Pitfalls of promotional pricing: how often does promotional pricing really work?

In spite of how essential promotional pricing strategy is for retailers, it actually poses much uncertainty for them. Every new promotion is inherently risky. What if the promotion costs more to run than it generates in revenues? What if the promotion doesn’t stir interest as anticipated? Some retailers will even continue to run price promotions at an overall loss to their businesses because of misplaced expectations about how a promotion will work. Others will make a loss because unbeknown to them they could have but didn’t sell their promoted products at a higher (though still discounted) price. 

 

Furthermore, promotional strategy highlights the problem of retailers using intuition to set promotional pricing. Guesswork is rarely a successful foundation upon which to build a promotional strategy, yet surprisingly retailers will often use it as the single basis for a promotional campaign. Other retailers will mount a promotional strategy, reactively, based for example on how they have priced a given product in the last six months. For others static campaigns are preferred so a promotion will always be calculated relative to costs for example the cost to manufacture. 

 

However, more astute retailers are adopting data driven strategies to plan and evaluate their promotional strategies. Analysis of historical sales data will tell a retailer how well a given product is selling both internally within their own business, and externally amongst their competitors. It provides valuable benchmarks which can be used to evaluate whether a promotion is working, and how it may need to be tweaked to guarantee an overall profit for the retailer. Data analysis therefore gives the retailer an advantage and a better chance of running a promotional strategy that actually works. 

 

 

One of the most common ways for a promotional pricing strategy to fail is when higher sales of a promoted product don’t actually recoup the cost of running the promotion in the first place. Retailers always need to set themselves benchmarks throughout a promotional campaign so that they can constantly evaluate whether their promotion is actually making them a profit. This allows retailers, at the very least to discontinue unprofitable product lines and replace them with product lines that stand a better chance of making better overall profits. 

 

Another very common pitfall of the promotional strategy is not knowing about competitor pricing strategy. If a brand’s competitors are continuously selling the same products at cheaper prices, customers can lose faith in that brand and switch their loyalty. Research shows that customer loyalty is harder to win and customers equipped with price comparison tools, and a world of information at their fingertips will quickly identify the brands that constantly let them down by selling over-priced stock. 

 

Other pitfalls surround the integration of supply chains with promotional strategies. Retailers need to ask themselves, if they are prepared to cope with a spike in demand for some of their product lines. Retailers who fail to prepare for this will find themselves “out of stock” of products that are selling well. This can result in two distinct disadvantages. First, the brand will inconvenience customers who have learned of a price promotion and attempted to make a purchase, only to find an out of stock notification. This often results in damage to a brand’s reputation, as news of poor service can spread like wildfire through social media and word of mouth. Additionally, the brand loses out on sales that they could have made, but lost out on because their supply chain failed to deliver products rapidly enough to cope with demand. 

 

Failing to plan for events like Black Friday, Boxing Day and the January sales are again a possible pitfall for retailers. There is much evidence that consumers regularly delay making purchases until events like Black Friday where there are many discounts and promotions to choose from. Many retailers will plan their Black Friday, Boxing Day and January sales promotions for months in advance of the events themselves by looking at demand for products within their business and competitor pricing. 

 

It is well documented that impulse buying which is encouraged by events like Black Friday, can result in increased product returns. Returns represent lost sales and as such retailers need to take account of this when evaluating the success of their promotional campaigns. Furthermore, it isn’t just ‘lost sales’ that is problematic, there are associated problems like damaged stock and costs associated with higher returns which must also factor into whether a price promotion campaign has been an overall success. 

 

Price promotions can also fail in unexpected ways. A price promotion that is implemented in circumstances where the products would have sold just as well at full price is also a failed campaign, because the price promotion was not necessary in the first place. Price monitoring software can help a retailer understand when a price promotion campaign is necessary to begin with. Retailers should beware of competitor retailers who reduce their prices and then shortly afterwards run out of stock (provoking discontent and ire from customers). A slightly deeper analysis, using price monitoring software will reveal who these retailers are and in these circumstances a retailer is justified in keeping their prices higher than some, or even all of their current competitors who can’t deliver the deals they are advertising. Regular use of price monitoring software will help retailers understand when opportunities for successful promotions actually do exist. 

