Price Promotions Pros and Cons

In 2012, JCPenney famously – and fruitlessly – attempted to challenge retail tradition when it implemented what it called “fair and square” everyday pricing rather than offering customers price deals at periodic junctures throughout the year. On a 25% sales plunge and a 13% drop in customer traffic, by early 2013 the retailer announced a return to tradition.

In all JCPenney stores, price tags were quickly adjusted so that, for example, an item with an “everyday” price of $5 was repriced at $6. This gave JCPenney room to offer a traditional markdown even though it would ultimately arrive back at the same price.

As JCPenney noted in a news release: “While our prices continue to represent a tremendous value every day, we now understand that customers are motivated by promotions and prefer to receive discounts through sales and coupons applied at the register.”

Price promotions have long been a staple of marketing, and not just in the retail industry. Designed to stimulate trial and consumer demand over a limited time period, they can take a variety of forms like discounts, premiums, buy one/get one free sales and coupons, just to name a few. Credit Coca-Cola with the first coupon, created in 1887 and redeemable for one free drink. By 1931 it was estimated to have been distributed to one in nine Americans.

JCPenney was not the first business to try to find a better way. The challenge to marketers is to understand the pros and the cons of price promotions, particularly when aligned to consumer behaviors, and to incorporate that understanding into their marketing strategy. That is how businesses can reap benefits without falling prey to the downsides.

On the positive side, there are various benefits to well-conceived price promotions. Small businesses with limited budgets for marketing may find them a useful tool to heighten awareness and increase sales.  They can be an incentive to retailers to carry a particular product while also motivating people to buy it over its competition.

If product quality and value are in play, a price promotion might be the introduction needed to convince customers to switch their loyalty. That creates return business and also has the potential to generate positive word of mouth buzz. And in some situations, a discounted sale is better than none at all, and can make the difference between a month that is profitable, or not.

While it is always pleasant to have a lift in sales, the problem is that promotional lifts are typically short-lived, not sustained. They have very little effect on overall sales volume and erode profit margins. Discounts tend to create a tight link in the consumer’s mind between the idea of value and price. That tends to commoditize a product and creates an expectation of lower prices. It’s a better practice to build the consumer’s value associations in other ways, such as through improved customer service or loyalty programs that emphasize the experience more than the transaction.

Finally, when promotions are overused, the edge can be lost. There’s no sense of urgency to “buy now” because the consumer knows there will always be another deal that’s just as good or better, right around the corner.

Marketing managers will weigh the benefits and pitfalls of promotional marketing strategies against their insights into their customers’ needs, preferences and ability or willingness to pay certain prices for products and services. Finding the right balance is what can lead to business success.

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