Promo pricing in the form of discounts and deals, for example, are a popular method to increase sales and attract customers. But despite its popularity, the sales increase is rarely worth the cut in revenue, and there are several reasons why promotions aren’t as effective as they seem.
Promotional pricing has been a popular strategy among retailers for decades. Whether it is through "buy one, get one free" deals, or putting items on sale for a limited time, companies are willing to sacrifice a cut of their profit if it means giving customers incentive to buy.
On paper, the reduction of prices to attract customers seems like a reasonable method. This increase should, in theory, make up for the decreased revenue, and more customers will be attracted to the offer in fear of missing out on a good deal.
But is promotional pricing really effective?
The truth is, 72% of promotions don’t break even. Let’s talk about some of the reasons why promotional pricing is not as successful as retailers hope it will be, and what other more efficient pricing methods can be used to replace it.
Forever on Sale
Customers aren’t stupid, and according to recent studies, they’re getting smarter in regards to retail marketing tactics. They have become accustomed to regular sales events like Black Friday and Cyber Monday. This oversaturation and regularity of promotional events means that the fear of missing out that retailers hope customers will have simply doesn’t exist—instead, these sales are expected, and customers assume items will be discounted in the future.
Additionally, other companies are paying attention to any promotions a retailer makes. Competing companies are likely to mimic each other’s prices, so if one retailer decides to make a promotional campaign, others will soon follow suit. This means the competitive deal is no longer that competitive, and the only way to make the price more appealing is to increase the discount. The continuous decreasing of prices can lead to brutal price wars between retailers, and as we have seen a few years ago in the UK with companies like Tesco and Sainsbury’s, it is a war in which everyone loses.
Last-minute purchases are not lasting
Promotions do encourage customers to buy products, though. In fact, it can encourage customers to be more impulsive, making last-minute purchases because the deal is such a bargain. The problem is, customers who purchase these discounted items impulsively are also much more likely to return the product for a refund in the future. This increased likelihood of returning items can put an even bigger dent in revenue for the retailer, who has already decreased their profit margins to make the promotion in the first place.
Cheaper products create a cheaper reputation
Lastly, a retailer who uses promotional pricing often is likely damaging their brand in the process. The heavy and regular discounting of products can tarnish a company’s reputation among consumers, making them look cheap and therefore less fashionable. In a survey, a quarter of shoppers said they would be less likely to shop at a store that regularly had items on sale. Moreover, 38% said that constant discounts makes a brand look less appealing.
Retailers who use promotional pricing are negatively impacted by all of these consequences. They typically never meet their end goal of increasing sales without losing too much revenue in the process, and they will probably damage their brand image along the way. Knowing this, what are retailers supposed to do if they want to attract customers, stay competitive and increase revenue?
Better pricing for better results
The truth of the matter is, lower prices aren’t always the most optimal prices. Many successful retailers are ditching price cuts and promotions and turning to price optimization software to help them increase their sales in a way that doesn’t sacrifice their revenue.
Thanks to artificial intelligence, years of sales data can be analyzed to find patterns and relationships in products and purchases to determine prices that are near-guaranteed to bring results. Pricing optimization software can go a step beyond pricing individual products as well—a retailer’s entire portfolio can be analyzed, and price recommendations given by the software consider all products offered to avoid price cannibalization and other negative sales relationships within a company’s assortment. The software can be fine-tuned to the ebbs and flows of a business’s sales patterns, and can be used to meet the unique objectives of any retailer whether they are online or brick-and-mortar.
Price optimization software is not just for pioneers within the retail industry anymore, either. It has been utilized by several companies for years now, and has the numbers behind it to prove its effectiveness. A retailer using our pricing optimization software, for example, saw an 8% boost in revenue despite their market being squeezed by promotional pressure from other companies.
Figures revolving around the topic of promotional pricing don’t lie; the fact of the matter is, retailers are better off avoiding making promotions altogether, and are likely to see more revenue and success when they ditch promotional pricing for good. Using proven methods such as price optimization to increase sales and attract customers is a better way for retailers to stay competitive, even if their market is oversaturated with discount offers. In this high-tech and consumer-oriented era of retail, consistency is key, and price optimization software is proving to be a vital tool in maintaining the right prices at all times.