How to execute effective and efficient price promotions?
Price promotions can increase sales, but they are not always a good idea. It is important to understand when to use them, how to execute them, and what their effects are on brand perception and profitability.
PROMOTIONS
Advertising has a positive effect on demand. But this increase in sales is not explained by each customer buying more, but rather by an increase in the number of buyers. In a price promotion, the increase in sales generated by a price reduction is usually smaller than the impact generated by advertising.
However, even though promotions increase sales, it is not always appropriate to run them.
Three valid reasons to use price promotions
Well-designed promotions can be useful in three cases:
New product launches: When a product is new, the buyer faces uncertainty. A low-price promotion can reduce that risk and encourage the customer to try it. In consumer categories, this is achieved through free samples or special introductory prices.
Penetrating new segments: When entering a new geographic, demographic, or behavioral segment, it is crucial to avoid current customers taking advantage of promotions designed for others. Effective price segmentation allows attracting new consumers without cannibalizing existing sales. Uber Eats, for example, offers discounts when entering a city to encourage new users to try the service.
Inventory management: Promotions can be very effective for clearing obsolete or perishable inventory, such as end-of-season clothing sales. In these cases, any unit sold generates incremental profit, as long as line products are not affected.
Two reasons to avoid promotions
There are situations where applying discounts can be harmful:
Responding to a new competitor: When Beat entered the market with aggressive prices, Uber did not need to match them. Only some customers were price-sensitive, but they could not be identified individually. A mass promotion would have unnecessarily reduced prices for all users.
Creating a perception of low prices: Some competitors in mature markets use constant promotions to appear cheaper. However, this can generate high price sensitivity among customers, who learn to buy only when there is an offer. Over time, this practice damages the brand’s quality perception and its ability to charge premium prices.
Evaluation of promotional formats
Promotions can be classified based on their effectiveness for inducing trial and their cost-efficiency:
Free samples: The most effective tactic for getting customers to try a new product, but also the most expensive, even in small presentations.
Special prices: They facilitate trial but have medium cost and medium effectiveness. They require strict control, as the discount may remain in the channels. Moreover, they do not allow precise segmentation.
Coupons: Highly cost-efficient. Although not the most effective, they allow segmentation based on price sensitivity, since they require effort to redeem. They are useful in mature markets seeking to attract new customers.
2×1 promotions: Not very effective for inducing trial, as they are usually taken advantage of by existing customers. Their frequent use increases price sensitivity and fails to achieve the goal of attracting new consumers.
Conclusion
Price promotions must be used strategically. They are valid for inducing trial or managing inventory. Outside of these cases, they can destroy value and affect brand health. Therefore, it is essential to analyze them carefully and design them with clear objectives.