Price Promotions
Chapter 7
Agenda
• How does a price promotion improve
profitability?
• Do price promotions mostly grow the
market or grow the share within the
existing market?
• Are price promotions a good means of
price segmentation?
• What are common examples of price
promotion?
Positive effects of Price promotions
• An effective Segmentation Hedge
• Capturing market share
• Increase in the profitability
Price Segmentation
•
Targeted discounts enable a
company to charge different
prices to different customers
Revenue w/o Discounting
– Allows the price sensitive to
purchase at a lower price
– Keeps the utility sensitive
purchasing at the higher “list”
price
Price
Additional Revenue
Gained from Discounting
Marginal Unit Cost
•
Incremental sales at a
discounted price above
marginal unit cost enhances
profitability
Demand
Quantity
Promotional discounts grab market
size and share
•
Promotional Discounts tend to increase sales volume
•
The increase in volume will come
–
–
•
Primarily from capturing share from you competitor
Secondarily from growing the overall market
Note: Short term reactions to downward price movements tend
to be larger than long-term reactions
Negative Effect of Price Promotions
• Imperfect segmentation hedge
– Price promotions can provide unnecessary price
concessions to customers that otherwise would
have paid the full price
– Dilution / cannibalization of otherwise higher
margin sales
• Customer Churn
– Price promotions improve profitability by
encouraging brand switching among customers.
If customers who switch are not captured, the
result is simply a high-customer-acquisition cost
with the loss of customer retention profits
Resets Price Expectations
Promotional discounts reset price
expectations to a lower level,
dampening demand in future
periods when the product is
offered at full price
•
Full price periods will increase
price expectations, increasing
demand during promotional
periods
Price
•
Observed
Price
Reference
Price
Time
Increases Price Sensitivity
• Price promotions enhance buyer sensitivity to price
– Promotions highlighting brand and price alone increase
price sensitivity
– Marketing communications highlighting features and
benefits increase utility sensitivity and decrease price
sensitivity
• Customers that tend to be sensitive to advertising also
tend to be more price sensitive
• Market growth from promotional discounting is likely to
contribute to the size of the price sensitive segment
Promotional Design
•
•
•
•
Targeted
Temporary
Special
Irregular
Examples
• Couponing
– Manufacturers coupons to induce trial
– Store coupons to induce patronage
– Key metric – portion of customers from couponing
resulting from incremental sales rather than
displacing normal sales
• Trial Offers
– Effective with products that will be purchased
frequently, have a low incremental production cost,
and have benefits that are self-evident after one use
• Rebates
– Can be used with a high degree of targeting
• Promotional Bundles
Evaluating Promotions
• Consider
– Cost (distribution, process, etc)
– Redemption Rates
– Discount Depth
– Sales volume induced
– Type of customer redeeming the promotion
• Conduct a Break Even Incremental Sales
per Redemption analysis
Summary
• Price promotions are a form of price segmentation in which
prices are reduced for those with a lower willingness to pay
and regular prices are offered to those with a higher
willingness to pay.
• Price promotions generate increased sales primarily through
encouraging brand switching and secondarily through
increasing the size of the market.
• Because price promotions focus the customer’s attention on
price, they can also increase price sensitivity.
• In general, price promotions should strive to be targeted
towards marginal customers. Other design criteria for price
promotions include a desire for them to be temporary, special,
and irregular.
• Price promotions include specially marked packages,
coupons, trial offers, trade deals, promotional sales,
discounts, promotional bundles, and rebates.