Promotional Pricing 101: Everything You Need to Know to Get Started

Promotional Pricing 101: Everything You Need to Know to Get Started

Learn how to offer the right short-term discounts to grow revenue in the long run.

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Promotions can make sales easier. Discounts, markdowns, and bundles can capture new customers, drive incremental sales and increase revenue in the short term.

Let's explore how and why promotional pricing works, how to use promotional tactics in your pricing strategy, and how to measure your campaign's success.

What you'll learn:

• What is promotional pricing?
• Benefits of promotional pricing
• 7 types of promotional pricing strategies
• How to calculate promotional pricing
• Best practices for developing a promotional pricing strategy
• Measuring the success of promotional pricing

What is promotional pricing?

Promotional pricing involves a temporary price drop on products or services. A promotion is 'run' for a set time period to generate interest, sales, and revenue. Companies regularly use promotions as part of their business cycles and for one-time offers to stay competitive. Promotions are a key lever in the pricing toolkit, complementing discounting or special pricing.

Benefits of promotional pricing

Why would a business want to lower its profit margins voluntarily? Let's look at a few of the reasons:

Create urgency

Since promos are temporary, they create the fear of missing out (FOMO) in buyers. They may also assume others feel the same way and fear stock running out. This is perfect for price-sensitive customers and those who hesitated to buy previously.

Acquire customers quickly

Lowering prices increases interest and may create incremental demand. Promotions catch the attention of new customers and buyers who are buying from your competitors. Suppliers leverage promotions to increase exposure and get your brand in front of a larger audience. Customers tend to act more quickly when the price change is temporary, and might also be more inclined to refer others to your business.

Clear out old stock

Whether your business frequently introduces new products, updates specs, or has a limited shelf life, companies regularly want to clear out excess or aging inventory. Warehousing unsold merchandise costs money too. With a promotion driving demand, clearing out old goods can make room for new ones and free up working capital.

Launch new products quickly

Discounts and promotions do not have to be reserved for old products. You can use introductory pricing during a product launch to create buzz and juice sales early on, attracting early adopters and gathering reviews. Offering promotions and discounts may also encourage consumers and businesses to try out a new product.

Increase customer loyalty

Current customers can feel more valued when you offer promotional pricing, especially when targeted through email lists, SMS, or long-term buyer relationships. Selling to current customers is generally much easier, and occasional exclusive deals incentivize repeat purchases. Plus, you can earn positive word of mouth.

Stand out from competitors

Any discount is at least a temporary differentiator in a market with rigid price points. Offering promotions during unexpected times or deeper discounts than competitors can stand out and strengthen your share position.

Promotional pricing pitfalls to avoid

If there were no drawbacks, every company would constantly discount. However, promotional pricing can backfire if executed poorly. It has the potential to:

• Decrease profit margins: A lower price means less margin
• Damage brand value: Frequent discounts can diminish perceived value.
• Erode customer loyalty: If existing customers feel you're always chasing new buyers, they may leave for a competitor.

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7 types of promotional pricing tactics

Promotional pricing is not a strategy on its own; rather, it's part of a penetration pricing strategy, which aims to initially set prices lower than those of competitors to grow market share before gradually increasing them.

The main types of promotional pricing tactics are:

1. Percentage discount

The simplest tactic cuts prices by a percentage that entices customers while remaining profitable. Examples include end-of-season markdowns, discounts near the end of product shelf-life, or peak-season sales to capture more of the increasing demand.

2. Loyalty programs

From sandwich shop punch cards to in-app point systems, loyalty programs provide exclusive promotions for the most frequent customers. They make it easier to encourage current shoppers to spend more, and the gamification can make earning the promotion or reward an end in and of itself.

3. Buy one, get one (BOGO)

This tactic trades margin for volume, resulting in larger cart sizes and moving inventory out. Customers are incentivized with free or discounted merchandise if they choose to purchase now.

4. Coupons

Coupons require customers to present proof of the promotion, whether it's a clipping from a newspaper or a code from a display ad. This serves two purposes: limiting the number of customers who get the deal and creating a sense of scarcity. It's good for commodities you don't want to fully sell out of.

5. Flash sales

Flash sales are extremely short promotions, often measured in hours. The discounts are steeper and not marketed in advance. They're spontaneous and demand near-instant action from customers. It's great for brands that frequently have new releases, or companies that end up overstocked on a given item.

6. Seasonal sales

Commonly seen in retail, a seasonal sale is a predictable event featuring promotional pricing on an entire collection of products. It helps make way for new merchandise and is a great way to capitalize on known shopping holidays.

7. Segment promotions

A more complex form of promotional pricing involves deals tailored to specific customer segments. Military and senior discounts make these segments feel appreciated by the provider, prompting them to prioritize this brand.

