Tuesday, December 4, 2012

Price promotions - competing against your future self

Price promotions are important elements of any pricing strategy.  However, they should be used with caution.  In this post, we'll review how putting items on sale now will shape how consumers view your future pricing




INTENDED CONSEQUENCES OF PRICE PROMOTIONS

When companies launch price promotions (e.g., sales, coupons, rebates), they often expect (a) demand to increase enough to (b) offset price reductions and (c) overall, raise revenues.  As they lower price below the willingness to pay of non-customers, they can bring new customers into the market and steal customers from competitors.  The overall revenue outcome depends on the volume / revenue trade-offs that occur.  There are also additional, non-revenue benefits that can come from price promotions.

AN UNINTENDED CONSEQUENCE - COMPETING AGAINST YOUR FUTURE PRICING

Unfortunately for companies that use price promotions, customers have long memories - they will remember that you reduced prices and some will wait for and expect it to happen again.  Your price promotion might attract new customers to your business, but you've also shown all of your customers that you are willing to lower your price.  Now your customers will be comparing your regular price to the discount price you might offer again in the future.  You are now competing against your future self.

HOW THIS WORKS:

Before your price promotion: customers were comparing the following when making their decisions:
  • The value they get from your competitor and the price they're charging
  • The value they get from substitutes and their prices
  • The value they get from your product and the price you're charging

After the price promotion ends: your price might go back to normal, but your customers' consideration set does not.  Now they are choosing between the three choices they had before, plus a new, fourth choice* created by the price promotion expectations that you've set:
  • The value they get from your competitor and the price they're charging
  • The value they get from substitutes and their prices
  • The value they get from your product and the price you're charging
  • *The value they get from your product and the sale price they might pay if they wait for the next price promotion

IS THIS A PROBLEM?

You've now trained some of your customers to wait for your next price promotion - your current pricing is competing against future, sale pricing that your customers are anticipating.  Whether or not this is a problem depends on which customers are now waiting for your future pricing.
  • If these are new customers you gained during your price promotion, it's fine because they weren't buying from you at all before the discount.
  • If these are original customers who were already buying at your full price, it's a problem because some of your full-price customers are now trained to buy at the discounted price

WHAT THIS LOOKS LIKE IN REAL LIFE

JCPenney offers an excellent example of how hard it is to un-train your customers to expect price promotions.  JCPenney relied heavily on price promotions and their customers grew accustomed to buying items with discounted prices.  There's no shortage of stories you can find online about how difficult it has been for JCPenney to reverse course and re-train customers to value "everyday low pricing".  Some articles on JCPenney's struggles include:

WHAT THIS MEANS FOR YOU

Think carefully about opening this can of worms and use caution before heading down the path of price promotions.  They can be powerful tools, but can completely change the way that even your most loyal customers think about the price they're willing to pay for your product.

No comments:

Post a Comment