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WHAT ARE PRICE PROMOTIONS?Price promotions are temporary reductions in price. Common examples include sales, coupons, discount codes, and rebates - anything that allows your customer to purchase your product at a lower price.
Price promotions are often used to increase revenues by increasing demand - considering the volume / revenue trade-offs will allow companies to adjust how much revenue they gain or lose during a price promotion.
WHEN IT COMES TO PRICE PROMOTION, REVENUE IS NOT THE ONLY MEASURE OF SUCCESSThe best price promotions will increase your revenue AND provide other benefits to your business. But, these additional benefits can create tremendous value for your company and might be worth capturing even at the expense of short-term revenue, especially if you take a longer-term view of their impact. You might have to think of price promotions as investments - you might give up revenue in the short term, but the following additional benefits might make them worthwhile. I'll list them based on their place in the marketing funnel...
FIVE ADDITIONAL BENEFITS FROM PRICE PROMOTION
1. DRIVE AWARENESSAny price promotion requires getting the word out that you're offering a discount. In doing so, you'll be increasing customer awareness that you exist. Think about coupons you see for companies you've never heard of - in offering you their discount, they've also introduced themselves to you.
If you prepare your communications and advertising properly, you can also drive interest and evaluation as part of your price promotion campaign. This is easiest to do if they are already aware that you exist and/or you can associate your product with another product or category that's already familiar. If that unknown company sending you a coupon is a car wash, they don't have to explain what a car was is to you - instead, they can focus on reasons why you should go to them for a car wash.
2. ENCOURAGE TRIALSome of your customers might want your product, but haven't tried it because it's still too expensive to get them off the fence. But, your price promotion might get your price below their willingness to pay (WTP) for trying out your product. This can be especially powerful if you believe trial is likely to lead to adoption - that can be especially true if you're in a category where customers tend to be loyal and/or they will be incredibly impressed with your product once they try it.
3. GAIN NEW CUSTOMERSLowering your price will make you attractive to potential new customers, especially those who are:
- Already buying from competitors
- Currently buying a substitute product
- Not yet in your market (not buying substitutes or from competitors)
Attracting new customers is almost always good, but be careful about giving up too much to lure customers away from the competition. If those customers are switching because of price, there's not much stopping them from switching back once your competitors respond. This applies to direct competitors as well as substitute products.
Getting new customers to enter your market might be worth the investment, especially if they're likely to be loyal due to the nature of the category or your superior product. More new customers also means a larger pool of potential advocates.
4. CAPTURE SCALE BENEFITSIn many industries, there are economies of scale that make higher volume valuable. The more you produce, the lower the unit cost of production, increasing your profit. Or, if you're a retailer, the more you sell, the more you buy, triggering volume discounts from your suppliers. Those scale benefits might offset lost revenue if the increase in demand is great enough.
5. EXPAND YOUR INSTALLED BASEThe quantity of your product being used out in the world is your "installed base" and price promotions will help increase your installed base. That could be a powerful advantage if your product ecosystem - your customers, suppliers, and/or partners - values a large installed base. Let's consider how this virtuous cycle plays out in smartphones:
- The more iPhones apple sells, the more incentive developers have to make apps for it...
- The more apps developers create, the more useful the iPhone is to customers...
- The more useful the iPhone is to customers, the more iPhones apple sells...
- ...rinse, repeat
RESTAURANT EXAMPLEOne anecdotal example I've heard is from the restaurant industry. A restaurant that makes most of its money and profit from its dinner service might stay open at lunchtime. It offers discounted lunch specials, uses utilities, and pay its staff - all at a loss. There were three rationales for doing this despite the fact that lunch service was unprofitable and each relates to one of the benefits we've just reviewed:
- Increase likelihood that people would hear about or see the restaurant open
- Get people who work nearby to try the restaurant to lunch and convert them to profitable dinner guests
- Go through more ingredients each day, getting better volume price breaks from vendors