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How to calculate and implement promotional pricing

Follow these guidelines for a quick way to map out, calculate, and implement promotional pricing:

1. Set specific objectives

Are you focused on customer acquisition, increasing exposure, shutting down competition, or moving inventory? How will you measure success? These questions help determine which promo pricing tactic to use, the duration, and what level of discounting will be appropriate.

2. Determine the real value of your product or service

Calculate how much value your offering provides to your buyers in the most common use cases. For example, if a sales rep saves 10 hours of manual data entry each week with a CRM subscription, you would take those 10 hours x 4 weeks and multiply by their monthly average hourly cost. This helps you figure out an appropriate discount rate to make the deal too good to be true. Note that this may vary by different applications, so you might use an average of the values among your customers.

3. Study your competitors and demand

See what pricing strategies your competitors are pursuing, what promotions they're running, the duration they last, and which sales channels they're using. You may have to offer a deeper discount to match them or structure your deal more enticingly. You also need to take into account the entire size of the addressable market, and consider how much market share and demand you could potentially take with your strategy.

4. Select your promotional pricing model

Based on your research and your objectives, select one or more promotional pricing strategies from the previous section to implement, and a duration to run it. The right pricing model will change depending on your industry, brand's positioning, target audience, and overall business goals. It's important to test and refine your strategy over time to ensure it aligns with market demands and maximizes profitability.

5. Do the math

You now have the value of your product, a competitive analysis, and the goals you want to hit. However, you may still lack an appropriate discount level, because what if you simply can't afford it? Take these into account:

• Customer acquisition cost (CAC): What's the typical cost associated with ads and the time salespeople require to sign a new customer? How does this compare with the cost of a promotion, in terms of lost margin?
• Percentage of promo customers who convert: How many new buyers become regular buyers during a promotion?
• Amount of average sale: Compare a regular cart value with a promotional one.

6. Consider potential negative consequences

Not every tactic works for every industry or even for every brand. Can your business handle a spike in demand, or would it fill backorders to frustrated customers for months? Do discounts align with your brand's positioning, or would customers find them tacky?

7. Gauge impact

After the promotion has ended, revisit important metrics for the promotional period, like customers acquired, CAC, and consumer sentiment towards your brand. Learn what you can and plan your next promotion.

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Best practices for developing a promotional pricing strategy

Every plan will look a little different, but these best practices often apply:

• Track your prices with software: Tracking everything through a platform makes it easier to build and assess the impact of promotional pricing. For example, you can set retail pricing with AI designed to analyze the various price points that sold the most products in your historical data.
• Post comparison prices: Don't just show the new deal. Show what the price was to drive interest.
• Show savings as a percentage: Showing the savings as a percentage provides a clearer indicator of a value.
• Keep your best items at full price: The luxury and flagship products that consistently sell well and represent the brand shouldn't be marked down. Use lesser and complementary lines to drive traffic and allow the signature products to remain aspirational while retaining their value.
• Gradually decrease discounts: You can capitalize on customers' FOMO by reducing the savings. If a customer could've gotten 40% off on day one and today it's 30% off, they'll feel compelled to act now so they don't miss out even more.
• Monitor competitor movements: To set competition-based pricing, observe how competitors react to your promotions and respond accordingly.

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Measuring the success of promotional pricing

You need to measure all the key elements of a successful sales promotion to see if you've succeeded. Results must be monitored during and after the promotion, not just for the items marked for promotion. Compare them to a previously established baseline without an ongoing promotion and to other similar promotions in the past.

Quantitative measures

The point of a sales promotion is to make numbers go up in comparison to non-promotional prices, so you need to refer to some key performance indicators (KPIs), such as:

• Sales volume: How many products were sold, and how much inventory is left over?
• Revenue: How much total money was brought in?
• Return on promotion (ROP): Compare the baseline sales to the sales during the promotion period by subtracting the promotional costs. The higher the ROP, the more successful the promotion relative to its cost.

Qualitative measures

Some promotional pricing outcomes are intangible but still need to be measured to understand your success. These include:

• Brand perception: What do customers think of your brand? You can find this out through standardized customer satisfaction (CSAT) surveys and social listening on various social media channels to see what customers say and how they react to promotions.
• Competitive response: This is a subjective measure where you analyze the promotional activities of key competitors. Are they running similar promo campaigns? Do they match your percentages or undercut them in some way? This helps you gauge their business performance, whether they feel threatened, and if they have the margins to compete with you.

Use promotional pricing to win customers and loyalty

Promotional pricing attracts attention, captures market share, and rewards the loyalty of current customers. With the right tactics as part of a long-term pricing strategy, the smart use of promotions allows you to take advantage of natural market cycles and create new cycles of your own. As long as you're careful not to cut into your margins or devalue your brand, promotional pricing is your secret weapon for driving more sales.

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Colin Carroll is a Partner in PwC's Marketing and Sales Practice, with a focus on Pricing and Commercial Excellence. His experience spans B2B pricing, sales, and channel effectiveness.

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