October 14, 2019  
 
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Effectively Using Price Promotions

Written by James Garvin for Gaebler Ventures

The law of demand states that as a price becomes lower, demand increases and vice versa. Every business owner and consumer know that lower prices mean more unit sales and price promotions via sales and coupons are an effective means for creating more short-term demand for your products.

Price promotions are everywhere these days and consumers have become trained to not only expect, but to demand price promotions.

Many consumers today only buy during a price promotion and forego the convenience of buying at regular price.

Everyone loves a good sale. Coupons have become a multi-billion market and annual shopping events such as Labor Day Sales and other holiday sales use price promotions to increase sales and demand during certain time periods.

Price promotions are used across all industries and by nearly all firms. However, firms like Tiffany's rarely use price promotions because it dilutes their brand value and does not reinforce the luxury goods that they offer. Price promotions for non-luxury goods are a popular and often times successful way to drive greater sales and profits for your products.

There are many challenges with running a profitable price promotion. The first challenge comes with making a greater profit from your price promotion than with out it. Secondly, effective price promotions should be offered to segmented customers. It does your business no good providing a customer with a discount if they are willing to pay full price. Lastly, a firm should avoid running price promotions too often, other wise a firm trains its customers to only by when a promotion is being run.

The key to running any price promotion is to analyze your break even quantity. In other words, how many more units do you need to sell at your promotional price in order to make a greater profit that you would make by selling at regular price? A quick example: If you discount your products at 50%, you would need to more than double your sales in order to generate greater profits. Remember, businesses are about profits, not just sales volumes.

Price promotions can be an effective means for driving greater sales, but having a sale just to have a sale can be a dangerous proposition. Price promotions should induce trial of your product, but should ideally let your most loyal customers continue to pay full price for your products and maintain higher profit margins.

Price promotions can be effective in yield management cases where you need to fill empty seats or create greater demand during slow sales cycles. We see this in movie theaters who discount matinees, restaurants offering kids eat free on Mondays (a restaurant's slowest night) and in the airline industry where big discounted airfare usually occurs on travel days Tuesday thru Thursday only.

Sales events grab a customer's attention and undoubtedly create greater demand. However, a poorly run price promotion can leave a business with fewer profits than if they had never run the promotion in the first place. Strategically analyze why you are running a price promotion, how many more units you will need to sell, and how you can target your more price sensitive customers with your price promotion while allowing your non price sensitive customers paying full price.

James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.

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