Promotional Pricing, Benefit or Curse?
Promotional prices within the life-cycle prices are assigned to new products or that have been modified and seek a place in consumer preference.
Promotional prices also apply to support a campaign or larger promotional event and can serve to generate traffic to stores or corridors and look for consumers to purchase products that generate higher profit margin.
Difference with Markdown Pricing
Remember that, unlike the markdown prices, promotional prices are only a temporary decrease in the price of a product and after a while, the product returns to its original price.
To get this traffic and additional demand several different promotional tactics are used, you have to do tests to see which one is the most effective according to the type of product and consumers.
Even when discounts mean the same thing, how to present them can greatly affect sales performance. Because of the perception that as consumers we have about prices.
Is not the same, just for example, if a product that costs 10, is put it with a discount of 50%, than to put a 2×1 promotion, or a “buy 2, get one free”, presenting it as “Before 10 now 5” or “today only 5 less.”
All we get a 50% discount on the product.
Each promotional tactic causes a different response in consumers, that is why we should use the right one for each location, store banner and product.
The goal of the promotion is to increase product sales and at the same time generate additional traffic to the store or the corridor where the promoted product is located looking forward that on its way the consumer will purchase additional or complementary products that increase the value of his purchase.
Because of the difficulty and risk involved in putting a product on promotion, usually most retailers tend to do the same promotions year after year on the very same days.
Thereby the potential of promotional prices, which is to attract consumers to the stores is lost. As people “learn” what promote will be out, at what price and when and instead of going to the store attracted by the promotion and making more purchases of other products, there are consumers who only go to the store specifically for the promotion, and do not buy anything else.
They’re just hunting for promotions, which erodes profit since selling a product at a promotional price does not have all the benefits and people are getting used to only buy products with price reduction, which affects the rest of the products and sales of the store.
An additional effect of applying the same promotions over and over is cannibalization between products of the same category.
Generally providers drive the promotion of its products with the retailer because they need to achieve their sales goals and offer an attractive discounts, increasing product sales benefits only the provider, because it focuses on sales of Individual product.
But the retailer, whose objectives are for the whole category, not only for an individual product. For example, in the jams category, the provider is responsible for its brand but the retailer will be for the combined sales of all brands of jam.
Taking this into account, driving a promotion in one product, will have an increase in sales of that product and may cannibalize other products, reducing the gain of the whole category.
Because customers can change their current preference to acquire the product that is cheaper, sales of other products at full price will decrease and increase the sales of the brand with a reduced price, which will bring less income.
The optimal promotional price is one that minimizes the cannibalization in the whole category while generating increased traffic to the store.
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