 

Retailers should also be aware that overly frequent price promotions can leave a negative impression with customers. In today’s consumer landscape, where consumers value convenience, quality and good customer service experiences, lowering prices too often can send the wrong message to customers. Customers can become wary that overly cheap products might imply a risk of poorer quality, or a poorer overall experience. Quality brands will often command their higher prices successfully, so retailers need to be alive to the issue that price promotions can actually damage a brand. Also regular price promotions can result in customers delaying their purchases of products that aren’t discounted. Some experts describe this as the perception that full prices “aren’t real”, and so must be disregarded until a sale or promotion lowers the actual price. Some retailers like Nordstrom address this problem by selling selected product lines at full price, alongside selected lines that are on sale. 

 

On the other hand price promotions can have significant impacts on a retailer’s overall profits and cash flow. They can help a retailer clear out stock that is not selling well, quickly so that space in the supply chain is freed up for products that have a better prospect of generating profits. Some retailers use price promotions to boost footfall during less busy periods, for example a discount that is only available for redemption on certain days, or at certain times. This can increase impulse buying, particularly in bricks and mortar stores where products are prominently displayed beside tills.  

 

The right price promotion drives sales because of increased value perception. Customers who consider that they are getting a deal only available for a short period of time may take a decision to make a purchase that they would not otherwise have made, had it not been for the price promotion. 

 

Companies can use price promotion strategies to quickly generate extra funds to cover additional company outlays. This is particularly useful for small to medium sized businesses for whom cash flow can be a problem. 

 

Price promotions also afford companies opportunities to increase loyalty from customers. Customers who believe they have benefitted from a great deal may decide to use the retailer again in the future, and may monitor future deals or promotions from the retailer to see if similar deals are available. 

 

So, how do retailers avoid the risks associated with price promotion and secure the benefits the strategy can deliver? More and more retailers are turning to data driven strategies to ensure their price promotions actually work as intended. 

 

 

Retailers are now using demand forecasting to manage their sales and supply chain strategies and integrate them with price promotions. Walmart, for example retains data called “point of sale” data. This is the data that is generated when each and every product is sold. This creates a large dataset that can be used to predict demand within particular product lines, which helps the retailer set their prices and price promotions successfully. It also helps the retailer clear out their inventory by discontinuing product lines that aren’t selling successfully, or are not selling as successfully as had been anticipated. This strategy also helps the retailer to manage their supply chains. Product lines that are in high demand can be prioritised in the supply chain, and this helps the retailer ensure that popular product lines don’t sell out, resulting in the loss of potential sales and damage to their brand reputation caused by out of stock status. 

 

Demand forecasting can also be used to assist retailers in the acquisition or creation of new product lines, which can be discounted to boost their sales compared to similar competitor products. A good example is Starbucks, and the popularity of their Pumpkin Spice flavoured products. Having noticed a surge in sales related to their Pumpkin Spice product range, Starbucks was able to take the decision to expand their product line to include new Pumpkin Spice themed products, which had the effect of multiplying the success of their Pumpkin Spice concept. Many doubt whether Starbucks would have been in a position to make this extremely savvy and profitable decision, had it not been for the point of sale and other data it analysed regularly. 

 

Demand forecasting can also be useful when it considers data relating to wider economic conditions and this can help retailers to understand the optimal time to launch a price promotion. Demand may vary across different geographical areas and the collection and analysis of relevant data will enable retailers to more accurately predict the demand they will experience in respect of certain products. A good example of this strategy in action is the approach adopted by Walgreens the pharmacy brand in the USA. Walgreens consider a wide number of internal and external variables in their demand forecasting strategy. One factor it takes account of is flu incidence in different parts of the USA. This is analysed and the retailer is able to predict when demand for its flu-related products is likely to increase rapidly. This also enables the brand to manage its supply chain and avoid the situation of out of stock status for a range of important products.  

