Planning yet another promotion, sale or discount? You should probably rethink that. Promotional pricing can cost you millions in lost sales by killing your brand value and by having an adverse effect on your sales. In fact, research has shown that discounting can cost retailers millions by simply NOT selling.
What is promotional pricing?
Promotional pricing is when a seller reduces the price of a product or service to attract customers based on the classic law of supply and demand in Economics that states that the demand for goods will rise as prices fall. Often, promotional pricing used to encourage sales, or to help new products enter the market.
The common notion among managers is that no other marketing instrument is better suited to increase sales volume quickly and effectively than price cuts. That’s why price wars are the rule rather than the exception in many markets, often with devastating effects on profits and growth.
According to the University of Pennsylvania’s Baker Retailing Center, promotions may benefit price-conscious consumers. But the practice is unhealthy for retailers, where competing on price with deeper discounts is creating a race-to-the-bottom, shrinking profit margins, and diminishing brand value while making the path back to growth more difficult. “Once you discount, you get into this spiral because your margins get slimmer, and then you also have to sell so much more to make up for the lost margin on the price. It’s sort of this vicious cycle that you get into,” explains Barbara Kahn, director at the Jay H. Baker Retailing Center.
Promotional pricing is bad for business
1. Shoppers whose first purchase is induced by a discount are 50% less likely to make a second purchase. This is because their purchase was motivated by price and not value.
2. Consumers become conditioned to only buy during sales. And when they do buy, they buy in bulk and store up so they have enough supply to last until the next sale.
3. Consumers become increasingly focused on price over product differentiators and perform mental trade-offs based primarily on cost/benefit versus emotional attachment to the brand.
4. Consumers are more inclined to switch between brands just to get a good price. For the company, this means that it is continually selling its product at a lower price throughout the year and offering steeper discounts to woo customers back from the competition.
5. Over several years, this continued discounting erodes margins significantly, which in turn erodes shareholder value.
6. People get used to seeing discounts everywhere, so they simply stop believing the advertised prices and discounts. What happens is that people have become used to retailers raising prices to the arbitrary “list price” just so they can offer a more compelling discount. As a consequence, consumers don’t believe that the discount on offer is an accurate reflection of the purported savings they’ll get. This influences consumers’ perception of the value of the product and they’ll automatically assume that it’s much less than advertised.
7. Heavily discounted items take on average 20% longer to sell according to an analysis of discounts offered by luxury, premium and mass-market apparel and accessory retailers.
Promotional pricing creates price sensitive shoppers
Many companies, including retail giants Nordstrom, Gap Inc. and Macy’s have all reported dismal earnings in recent years. While factors such as stiff competition from fast-fashion, the increase in off-price retailers and the drop in foot traffic in malls have significantly impacted the health of their bottom line, the overriding reason driving their decline in earnings is that they’ve trained consumers to shop on sale.
Most retailers are already discounting too often and too much. Sales have become so ubiquitous and access and availability of coupons so prevalent that many consumers only get excited about shopping at the prospect of sales.
Why would consumers want to pay full price when they can wait for the next sale?
While sales promotions and discounting strategies are used by retailers as a quick fix to entice shoppers, this approach has inadvertently created a buying environment that conditions shoppers to wait for the markdown. As consumers become increasingly price sensitive, the demand for larger and more compelling discounts intensifies. Retailers who rely on reductive pricing tactics as their primary strategy to attract consumers have unwittingly created a monster that is increasingly difficult to engage with and satisfy.
By heavily incentivizing shoppers to purchase as much as they can during sales, retailers have fundamentally altered the buying behavior of their consumers. Essentially, consumers have been trained to wait for sales. They have become accustomed to it. As retailers continue to battle it out in a relentless price war, consumers know that even deeper discounts and sale promotions will likely follow.
Because consumers know what to expect and are familiar with the predictable promotion cycle that many retailers engage in, they are able to find ways to game the system. For instance, once consumers pick up on the fact that a retailer always ends the season with a massive clearance sale, they’ll likely wait until for the end of the season to make a purchase. Consumers know that if they defer their purchase and wait for the sale, their patience will be rewarded. This only reinforces this unprofitable buying habit.
This raises an important question: How do you break bad buying habits and unprofitable purchasing behavior?
The answers emerge from gaining a better understanding of the motivations and behaviors that influence the decision-making process of your consumer.
Promotional pricing leads to race-to-the-bottom price wars
A 2015 benchmark report from RSR Research found that approximately 50% of all promotions end up losing money and fail to generate the intended lift in revenue. Not the outcome one would expect, especially when you consider how prevalent sales promotions, coupons, and discounts have become.
The study provides further valuable insight, listing heightened consumer price sensitivity, aggressive competitor pricing and increased price transparency as the top three pricing challenges.
Today, consumers have access to an ever-growing number of websites that are exclusively dedicated to listing the latest coupons and discount offers. A quick search on the popular coupon website, RetailMeNot, generates over 78,000 results for coupons and sales that are currently offered by US clothing retailers. This demonstrates just how quick and easy it is for consumers to access the latest information on promotions. Online shoppers have not only become frugal, they are incredibly savvy in terms of sourcing coupons and discounts that allow them to pay the lowest possible price. The current buying landscape of e-Commerce revolves around shoppers seeking out the next discount.
Online repositories of discounts and coupons are not the only factor influencing modern consumer behavior. Price comparison websites are yet another variable that marketers need to contend with, as it directly relates to one of the most important pricing challenges: increased price transparency.
