers are picky, and they will quickly understand that your offer is not worth paying attention at. This, in turn, will undermine the reputation of your brand, as a result of the customers’ disappointment. So, think carefully not only about the size of your discount, but also about what products should be offered.
Sometimes, customers can be suspicious about your discount offers that seem to them too good to be true. Moreover, the more the discount is, the more suspicious your shoppers may be about the quality of a product that comes with that discount. Thus, set discounts carefully so as not to cause suspicions or at least to minimize them.
A rebate is an amount paid by a reduction, return, or a refund on what has already been paid by a customer. The mail-in rebate (MIR) is the most common type of rebates, according to which, a buyer mails in a coupon or a barcode in order to receive a cheque for a particular amount depending on a particular product.
Rebates are widely used among retail stores, banks, fast food chains, air companies, etc. For example, several years ago, the Shoppers Food and Pharmacy supermarket offered the rebate with 100% cash back for some medications.
Pros and Cons
As any method of sales promotions, the rebate has its costs and benefits. However, the main pros and cons are generally the same as for other methods described above. From major pros, it is worth noting the possibility to increase customer’s awareness and loyalty to your store as well as boost its sales and the overall visibility of a brand. The major cons are the possibility of slack in demand on the market for some goods with rebates and, therefore, lose in profits for a company.
Bundling products is a sure way to generate higher value at a lower cost. Announcements like “Buy one, get one free” or “3 for the price of 1” make customers think that they’re getting more for what they’re paying. A good example of this promotional method is Walmart, which often sells the Xbox 360 video game consoles in bundles. Such bundles can include the console itself, a video game, wireless controllers, and a headset. Such packages can save customers up to $35 compared to if they purchased these items individually.
High Value of Sales
Bundling products can obviously create higher sales since the method allows merchants to increase average order values.
Simplicity of Sales
Bundle products consist of several single items, but are actually sold as one unite. This allows merchants to reduce operational and promotional costs. Moreover, bundles allow developing currently unclaimed, but potentially perspective additional options at the expense of the general package. For example, Microsoft office is a great example of successful bundling.
Customers do not necessarily demand all the included items and may consider them to be imposed not willing to pay additional costs for them.
Inadequate Price Transparency
In the circumstances of a wide choice customers may refuse bundles in favor of separate products, where they can see all the prices and consider the value of individual products clearly.
Another method of sales promotion are coupons. This is the document that certifies your right to get a discount on the goods indicated in it. A coupon can contain a percent discount or a fixed discount in monetary units.
The methods for distributing coupons are publications in newspapers or magazines in the form of a discount advertisement, leaflets in mailboxes or in a place of sale, internet ads, etc. A good example of using coupons is fast food chains, like McDonald, Domino’s, and others offering bonus coupons for some items in their menus.
Induces First-time Purchases
Coupons may be very effective in case of first-time sales promotions and brand new purchases.
Makes Additional Unexpected Profits
A lot of paid coupons are never redeemed, so merchants are able to receive additional sales without actually selling anything.
Some customers only take advantage of the coupon-based purchases and items and never come back again to take products at regular prices.
Some customers may postpone their purchases and wait for new coupons refusing to buy for the ordinary price. This makes sales to become constantly dependant on the provided discounts and reduces the average revenue considerably.
As you can see, all the price-based promotions have their own pros and cons and are able to provide both highly positive and negative impacts. So, you need to always properly anticipate the consequences to make them result in the the initially planned outcome.