Price-related promotion is a temporary price reduced offer to buyers. Marketing people obviously believe it is necessary for business. Price related promotions are also often criticized in the literature for various reasons.
Many firms use it to reach company objectives, such as stimulate sales volume, keep the brand in customers’ repertoire, move stock, and build a ‘low price’ image. However, price related promotion cannot fulfill all of these objectives. In this essay, the positives and negatives related to price promotion are also discussed.
The first reason for firms to use price related promotion is to stimulate market demand and increase sales in short time (Dawes, 2003).Pro:Price related promotion has a possitive effect on increase sales, and it can simulates sales to a peak in a shot term (Ehrenberg, Hammond ; Goodhardt, 1994:13). Most of the sales come from repeat buyers (Ehrenberg, Hammond ; Goodhardt, 1994:16).
It is because existing brand users know the quality of product/services, and they are confident to receive the offer when the price reduced. Price related promotion also attracts a few new penetrations. Most of the new customers are from brands below you.Price related promotion persuades customers to switch from competitors for an occasion purchase, due to better value. Also, some new customers may just try the brand in this period. Through trying, if the customers can clearly see some difference between the brand and others, the result will influence the customers’ quality reference point and their future choices.Con:Though price related promotion do have effect on attract repeat-buying in a short term, but not the subsequent sales or brand loyalty (Ehrenberg, Hammond & Goodhardt, 1994). White (2002) also argued that price promotion has little effect on attracting new buyers to a brand.
Around 80% of the buyers who buy a brand on a price promotion deal have already had the experience of using the brand (Jenny & Dawes, 2003). One of the reasons is that most of the new customers are from the brands blow you. However, when the promotion finish, these customers will not willing to pay that much again.
Moreover, Dawes (2003) suggested that managers must avoid cannibalization, if the manufacturer has multiple brands in the category. Brand substitution effect may cause increase demand of one brand, but decrease demand of the others. From aggregate view point, the firms may still suffer from lose.Some of the brands in a customers’ repertoire are eliminated as time goes. Delay delisted by customers is one of the objectives of promotion.
Many firms use price related promotion to keep the brand in customers’ repertoire (Dawes, 2003).Pro:Price related promotion can help brands stop or delay delisted by customers (Dawes, 2003). It actually reinforces the position of the brand in customers’ repertoire.Con:Peckham (1981) argued that price promotions for declining brands could reduce the speed of decline, but such brands would still continue to decline, the stable brand continued as before, growing brands continued at a slightly higher level. This means pricing related promotion only has a clear effect on increasing the sale of growing brands, but not stable brands or declining brand.
Price related promotion is possible to reduce the speed of a brand decline, but it cannot reverse the product lifecycle.Inventory takes space to stock, and a large amount of stock is risky for firms. Thus, firms may quickly clear up the stock by using price related promotion.Pro:Firms often reduce using price related promotion to meet the objective of quickly reducing inventory (Ehrenberg ; Kathy, 2001).
It is because demand will increase as price decrease. Firms often need to clear up the stock of seasonal goods and the products which are out of date. In this situation, sell these products for less profit is better than lose them. Also, it makes firms possible to get a healthy cashflow, and invest these funds on other business.Con:Price related promotion may causes firms sell more products, but not generates large profit (Dawes, 2003). Firms may decrease the contribution margin by doing price related promotion. Through price promotions has a positive effect on gaining sales volume, but it does not necessarily leads to a high profit.Building brand image and create brand awareness is another the reason of using price related promotion (Dawes, 2003).
Pro:Customers may look for better deals which is relative low price. If a brand uses price-related promotion, it can build an image of ‘good value’ or ‘low price’ (Dawes, 2003). Brand image can influence the position of the brand in customers’ repertoire. Thus, it will have more chance for customer to buy such brand when they look for a better price deal. Also, when a brands’ price is clearly low than its competitors, it can make customer easily aware the brand. Therefore, price related promotion also can increase brand awareness.
Con:Customers do not always look for the lowest price. They are often willing to pay high price for better quality as well, especially for the products which have a closed relationship between price and quality (such as wine). In fact, brand salience is the essential factor of most successful brands.
In general, brand image is hard to change. In order to build a brand image, firms need to use low price strategy for long time, rather than a few times price promotion. The core questions are how often a firm to perform a price-related promotion in order to build a low price image. If discount the price too often, it will result in reducing company contribution margin and stimulating a price war in the category. Also, Jenny and Dawes (2003) argued that if the retailer operated on low prices, their customers should knew already.
However, if a firm just does price related promotion a few times, then the company cannot build such image.ConclusionIn conclusion, careful planned and organized price-related promotion does profit firms; even it cannot fulfill all of the firms’ objectives. The core question of using price related promotion is how and how often to perform a price-related promotion. It should be consist with brand objective marketing planning, marketing strategy and budget as well.