Promotional Pricing: Strategies to Maximize Profits

The faster you make a profit, the faster your business can grow. However, profits don't mean you necessarily have to send a price increase letter to your customers or clients informing them of a price change. This strategy can increase your profit margins but drastically decrease consumer demand.

Instead, you can use promotional pricing to reduce prices and increase product demand.

To understand how promotional pricing works, you should have a basic understanding of the price elasticity of demand. Price elasticity refers to how a product's price change affects consumer demand. For instance, if your product is price elastic, demand increases when your prices are low and decreases when you increase prices again.

Promotional pricing works using this concept. Ultimately, it focuses on increasing demand for a product by reducing its price. Promotional pricing isn't technically a dynamic strategy that changes pricing based on consumer demand. Instead, it aims to increase consumer demand by being proactive rather than responding to a decrease in demand.

At the same time, a promotional pricing strategy can respond well to a decrease in demand by helping you attract customers with low prices on a temporary, limited-time basis. It can also help you get rid of excess inventory that's costing you money sitting in warehouses and fulfillment centers by increasing customer traffic.

Promotional pricing increases demand and has been proven effective. After all, everyone enjoys a good deal. However, promotional pricing can also be detrimental to businesses. If you're consistently using a promotional pricing strategy, you're cutting into your profit margins.

At this point, a promotional pricing strategy can hinder your business because customers will always expect low prices. Therefore, it's crucial to keep track of when you use promotional pricing and how. You shouldn't offer promotional pricing too often because you may inadvertently be creating the expectation that your prices are always that low. Then, when prices increase again, you can upset your customers.

Instead, this pricing strategy works best if you'd like to generate interest in your brand and its product or service. For instance, a company new to the market might begin with promotional prices to increase brand awareness and help increase customer loyalty.

Promotional pricing can also encourage existing customers to purchase more products. For instance, promotional pricing examples like flash sales, seasonal sales, and limited-time deals throughout the year can help generate interest in a particular product or service, enticing loyal customers to want to shop more.

Unfortunately, unlike some other pricing strategies, promotional pricing doesn't aim to help you retain new customers because the prices don't last. Instead, it generates interest in your products and services. If your products deliver, you can retain new customers, but your ability to do so isn't based on pricing alone. That said, promotional pricing can help you retain existing customers by giving them the first access to these deals.

When done incorrectly, promotional pricing can also hurt your brand image. Consistently providing promotional pricing on your products and services can make them appear cheap rather than trustworthy. Therefore, you should use this pricing strategy only when it makes sense.

There are several types of promotional pricing strategies, and each one can be used to generate interest and demand, making more customers purchase your products and services. Your chosen strategy can also help you determine when to decrease your prices to attract more new customers.

Discounted pricing, bundle pricing, limited-time offers, deals, and loyalty programs all have their place in business, but they're each used in different ways.

Discounted pricing

Discounted pricing refers to regular deals your business might have throughout the year to drive sales. For instance, you might have holiday sales to encourage purchases during the holiday season. These discounts help attract new customers and retain existing customers by giving them a good price that won't last.

Bundle pricing

Bundle pricing is another promotional pricing strategy that allows you to attract new customers without impacting your profit margins too much. Bundle pricing is typically used to sell several products together as a bundle. The more someone purchases, the less expensive it is.

One of the most common types of bundle pricing is mobile plans that come in the form of family bundles. The more people on the plan, the less expensive the plan is per person. This concept works based on economies of scale.

There are more savings for the business with a higher level of production, so promoting bundle pricing can be more profitable. While a family plan is still more expensive than an individual plan, each individual on the plan can save money, making it a more appealing option.

Limited-time offers

Limited-time offers are another option. Also known as flash sales, these offers won't last and have a short promotional period, making customers want to get the best deal while they still can. For instance, companies may have one or two-day events where they significantly reduce their prices to generate demand and sell more products.

Flash sales aren't a year-round offering. Instead, they happen throughout the year for only a few days at a time.

Buy one, get one (BOGO) deals

BOGO deals are both a marketing and pricing strategy because they attract new customers while delighting existing ones. With a BOGO deal, customers get two items for the price of one. This popular sales strategy can attract new customers, giving more people the opportunity to experience your brand.

At the same time, BOGO deals can be dangerous because customers are spending half the price on two products. You should determine which products qualify for BOGO deals to ensure you won't cut into your profit margins by offering them.

Loyalty programs and rewards

Loyalty programs and rewards aren't necessarily a pricing strategy, but they're part of a promotional pricing strategy because they allow you to offer deals that reward loyal customers. When customers reach their reward, they'll get a percentage off or a free product.

