Promotional Pricing Chapter 5 PDF

Chapter 5 Promotional Pricing Earvin John J. Medina, MBA What is Promotional Pricing? Promotional pricing is a marketing strategy where businesses temporarily lower the prices of their products or services to attract customers and increase sales. Importance of Promotional Pricing...

Chapter 5 Promotional Pricing Earvin John J. Medina, MBA What is Promotional Pricing? Promotional pricing is a marketing strategy where businesses temporarily lower the prices of their products or services to attract customers and increase sales. Importance of Promotional Pricing for Business Growth The purpose:  Attract new customers  Retain existing customers  Boost sales volume  Create brand awareness  Clear excess inventory Chapter Overview  Promotional pricing strategies include discounts, limited-time offers, buy one get one free (BOGO), bundle pricing, seasonal sales, loyalty programs, coupons, rebates, and flash sales.  These strategies aim to incentivize customers to make a purchase, increase customer engagement, and drive revenue. Identifying your target audience  Different customer segments may respond differently to various promotional offers.  Tailor your pricing promotions to align with their preferences and needs. Market Segmentation  Demographic Segmentation: This involves dividing the market based on demographic factors such as age, gender, income, education, occupation, marital status, and family size.  Demographic segmentation provides insights into the basic characteristics of consumers and helps businesses understand their purchasing power and behavior. Market Segmentation  Psychographic Segmentation: This segmentation approach considers consumers' lifestyles, personality traits, values, attitudes, interests, and opinions.  Psychographic segmentation focuses on understanding the motivations, aspirations, and preferences that drive consumer behavior  Understanding psychology allows businesses to create targeted messaging and offerings that resonate with specific psychographic segments. Market Segmentation  Geographic Segmentation: This involves dividing the market based on geographic factors such as location, region, climate, population density, or urban/rural areas.  Geographic segmentation recognizes that consumer needs and preferences can vary based on their geographical location and helps businesses tailor their marketing efforts to specific geographic markets. Market Segmentation  Behavioral Segmentation: This segmentation approach categorizes consumers based on their behaviors, purchase patterns, usage habits, brand loyalty, or responses to marketing stimuli.  Behavioral segmentation looks beyond demographic or psychographic characteristics and focuses on understanding the actual consumer interaction with your offering. Market Segmentation  Firmographic Segmentation: This type of segmentation is primarily used in business-to-business (B2B) markets and involves dividing the market based on firmographic variables, such as industry, company size, location, organizational structure, or purchasing process.  Firmographic segmentation helps businesses understand the unique needs and buying behaviors of different businesses and tailor their offerings accordingly. Types of Promotions Offered for B2b Transactions B2B Promotions: Volume Discounts: Discounts based on the volume or frequency of purchases, encouraging larger, more frequent orders. Trade Discounts: Offered to partners or distributors as part of the ongoing partnership to maintain competitive pricing and loyalty. Types of Promotions Offered for B2b Transactions B2B Promotions: Contract-Based Pricing: B2B often involves contract terms where special pricing may be locked in for a certain period, giving clients predictability in costs over time. Extended Payment Terms: Promotions in B2B can involve flexible payment schedules, allowing clients to defer payments or pay in installments, improving their cash flow. Examples of Market Segmentation  Demographic Segmentation: A soft drink company targets its advertising towards teenagers and young adults (age segment) who are more likely to consume sugary beverages.  Psychographic Segmentation: A luxury car manufacturer develops a marketing campaign highlighting the prestige and status associated with their vehicles, targeting individuals who value luxury and exclusivity (psychographic segment). Examples of Market Segmentation  Geographic Segmentation: A sunscreen brand creates different formulations for its products, with higher SPF levels for regions with intense sunlight (geographic segment) like tropical areas or desert regions.  Behavioral Segmentation: An e-commerce retailer sends personalized recommendations to customers based on their past purchase history and browsing behavior (behavioral segment), offering products that align with their preferences. Examples of Market Segmentation  Firmographic Segmentation: A software company develops specialized solutions for small businesses (company size segment) in the healthcare industry (industry segment), addressing their unique needs and workflows. How to assess your competitor’s promotional pricing Price Comparison:  A retailer monitors competitors' promotional pricing to identify instances where their competitors offer lower prices for similar products  This will allow you to adjust their own prices or offer price-matching guarantees to stay competitive. How to assess your competitor’s promotional pricing Promotional Analysis:  A company analyzes the frequency and types of price promotions used by competitors in the market to understand the effectiveness of their strategies and identify potential gaps or opportunities for their own promotional offerings. How to assess your competitor’s promotional pricing Value Proposition Evaluation:  A business assesses how competitors' price promotions align with their overall value proposition, examining whether competitors emphasize low prices, quality, convenience, or other factors in their promotional messaging.  This helps the business identify areas where they can differentiate themselves and appeal to a specific customer segment. How to assess your competitor’s promotional pricing Promotional Timing:  A company analyzes competitors' promotional timing and duration to identify periods of increased promotional activity or seasonal trends.  