Definition

Price promotions are temporary price discounts from a regular price in order to stimulate sales for the brand. The price is the easiest element of a brand to change and it has the largest direct (and directly measurable) effect on sales.

Sometimes more than half of a brand’s sales are made at a discounted price.

Key Findings

• Price promotions have an immediate and positive effect on sales; causing a spike in sales. But the effect is transitory; the sales spike ends when the price discount ends.
• Price-related promotions for branded grocery products are largely used by past customers of the brand and seldom attract new customers.
• Price-promotions do not lead to extra subsequent sales.
• After the sales promotion sales return to their normal levels.
• Price promotions do not alter underlying propensities to buy in the future.
• Price promotions lack reach and usually fail to recruit in new customers to a brand.
• Many price promotions do not deliver extra profit (and often make a loss), because the margin given away on sales would have been made anyway at full price.
• The sales volume increases that price promotions deliver lead to volume sales targets that require (can only be met) by further price discounting and therefore price promotions become a way of life for organisations.
• Some sales in a price promotion have been brought forward from future sales, leading to some post promotion dip in sales.
• Price promotions bring in light, infrequent buyers who buy during the promotion who then revert to their previous low buying propensity.
• Price elasticity measures the percent increase in sales volume for a 1 percent decrease in price. On average this is -2.5, a 25% increase in sales from a 10% decrease in price.
• Price elasticities for a given brand are not a fixed property of it, but rather are context and situation specific.
• A price elasticity is larger if: the brand’s price moves past a local ‘reference price’.
• A price elasticity is larger if: the price change is explicitly signalled.
• A price elasticity is larger if: the brand’s market share is low. Small brands have big elasticities, big brands have small elasticities.
• A price elasticity is larger if: the price is increased from its normal level; price increases have bigger elasticities than price cuts
• A price elasticity is larger if: the brand’s normal price is close to the average of the other brands.
• Even large increases in volume may still not make any additional profit, because the price cut comes directly from the brand’s contribution margin.
• The short-term profitability of a price promotion depends on: 1) the contribution margin of the brand at normal price; 2) the depth of the price cut; 3) the price elasticity of the brand

Best Practice

• Report 43: Price Promotions
• Report 78: We (still) all like a Good Deal! Do brands need to discount in order to reach the deal-prone segment?
• Academic Publications: The Effects of Competitive Context on Consumer Response to Price Changes
• Make price discounts as shallow as possible, because the contribution margin is reduced exponentially from larger discounts.
• Managers should favour promotions focussed on advertising the brand, rather than one that focusses on deep price cuts.
• To measure the impact of price discounting, you need to calculate the following three metrics: baseline volume, the proportion of brand sales sold at a discounted price; and the extra sales that are obtained from discounting.
• To determine the effect of a price promotion on sales and profit, you need only consider the sales spike during the promotion period (and the immediate post promotion dip); there are no longer-term effects.
• As a guideline, the absolute upper limit for the proportion of sales sold at a discounted price should be 1/3rd; for every unit sold at a discount, two are sold at normal price.
• The profitability of price promotions is sharply eroded by cross-brand cannibalisation – even when the other brand or brands owned by the company have quite small market shares.
• Price promotions for a given brand should be assessed based on the results across the company’s brand portfolio in the category, not just the promoted brand.