When retail sales start to slow, many companies consider more aggressive pricing strategies. One of the most popular strategies involves promotional pricing, which has many benefits. But these benefits can come at a cost. Let’s begin by reviewing the benefits:
Immediate increase in sales. Customers who are price sensitive often react to temporary price reductions and may make purchases they were previously unwilling to make. If your customer base is largely made up of this group, a promotion can have a significant impact on your sales.
Increased market share. Your business can gain market share by drawing new customers who were not interested in your product prior to the promotion. If they are impressed by the products and services your business provides, you can gain a loyal customer for life.
More foot traffic. Promotions often create an increase in store foot traffic, which can cause a halo effect on other areas of your business. This may be a good time to wow customers with a new product or service and increase your share of customers' shopping spend.
Promotional pricing can also have negative consequences:
Reduced sales. After the promotion is over, you may find that sales fall below your previous sales trends. This can happen when a promotion doesn’t add incremental sales, but instead pulls future purchases customers were planning to make anyway.
Reduced profit. Selling items at a reduced price without the ability to reduce your costs can erode your gross margin and reduce your profit. Selling items below cost is not a sustainable strategy.
Promotion expectations. Your customers may get hooked on promotions and become resistant to making purchases without them. This can cause your business to get caught in a promotional loop.
Many of the challenges with promotional pricing are unavoidable, but there are things you can do to minimize these potential pitfalls:
Bundle pricing. Offer a reduced price or other incentive to customers who buy several of the same item or multiple complementary items. This approach gives you the additional benefit of selling through items with excessive stock levels or short expiration timelines. This approach also increases your overall volume and reduces the impact on your gross margin.
Encourage loyalty. The idea here is to offer a promotional price to loyalty members only. This allows customers to realize the value of your loyalty program and encourages them to join if not already a member. Customers win with a price savings and your business wins by growing your loyalty base.
Explore other ideas. Don’t rely on promotional pricing alone. Businesses have additional levers they can pull to increase sales. For example, customers find value in a great experience. Focus on improving your customer experience and offering something your customers can’t get elsewhere. This will increase your customers' connection to your business.
Selecting the right pricing strategy for your business is a complicated process. It requires you to review both internal and external elements and weigh their influences on your business. It is also a decision that will need to be continually evaluated. The business environment and what your customers want will continue to evolve. Make sure you stay informed and listen to what they are telling you. Embrace this information and incorporate it into your business in any way you can.