 

 

Data driven strategies enable retailers to conduct a deeper analysis of a number of variables to fully assess whether a price promotion strategy will be profitable. Many retailers, particularly those following a manual as opposed to a data driven strategy will make a price promotion decision based on competitor price alone. In fact, this is sometimes unwise as there are lots of variables to consider and this means a retailer adopting a data driven strategy is at a distinct advantage. 

 

This can be illustrated using the example of shipping costs. Shipping costs typically add a small additional cost to the overall price of a product. Though small, when hundreds of thousands of products are sold, the shipping costs can change the overall cost of a product for the end customer. By taking account of this in the assessment of a price promotion strategy, retailers can make considerable savings, mainly by ensuring that they don’t underprice a product. A simple example is where a retailer is selling a product for a base price of 9.99 GBP plus shipping costs at 2.99 GBP, compared to a retailer who is selling the same product for 9.99 GBP plus free shipping. Although ostensibly both retailers have the product set at the same price, the end price that the customer pays including shipping is what is relevant. As such, it could be suggested that the retailer selling the product with an additional shipping cost, is actually selling an overpriced product compared to the retailer offering free shipping. 

 

Another example is sales volume. When a retailer truly understands how many products are being sold at particular times of the year for example during events like Black Friday and at high season, like Christmas, retailers can more accurately predict what volume of products sold at a particular price would need to be sold, in order to make the best profit. When historical data about similar sales over recent years or months, this helps the retailer build a picture of what their future demand for products is likely to look like. This places them in a better position to choose an optimal price for different products, and ensure the price is neither too high which is likely to alienate customers, not too low, which will result in lost revenues. 

 

 

Data driven strategies allow retailers the flexibility to replace some proposed price promotions with different strategies, or to operate price promotion strategies in conjunction with other strategies for example one that predicts products that customers may also be interested in, based on the items they place in their electronic “basket”. 

 

Prediction – based strategies analyse the items that shoppers place in their shopping baskets and use large datasets to decipher which products are most frequently purchased in conjunction with those products. This provides a system of targeted advertising and a ripe opportunity to sell to people who are about to spend money on related purchases. 

 

 

Retailers will sometimes default to price promotional offer campaigns, when they don’t actually understand that there are better options available to increase revenue streams, for example the creation of a retailer app, which personalises the shopping experience for each individual shopper. Retailer apps are used in-store and remotely to enable a customer to buy products quickly and easily, and the use of retailer apps among customers has doubled in 2018. Lots of customers use these apps during in-store visits to enhance their shopping experience. Depending on the app, features like store plans, store guides, useful information, shopping lists, stock checkers, product ratings and reviews information, reminders and targeted delivery of relevant promotions and offers can all help the customer have a better experience on their shopping trips. Other apps have payment facilities, which mean that the customer does not have to queue to make a payment, whereas some apps will make personal recommendations about purchases that a customer might be interested in.  

 

 

Price promotions have great potential to deliver benefits and advantages to retailers, but there is also a risk that price promotions can fall flat and result in business losses. Some retailers unwittingly reduce product prices too low and sacrifice profits because their retail strategy is not well planned or executed. Difficulties can also arise where a price promotion strategy is not properly evaluated, which can result in an unsuccessful price promotion strategy running for too long. Poorly planned price promotion campaigns – particularly those that are implemented too frequently create a risk that a brand will be seen in a negative light, or create an expectation in customers that they should never pay full price for a product that will almost certainly be discounted in the near future.  

 

Retailers are finding that price promotions have a greater prospect of working optimally when they are integrated with other retail strategies like demand forecasting, supply chain management and store replenishment strategies. This is particularly pertinent to assist a retailer cope with spikes in demand for particular product lines when successful price promotions are implemented.