A 2009 study conducted by Forrester Research states that the average consumer visits three websites before making a purchase and that the more expensive the product, the more time consumers spend comparison shopping. So if you think that a consumer will pay for your product or service without scoping out the competition first -think again! 83% of U.S. consumers research and compare prices online before making a purchase, even if they intend on buying the item in a brick-and-mortar store.
If you’re using discounts to drum up sales revenue and encourage repeat business, it’s time to reconsider. A study conducted by Coherent Path reveals that shoppers who are motivated by discounts to make their first purchase are half as likely to make a repeat purchase. This means that your current discount offering is likely the driving cause behind why you’ve been unable to reduce churn, despite your best efforts.
In fact, one analysis of discounts offered by 114 luxury, premium and mass-market apparel and accessory retailers, found that heavily discounted items took on average 20% longer to sell. According to the research by retail analytics company, Edited, the shelf life of a discounted $500 skirt from an online luxury retailer was a well-worn 106 days. In addition to this, their research uncovered that when luxury items were discounted at 40-50%, they took an extra 19 days longer to sell than if marked down at 30-40%. Online retailer’s addiction to discounting and markdown strategies cost them millions.
In the realm of e-Commerce, insights such as the ones discussed above can prove invaluable. By understanding the behaviors and motivations that influence the consumer’s decision-making process, e-Commerce business owners and marketers are able to use this information to develop an effective pricing strategy and set a price that compels their customers to buy. The exceptionally competitive nature of e-Commerce demands that business owners and marketers develop a deliberate pricing strategy, one driven by an acute understanding of their consumer.
Shoppers stop buying at full price
Consumers have become increasingly discount-dependent and now expect a deal from retailers with heavy promotion strategies. Sales promotions and discounts have become such commonplace that people suffer from sales fatigue and start to question the retailer’s motivation. Consumers are used to retailers arbitrarily raising their “list price” simply so that they can offer a more enticing discount.
A 2017 research report by First Insight found that the majority of the women who were tested across all women’s wear categories were unwilling to pay full price for items. In fact, on average, consumers were only willing to pay 76% of the full price. This means that the entry point for consumers to make a purchase from retailers is 24% off all the time.
Not only do price reductions cost retailer’s money, they shrink profit margins significantly and erode brand value in the long run. Retailers have created a markdown epidemic where consumers do not see the value of products and services at full price.
The same research report revealed that 45% of the women surveyed would only be inclined to enter a store if a markdown of 41% or more was being offered. People are so used to seeing discounts everywhere that they simply stop believing the advertised prices.
Another study examined consumer responses to price promotions, revealing just how little faith consumers have in retailers. It shows consumers discounting the discount. For example, when consumers encounter a 50% off sign, they automatically assume that the retailer is really only selling it for 40%.
Promotional pricing devalues your brand
Consumers use price as a cue to gauge perceived value, which means that deep markdowns and race-to-the-bottom price promotions have serious implications on brand value. Now, more than ever, retailers need to become aware of the true value that their product or service brings to the lives of their customers. This insight affords a significant competitive advantage to those retailers who use this information to guide their marketing efforts and carefully craft a pricing strategy that attracts and motivates consumers to buy.
As consumers continue to demonstrate increasing price sensitivity, the value of having a strong brand becomes even more significant. Powerful brands have the ability to command and defend higher prices compared to competitors. They generate more sales revenue, boost profit margins, encourage customer loyalty and contribute to increased shareholder value.
Promotional pricing such as deep discounting substantially erode brand value in the long term. Retailers engaged in heavy price promotion strategies attract price-driven consumers who are unlikely to become long-term loyal customers. Even more concerning is the negative impact that frequent discounting has on loyal customers who previously paid the full price for an item that is now discounted in an effort to attract new buyers. Suddenly, their quality/price relationship with the product is up for discussion and they end up reevaluating its perceived value.
Discounts can be viewed as a sign of weakness by consumers and create an impression that the quality of the item has decreased.
The prestige effect on pricing is a powerful psychological phenomenon that occurs when consumers assume that a high price indicates greater value and higher quality. Consumers are motivated to pay a higher price because of the prestige associated with the brand. Therefore it is essential that deep discounting and race-to-the-bottom pricing strategies are avoided because they devalue the product or service and significantly damage the brand. Instead, focus on creating a compelling narrative that reinforces and supports the brand. This approach shifts the consumer’s focus away from price and directs their attention towards the perceived value and emotional attachment to the brand.
Psychological pricing advantage
Pricing is more than just numbers. From a consumer-oriented perspective, the price is a reflection of the perceived value of a product or service. Study after study demonstrates the adverse effects that discounts and promotional pricing have on the consumer’s decision-making process and purchasing behavior.
The evidence is clear, promotional pricing, deep discounts and race-to-the-bottom tactics are not a quick fix to bump up sales revenue and attract new customers- in fact, research shows the complete opposite.
The survival of retailers and e-commerce stores will be determined by how well their pricing strategy addresses challenges such as increased price sensitivity, aggressive competition, and increased price transparency. Those who develop a pricing strategy that takes into account the factors which drive the needs, values and motivations of their customers will have a significant advantage over their competitors.
By using psychological pricing strategies, you are able to influence how your customer perceives and engages with your price. This is how you establish a pricing strategy that motivates your customer to buy, increases online sales revenue, boosts profit margins, encourages customer loyalty and strengthens your brand.
Learn how to use psychology to grow your business, supercharge your sales and make your prices appear more attractive without relying on deep discounts, coupons and sales that damage your brand and breeds bad buying behavior.
Use our promotion calculator to discover how much your next promotion will actually cost you and how much you need to sell to break even.