What’s it: Promotional pricing is a pricing tactic to attract interest and increase short-term sales. Companies, especially those in the retail industry, usually adopt it to deplete warehouse stock or increase sales during peak seasons.
What is the difference between penetration pricing and promotional pricing
Promotional pricing typically targets sales of existing products. In contrast, penetration pricing is typically for products in new markets. Or a new product on the existing market.
Both of them aim to attract more interest in the company’s products. But, specifically, penetration pricing is to build a customer base and market share. Meanwhile, the promotion price increases sales volume and the company already has a market position (not a new product).
Furthermore, the company may adopt promotional prices to penetrate the market. Or, companies use them when launching new products. In this sense, promotional pricing is a specific type of penetration pricing.
How promotional pricing works
Companies use a variety of alternatives to set promotional prices. But, basically, the company is offering a lower price than the regular price. It can take an immediate discount on the sale price or through other programs.
I will discuss four examples of promotions.
The first is a price discount. The company deducts a certain percentage from the regular price of the product. Its purpose is to increase demand from price-sensitive consumers.
You can almost find price discounts for various daily necessities. Typically, firms adopt it when demand is elastic. A lower price raises a much higher demand.
Companies may also adopt them during the peak season. A higher sales volume allows a higher inventory turnover rate. Thus, the warehouse cost savings should compensate for the lower profit margins resulting from discounted prices.
Many companies also offer promotional pricing as a sales incentive when they first launch a particular product line. They try to sell as many products as possible to quickly achieve economies of scale. By doing so, they can achieve lower average costs.
Second is the loyalty card. Companies use it to manage discounts and promote gifts. So, to get a discount, you must have the card.
The company encourages you to shop more. Every purchase using the card will get points. The more points you have, the better your chances of getting a discount or getting a prize.
If you have reached specific points, you can exchange them for discounted prices for particular products. This strategy is common for retail stores.
The third is buying one to get one free (BOGOF). As the name suggests, you get one free product when you buy two items at once. There are many variations of this promo program, and basically, when you buy more, you pay less. Companies usually use it to gain market share and attract customers to a new product or brand.
The fourth is a coupon. Usually, companies put it in newspapers or magazines. You will get a discount by exchanging these coupons at related merchants.
The advantages and disadvantages of promotional pricing
The advantages of promotional pricing are:
- Increase sales volume in the short term. Low prices provide an attractive incentive for customers to buy, especially those who are budget conscious.
- Revenue growth. A promotion strategy is essential for gaining more income and increasing cash flow in the short term. For example, a company might use it towards the end of the year to reach its annual target.
- Increase inventory turnover. Promos stimulate higher sales volumes and reduce product buildup in warehouses. That ultimately reduces the costs associated with inventory.
- Maintain current customer loyalty. Promotion can be a form of company appreciation to their loyal customers.
However, promotional pricing also contains several disadvantages, including:
- The calculations are more complicated. The company must assess each discount’s appropriateness, the duration of the offer, target customers, and estimates of additional sales resulting from the discount. The company must ensure that the increase in sales volume compensates for the discounted price.
- Price orientation by customers. They may only buy if a discount is available and be reluctant to buy again because it does not offer any more discounts. So, some companies may use regular promotional pricing to sustain ongoing purchases from price-sensitive buyers.
- Low perception by consumers. They often perceive discount prices with low quality. For that reason, not all products are suitable for setting promotional prices.