This allows them to strategically plan their own promotions, avoid direct conflicts, and maximize the impact of their promotional efforts. How to assess your competitor’s promotional pricing Customer Perception:  A business conducts surveys or gathers customer feedback to understand how competitors' price promotions are perceived by consumers.  This insight helps them gauge the effectiveness and appeal of different promotional tactics and make informed decisions about their own pricing strategies. The Basic Promotional Pricing Strategies Price Discounting:  Price discounting refers to the practice of reducing the original price of a product or service to encourage customers to make a purchase.  It is a common promotional strategy used to attract customers, increase sales, and compete in the market. The Types of Discount Pricing Strategies  Seasonal Discounts: Seasonal discounts are temporary price reductions offered during specific seasons or times of the year to encourage sales. These discounts are often aligned with holidays, festivals, or seasonal fluctuations in demand to attract customers and boost sales during these periods.  Volume Discounts: Volume discounts are price reductions offered to customers who purchase in larger quantities or reach a specified sales volume. Businesses provide lower prices as an incentive for customers to buy more, encouraging bulk purchases and rewarding customers for their larger order size. The Types of Discount Pricing Strategies  Cash Discounts: Cash discounts, also known as prompt payment discounts, are incentives offered to customers who pay for their purchases in cash or make prompt payment. These discounts typically involve a percentage reduction in the total price and are intended to encourage timely payments and improve cash flow for the business.  Trade Discounts: Trade discounts, also called industry discounts or wholesale discounts, are price reductions given to resellers, distributors, or wholesalers in the supply chain. These discounts are negotiated between the manufacturer or supplier and the trade partner, and they help facilitate bulk purchases, strengthen relationships, and incentivize intermediaries to carry and promote the products. The Basic Promotional Pricing Strategies Coupons and Rebates:  Coupons and rebates are marketing tools that offer customers a discount on a product or service.  Coupons are typically paper or digital vouchers that customers can redeem at the point of purchase, while rebates involve customers receiving a partial refund after the purchase is made. Some Tricky Rebate Tactics  Complex Redemption Processes: Some companies make the rebate process intentionally complicated, requiring multiple forms, receipts, or barcodes. This discourages customers from completing the rebate process.  Limited Redemption Windows: Companies often set a narrow time frame for submitting rebates, sometimes as short as 30 days after purchase. If customers miss this window, they’re out of luck. Some Tricky Rebate Tactics  Mail-In Only Rebates: By requiring customers to mail in the rebate instead of submitting it online, companies add friction to the process. This increases the chance that customers may give up or forget.  Lengthy Processing Times: Some companies have long wait times (e.g., 8–12 weeks) for processing rebates. This may cause customers to forget about the rebate or lose interest in pursuing it if there’s a follow-up issue. Some Tricky Rebate Tactics  "Prepaid Cards" with Expiration Dates: Instead of cash or checks, companies sometimes issue rebates in the form of prepaid cards, which may have expiration dates or fees for non-usage. This way, any unused balance is reclaimed by the issuer after expiration. The Basic Promotional Pricing Strategies Bundling and Package Deals:  Bundling and package deals involve combining multiple products or services together and offering them at a discounted price.  This strategy encourages customers to buy more by providing them with added value or convenience through the bundled package. Bundling and Package Deal Strategies  Product Bundling: Combining multiple products or services into a single package and offering them at a discounted price to increase customer value and encourage larger purchases.  Package Deals: Promotional offers that combine multiple products or services into a pre-defined package, providing convenience, variety, and cost savings to customers.  Add-On Bundling: Offering additional products or services at a discounted price when purchased together with a primary product or service, encouraging upselling and increasing the transaction value. The Basic Promotional Pricing Strategies Buy-One-Get-One (BOGO):  Buy-One-Get-One, commonly referred to as BOGO, is a promotional strategy where customers receive an additional item for free or at a discounted price when they purchase one item at the regular price.  It incentivizes customers to buy more and can help increase sales and clear out inventory. Some Tricky Buy One Get One Tactics  Selective Product Pairing How it works: Instead of offering BOGO on any item, the promotion may only apply to specific products or less popular items that the company wants to clear out. This approach can increase inventory turnover on slow-moving stock without reducing the price of more desirable items. Example: A clothing store might offer a BOGO deal on last season's styles but exclude the latest collection, making it less appealing for customers wanting current trends. Some Tricky Buy One Get One Tactics  Increased Prices Before BOGO How it works: Sometimes, companies will temporarily raise the price of the item before the BOGO promotion begins, so the "free" item’s value is built into the higher price. This way, customers feel like they’re getting a great deal when, in fact, the promotion may be close to the original price. Example: A pair of shoes might typically cost $50 each, but during the BOGO event, the store raises the price to $75, making the “free” item less of a bargain. Some Tricky Buy One Get One Tactics  Requiring a Minimum