The advantages of promotional pricing

Written by kristen mirsky | 13/05/2017
The advantages of promotional pricing
Reel in new customers by cutting prices on popular items. (Phil Ashley/Lifesize/Getty Images)

Selling products is challenging when shelves are lined with similar-quality products, and customers are bombarded with advertising messages. Promotional pricing helps differentiate a specific product and leverage a potential customer's attention long enough to purchase the product. Promotional pricing involves lowering the price of a product, distributing coupons or offering specials, such as buy-one-get-one-free offers. In certain cases, the product may even be sold at or below cost. Companies --- especially those in the retail industry --- often maintain a standardised pricing spreadsheet to provide a consistent format for the buying offices and merchant support teams to successfully communicate pricing strategies.

Inventory Reduction

When excess inventory is on hand for an item, especially time-sensitive products that are perishable or have a specific shelf life --- think holiday merchandise--- businesses must move merchandise quickly to minimise losses. Promotional pricing is designed to attract busy or new customers who may have otherwise ignored the goods; this strategy reduces inventory levels. To attract new customers, creative and enticing promotions should be utilised to convince them that they're getting a deal.

Expanding the Customer Base

Because promotional pricing draws in new customers, the company has the opportunity to turn these consumers into part of the foundation of a loyal customer base. Offering promotional prices can initially attract customers who normally don't shop at the store. After customers experience the store's environment and customer service, they have the potential to become repeat customers, in turn increasing the company's profit margin and items-per-sale ratio. Aggressive pricing strategies are key to luring in bargain hunters and younger shoppers.

Influencing Customer Behavior

Because promotional pricing strategies are short-term and customers is aware of this, they tend to make more impulse-based shopping decisions. This drives sales volume and could increase demand of the product by encouraging consumers to try out new products that they typically don't use. When customers perceive that they're receiving a valuable item at a low cost, their behaviour is influenced to purchase items in bulk, thus spending more money.

Increasing Market Share

Products priced competitively typically sell quicker than higher-priced items. The increase in sales volume contributes to increased market share and even stock price. Selling a higher volume than competitors is imperative to developing a cost advantage. A larger company has more negotiation power when dealing with suppliers and merchants, which can help increase profits through discounts.

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