One example of a loyalty program is a punch card you might find at a coffee shop. On your 10th punch, you might earn a free coffee. While the coffee shop loses the cost of that coffee, they've earned your loyalty by making you want to keep purchasing their products to get the reward.

Since it's more cost-effective to retain existing customers than find new ones, a loyalty program ensures your customers continue coming back for more.

Set objectives and goals

Before you implement a promotional pricing strategy, you must determine the purpose of it. By now, you know that this strategy helps increase demand for your products or services. However, you should determine which products and services will be impacted by the change in pricing.

Defining specific objectives, like how much you want to increase demand and lower prices, can help you keep track of the results of your strategy.

Analyze costs and profit margins

Before you drastically reduce your prices, consider the costs and profit margins. Remember, even though you're offering a limited-time deal, you should still aim to make a profit. Always calculate product costs and associated expenses to determine the desired profit margin for the promotion.

Remember, while you might significantly decrease your profit margins, generating demand can increase brand awareness and help you attract new customers making it well worth it to take a loss from time to time. Promotional pricing doesn't last forever, so taking a loss now shouldn't affect your financial future. If it does, you've decreased your prices too much.

Once the sale or promotion is over, you should evaluate its impact on profitability. Instead of measuring only profits and profit margins, consider how many new customers you've earned and start finding ways to retain them.

Promotional pricing doesn't work for every business or industry. You should understand your target audience before deciding to cut prices. Identify customer segments and personas to determine whether a price change will impact demand at all. For instance, if your customers purchase luxury products, a price reduction might deter them.

You should understand your customers' needs and preferences while customizing promotional pricing to appeal to different segments. For instance, even luxury items may have a market for individuals who earn less per year when they reduce their prices.

Conducting marketing research and competitor analysis can help you determine whether an increase or decrease in pricing is right for your brand.

Determine the promotional pricing strategy

Before slashing prices, always determine which strategy you should use. For instance, bulk pricing might not make sense for your business, but flash sales do. Select the appropriate promotional pricing tactic based on what you know about your target audience.

For instance, consumers tend to shop more during the holidays, so a limited-time promotional pricing tactic might work best for your business then. Meanwhile, a flash sale might drive revenue during the slower seasons.

Always analyze the price elasticity of your products and sensitivity. If demand increases drastically when you decrease prices, finding the right time to implement a promotional pricing strategy can help you maximize profits.

You should also consider the duration and timing of the promotion. While giving consumers enough time to make a purchasing decision can increase profits, limited-time promotions may perform better because they make customers want to take immediate action.

Remember, a promotional pricing strategy won't work for every business. You should assess the long-term effects on brand perception and customer loyalty. For instance, if your customers expect luxury pricing on high-end products, using a promotional pricing strategy can hurt your reputation because customers will think it's lower quality.

Communicate the promotion

Once you've determined the promotional tactic you want to use and have worked out the logistics, like what the new pricing is and how long your deals will last, it's time to communicate with your customers.

You should craft a compelling message and value proposition while using the right marketing channels to reach your target audience. You should also update your pricing page on your website to reflect the new, limited-time deals.

When leveraging social media, email marketing, and other channels, your product pages will become increasingly important, especially for e-commerce companies. Ensure your product pages are optimized for conversions by creating a sense of urgency and exclusivity through marketing channels.

Monitor and measure success

You should monitor and measure your business performance whenever you alter your pricing. Discounted prices can negatively impact revenue, profits, and business growth when used too often to generate demand. A promotional price is designed to attract new customers, but you will need more than that to retain them. Instead, you must delight new customers in other ways and offer valuable, quality products.

You should establish key performance indicators (KPIs) for the promotion, such as whether the discounted price increased sales and by how much. Measuring the number of sales, profit from those sales, and increases in the number of customers can help you determine whether a reduced-price strategy was effective in the short term.

Post-promotion evaluation and next steps

Remember, a price promotion can only go so far. While it can help you attract new customers, it can't help you retain them if your products aren't of high enough quality and meet their expectations.

A promotional price isn't meant to last. To encourage repeat business, you must invest in other pricing and marketing strategies to help grow your business.

Mailchimp's suite of marketing tools makes it easy to perform customer research that helps you determine whether promotional pricing is right for your business. Then, you can measure the effectiveness of each promotional strategy against the full-price strategy to determine new ways to build customer loyalty. Implement promotional pricing with Mailchimp today.