Spend or Additional Purchase How it works: Some BOGO promotions are only available if the customer spends a certain minimum amount or buys an additional product not included in the promotion. This tactic drives up the overall purchase amount. Example: A grocery store might offer BOGO on a particular brand of pasta, but only if the customer spends at least $25 on other products. Some Tricky Buy One Get One Tactics  Limited Quantity or Low Stock Availability How it works: Retailers may promote a BOGO deal on items that are low in stock, creating a sense of urgency. By limiting availability, they can draw customers into the store or onto the website, hoping they’ll buy other items even if the BOGO products sell out quickly. Example: A beauty store might advertise BOGO on a popular shampoo but limit stock to only a few bottles per store, so customers still end up purchasing additional, full-price products. Some Tricky Buy One Get One Tactics  "Buy One, Get One Half Off" Instead of Completely Free How it works: While technically a type of BOGO, this strategy only provides a 50% discount on the second item, not a completely free one. This still encourages customers to buy more but results in higher total sales. Example: A sports store might offer "Buy One Pair of Sneakers, Get the Second Pair 50% Off," which seems attractive but doesn't offer as deep a discount as a true BOGO. Some Tricky Buy One Get One Tactics  Restrictions on Product Categories or Brands How it works: The BOGO deal may apply only to certain brands or product categories that are less popular or have higher profit margins. This tactic can steer customers toward these items rather than more profitable or in-demand brands. Example: A grocery store might offer BOGO on generic brands or private labels rather than national brands, which can increase brand awareness and push customers toward store brands. Some Tricky Buy One Get One Tactics  In-Store Only or Online Only How it works: Some BOGO deals are restricted to either in-store or online purchases only, which can be inconvenient for some customers. This tactic often helps companies control the scope of the promotion. Example: A retailer may advertise a BOGO deal that’s available only in physical stores, enticing online customers to visit the store, which may drive additional purchases. Some Tricky Buy One Get One Tactics  Bundling with High-Margin Products How it works: Some BOGO deals are structured to pair a high- margin product with a low-cost one, ensuring that the company maintains profitability even when giving away an item for "free.“ Example: A cafe might offer "Buy a Large Coffee, Get a Muffin Free," where the coffee has a high markup, ensuring profitability despite the free muffin. Some Tricky Buy One Get One Tactics  Short Promotional Periods How it works: Companies may limit BOGO offers to a very short timeframe, creating urgency and sometimes making it difficult for customers to take full advantage. This creates a sense of scarcity, encouraging customers to make quick purchasing decisions. Example: A weekend-only BOGO promotion creates a rush among customers, increasing foot traffic or online visits, but limits the company's financial exposure. The Basic Promotional Pricing Strategies Free Trial Offers:  Free trial offers are promotional strategies where businesses provide potential customers with a limited period to try out their product or service at no cost.  This allows customers to experience the value and benefits of the offering before making a purchase decision.  Free trials are commonly used for subscription-based services or software products and can attract new customers, build trust, and increase conversion rates. Examples  Price Discounting Example: A clothing store offers a 20% discount on all items during a weekend sale to attract more customers and increase sales.  Coupons and Rebates Example: A grocery store provides customers with digital coupons that can be applied at checkout, offering $2 off on a specific brand of cereal.  Bundling and Package Deals Example: A telecommunications company offers a package deal that includes internet, cable TV, and home phone services at a discounted price compared to purchasing each service separately. Examples  Buy-One-Get-One (BOGO) Example: A shoe store runs a BOGO promotion where customers who buy one pair of sneakers get a second pair of equal or lesser value at 50% off.  Free Trial Offers Example: A streaming platform offers a 30-day free trial to new users, allowing them to access all features and content during the trial period without any charges. Advantages of Promotional Pricing  Increased Sales and Revenue  Enhanced Customer Experience: Promotional pricing can contribute to an enhanced customer experience by providing customers with opportunities to save money and obtain value for their purchases Advantages of Promotional Pricing  Competitive Advantage: By offering lower prices or better deals than competitors, businesses can attract customers away from competitors and position themselves as a preferred choice  Improved Customer Loyalty: Customers appreciate discounts, special offers, and exclusive deals, which can strengthen their connection with the business and increase their likelihood of remaining loyal customers over time. Disadvantages of Promotional Pricing  Potential Loss of Profit Margins: Offering discounts or lowering prices may reduce the revenue generated per sale, impacting the overall profitability of the business.  Devaluing Brand and Product Image: Excessive or frequent promotional pricing can devalue the brand and product image in the eyes of customers. Disadvantages of Promotional Pricing  Attracting Price-Sensitive Customers Only: Customers who are solely focused on price may switch to competitors offering better deals, making it difficult to establish long-term customer relationships.  Negative Impact on Long-Term Sales: Customers may become conditioned to wait for discounts before making a purchase, leading to a decline in regular-priced sales. Additionally, if customers perceive that promotions are always available, they may delay purchases until a discount is offered, negatively impacting regular sales patterns.