Price promotions and their effect on consumer behavior

Over the past few years, competitive intensity has driven the indiscriminate use of sales promotions, especially price promotions. It is rare to visit a store and not find a product on sale, or go any day of the week to a large retailer without finding some section with special discounts. It is even strange to try to watch a TV show without seeing at least three promotional ads, where it becomes impossible to tell which brand was actually on offer.

Increasing price sensitivity
The majority of companies, both in mass markets and industrial ones, tend to abuse price promotions. They generally seek to increase traffic in their stores, boost purchase frequency and quantity, or take customers from the competition. In short, to increase sales and market share in the short term.

This article does not aim to analyze the profitability of promotions, but rather to review their impact on the final consumer in the medium and long term. Several studies show that once the promotional activity ends, consumers assimilate this information for future purchase experiences. This increases their price sensitivity by reducing reference prices in the category.

Increasingly rational
In the telecommunications sector, for example, promotional excess has increased consumers’ price sensitivity, making them increasingly rational. Not a month goes by without some operator offering three free months, free installation, or a service bundle where the fourth component is free, among others. This rise in purchasing rationality leads consumers to perform price comparisons and calculate the equivalent monthly fee that would be acceptable: if their service costs $59,000 per month and they are getting three months free in a year, they are actually paying 25% less annually. This means that the other providers, to be competitive with products of similar value, would need to offer a monthly fee of around $44,000 to fall within the acceptable price range for the consumer.

This situation is not limited to services; it also occurs in many other fast-moving consumer goods categories. After the promotional periods end, the product returns to its regular price, and the customer perceives it as expensive since it falls outside their acceptable reference range.

In summary...
If a company decides to run price promotions, they must be part of a sustainable commercial strategy with clearly defined objectives. Whatever the objective, it must consider the effects on consumer price sensitivity and reference values to avoid value destruction in the medium and long term.