We’ve all been there…

We see a product on promotion and we see an opportunity.

Maybe you’ve been thinking of this particular product for a while or maybe it’s new to you.

Either way, the reduced price and perceived value pull you in.

It’s an easy decision…

“Look at what the value is and look at what I can get it for. It’s a no-brainer.”

And just like that, you’re pulling out your credit card and making that buying decision.

But why is promotional pricing so effective, and how and when should and shouldn’t you use this strategy?

That’s exactly what you’ll learn in this article (along with some top examples, of course).

What is Promotional Pricing?

Let’s start with the definition of Promotional Pricing.

Promotional pricing is a pricing strategy used by brands that want to drive sales in the short-term. They do this by temporarily reducing the price of products or services to entice customers to buy before the offer expires, often through integrated marketing campaigns.

Without a doubt, promotional pricing is one of the most effective strategies for driving short-term sales.

Brands that leverage it effectively can expect to see revenue growth for the period of the promotion.

Although promotions tend to be associated with retailers, they are also used frequently by restaurants, gyms, airlines and service providers to name a few.

Essentially any brand that wants to drive more sales in the short term can leverage the promotional pricing strategy.

Increase In Sales & Revenue

The most obvious advantage of running sales promotions is the injection of sales and ultimately cash into the business.

Whether the additional revenue is helping to pay the bills or boosting the profits on an already impressive year, revenue & profits are the lifeblood of any successful business.

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Urgency Drives Action

The law of scarcity detailed by Robert Chialdini in his ground-breaking book “Influence: The Psychology Of Persuasion” is the fear of missing out.

The nature of price promotions is that they’re time-bound so they are inherently scarce. 

A promotion pricing strategy that’s not timebound won’t have anywhere near the impact of one that is. You want your discounted price to be limited so it incentivizes customers by creating a sense of urgency. Nobody wants to miss out on seasonal sales, for example.

Driven by the fear of missing out, buyers are driven to take action now, to lock in the value on offer before it’s gone.

Value Perception Favours The Buyer

When we go shopping for something, consciously or subconsciously, we want to see some value.

This is why discounted buys on higher volumes work well even though the price is higher. It lowers the average cost per item, increasing the value for the buyer.

Even wealthy shoppers with no restraints looking towards the top shelves, don’t want to be taken over the coals. 

In other words, in one way or another, we’re all drawn to value. And promotional pricing leans value in favour of the buyer, increasing the willingness to purchase.

Advantage Over Competition

When it comes to products in direct competition with each other, pricing promotions offer discounted products a competitive advantage.

All things being equal, we’re more likely to buy an identical product that’s discounted, than one at full price.

Even if this competitive advantage is short-lived, it can impact the sales and revenue of the brand on promotion and its competitors. It can also turn an otherwise reluctant audience into loyal customers in the long run.

Greater Volumes, Greater Buying Power

Brands that understand their price promotion strategy in great detail through extensive research can predict with a certain degree of accuracy, the likely impact on sales volumes.

This puts more power into the hands of the business, allowing them to source materials in higher volumes and at lower prices, ultimately reducing their cost of production per unit and improving profit margins.

Of course, this is off-set with the reduction in price-per unit though the life-time value of a new customer may make this a valuable trade-off to the business.

Brand Perception & Loyalty

The most important factor to consider when determining the price of a product is the impact it has on the brand’s perception in the market as well as customer loyalty.

Brands that operate with regular price promotions can negatively impact the relationship with customers on both ends of the price scale.

Customers who purchase the brand’s products at full price may very well feel cheated when they see the same products on offer at a discounted rate.

On the other hand, the shopper at the low price point may feel disgruntled when they want to make a repeat purchase only to see that the price has gone up.

Both sets of customers will likely feel less loyalty towards the brand affecting the brand’s overall perception in the market. In the long term, this can decrease customer traffic and reduce the brands’s market share.

Price Perception & Cannibalisation

Brands leveraging the price promotions regularly are sending a consistent message to their audience and the audience listens.

The message they send is:

We’ll will be back with another promotion soon.

Repeated discounts and promotions affect the price perception of the brand’s products, impacting sales outside the promotional period. And even if the sales run for a limited time, having consumers get used to frequent discounts removes the sense of urgency — they can get whatever it is at the next sale.

We see this a lot with e-commerce businesses and consumers waiting for holiday promos to get their shopping done.

In other words, customers become trained to wait for the promotions rather than pay the regular price outside the promotion.

Price Wars

Price wars are a well-documented side-effect of price promotions in highly competitive marketplaces.

As we covered earlier, discounts offer brands a short-term competitive advantage which may result in the competition responding with their own, lower discount.

When brands go toe-to-toe on price promotions, it can quickly become a price war which impacts the profits of not just the brands at war, but the entire industry.

In price wars, there is only one winner… the customer.

Promotional Pricing Examples & Types

With all that being said, let’s take a look at some of the most widely used promotional pricing examples so you can see if there’s a certain type of promotion that will work well for you.