Promotional pricing, also known as marketing price promotion or penetration pricing, is a cost setting strategy in consumer marketing. It involves reducing the price of a product or service temporarily to attract customers and develop loyalty for increased future revenue and profit. Used by both retailers and manufacturers, this technique can increase competitiveness. It has some significant flaws such as assumption of consumer need, however, and it is not sustainable over a long period.
Purpose
This strategy is meant to attract attention to a product, brand or retailer. The idea is to use the appeal of low cost to let consumers know that a seller, label or item exists. Those who use the technique believe that brand or company loyalty cannot develop until this consumer awareness grows. Loyalty is a goal because it means repeat business and a subsequent increase in revenue and profit. This translates to remaining competitive in the market.
Users
Both retailers and manufacturers use promotional pricing. With manufacturers, promotional pricing alerts the consumer to a specific line of services or products and provides a platform to introduce a brand. When retailers use the technique, it doesn’t matter so much what brands, items or services get the discount, because the objective is to get the consumer to buy many things from a single seller over time.
As an example of this difference, a clothing store may offer garments from many different companies at prices that are below the manufacturers' suggested retail price. Shoppers, attracted by the low prices, may remember that store and visit again when they have apparel needs. A cosmetic company may offer two compacts of eye shadow for the price of one. Consumers may choose eye shadow from that company because of the discount. When they need shadow again, they may remember the previous purchase and buy from the company again.
Method
The application of promotional pricing is relatively simple. Retailers and manufacturers first come to the conclusion that more attention is needed on a label, item or company. They then look at the typical market value of the item or service. They calculate how much of a discount they can afford and decide how long the discount is feasible to apply. Once management approves the promotional price, marketers use standard marketing techniques such as print ads to alert consumers of the discount.
Sustainability
Whenever this method is in practice, a major key is that the discount selected is almost never financially sustainable. Products and services often are at or below cost or part of a buy one get one free offer. Retailers and manufacturers expect that any loss they experience from the promotional pricing will be recouped by the future sales gained by new loyal customers. Most events related to the technique last an average of a week, although some promotions are as short as a few hours or as long as a month.
Frequency
Financial sustainability aside, pricing items at a promotional rate cannot be done with extreme frequency. Repeated promotions may cause customers to anticipate lower pricing. When the retailer or manufacturer raises the cost back up to the normal level, consumers might feel that the regular price is too high and refuse to buy unless they are shown there is something significant about the product or service. Many customers use price as the purchase bottom line and will go to any competitor that can offer the promotional rate. Limiting promotional prices therefore is a means to stabilize a higher perception of market value.
Flaws
Promotional pricing assumes that the discounted price will align with a current need that the consumer has. This isn’t necessarily the case. For example, a store might offer $100 off a television to the first 10 customers on a particular day. If a person already has a perfectly good television, however, the promotion likely won’t be enough to motivate him to shop at that location. This problem means that good promotions always require some market research to reach the largest consumer base possible, and such research can be expensive and time consuming.
During promotional events, retailers and manufacturers have to make some estimates about how consumers will receive the special offers. They sometimes do not make accurate predictions, however. If a mistake means that the manufacturer or retailer cannot meet the consumer’s expectations, customers can be upset and turned off. The promotion ends up having the opposite of the desired effect.
Another major problem in these schemes is that some individuals are not as motivated by cost. These people make quality the top priority instead. They will go to someone with a higher price if they believe that they will receive a better service or product.