What is promotional pricing and how can your business use it?

Promotional pricing is a sales strategy in which a business temporarily lowers a particular product or service’s price point to attract prospective customers. In many cases, this lower price orientation creates a sense of urgency that prompts people to purchase before the price goes back up.

Promotional pricing can be a cost-effective and straightforward move to entice new customers and boost sales volume in a short period of time. If you’re reading this, you might be considering implementing promotional pricing into your pricing strategy.

Coming up, we’ll do a deep dive into this pricing tactic, explore some examples, and outline best practices for using it successfully.

What is promotional pricing?

Promotional pricing is a sales promotion strategy that can help a business penetrate their target market by temporarily discounting the price of a product. You likely see promotional pricing examples every day, whether it’s a buy-one-get-one promotion or a holiday sale.

Elbowing your way into a competitive market can be challenging. Accordingly, businesses need a plan to differentiate themselves. Companies can differentiate through branding, advertising, or influencer marketing, but these can be expensive and time-consuming. On the other hand, promotional pricing offers a short-term solution for boosting customer traffic.

Not all business models are compatible with promotional pricing. But several industries often use promotional pricing to increase their market share, such as:

• Retailers
• E-commerce
• Wholesale/distribution
• Professional services

Whether the goal is to generate buzz for a new product, increase revenue during a critical time, or unload excess inventory, promotional pricing can give a shot of life to businesses when it’s needed most.

Benefits of a promotional pricing

Let’s explore three key advantages that businesses can gain through promotional pricing:

1. More customer traffic

The number of budget-conscious people far outweighs the number of people with unlimited spending money. Accordingly, promotional prices can be a strong incentive for a large segment of a company’s target market to purchase.

Put yourself in the shoes of a customer trying to stay on budget during the holiday season. You might be more inclined to shop at retailers that offer discounts instead of ones that never budge on price. Plus, you’ll be more willing to tell your family and friends about the deals you scored.

2. Increased value perception

A simple sale tag (whether physical or digital) can profoundly impact how customers perceive the value of a product or service. It’s human nature to gravitate towards a good deal. Even if the sale price is only slightly lower than the full price, many customers will opt for better value, thus driving more sales.

3. It’s a low risk, low-cost strategy

If sales are stagnant, it can be tempting to make expensive, sweeping changes to the brand to spark customer interest. But sometimes, businesses don’t need to rebrand—they just need results. That’s where promotional pricing comes in.

For example, let’s say a smoothie shop is struggling to find new customers. They could spend thousands of dollars on a creative advertising campaign with no guarantee of increasing revenue—or they could offer a limited-time promotional discount that gets customers in the door to taste their products.

Drawbacks of promotional pricing

Promotional pricing can be powerful in specific scenarios, but it’s not a long-term solution for increasing revenue. Here are two downsides every business must be acutely aware of before committing to a promotional pricing strategy:

Lower profit margins

While promotional pricing can fuel short-term success, it’s not a sustainable pricing method. First and foremost, the more you discount products and services, the lower your gross margins will be. Skating on thin margins is a risk that most businesses can’t afford to take, especially if they’re short on cash.

Potential price wars

One of the main advantages of promotional pricing is that it can differentiate a business from its competitors. However, always competing on price can create a race to the bottom where businesses operate at a loss to retain customers. On top of this, low prices can cause customers to question your commitment to quality.

Best practices for using a promotional pricing strategy

Just like any other business initiative, promotional pricing requires careful planning and a disciplined approach. These three tips are crucial to making the most of any promotional pricing strategy and mitigating risks.

Determine your budget

Even if promotional pricing attracts more customers and increases sales volume, it doesn’t matter if you’re not maintaining cash flow. Before implementing any type of promotional price, take some time to set goals and determine whether your business can absorb the risk that comes with low profit margins.

Take timing into consideration

Everyone loves a good deal, but a good deal at the right time is even more compelling. Rather than haphazardly offering discounts, consider when your audience needs them the most. For example, during nurses week in 2020, Uber offered free rides for healthcare workers traveling between patients’ homes and healthcare facilities.

Promotional prices tend to have the most impact when they’re part of a broader context, whether that’s a holiday, new product launch, or something more opportunistic such as a media event.

Use software to gain more control over pricing

Successful promotions usually come down to good planning. Pricing software gives businesses the flexibility to control, customize, and automate their pricing without having to micromanage.

For example, a retail manager can schedule start and end dates for their store’s price promotion months in advance. This way, the staff can save time and hassle and spend more time interacting with customers.

Promotional pricing examples

Let’s take a look at six top-performing promotional pricing strategies:

Buy one, get one free (BOGOF)

The name says it all: businesses offer a free product or service to incentivize the purchase of something else. To retain profits, firms typically charge a higher price for the “one” to compensate for giving something away for free. BOGOF promotions make the most sense for companies that can sell high volumes of products or services at high volumes.

Flash sales

A flash sale is a promotional event (usually in ecommerce) that creates a sense of urgency by offering heavily discounted products during a small window. One of the most popular flash sales these days is Black Friday.

Flash sales are typically supported by messaging like “act fast!” or “this offer won’t last long!” This strategy can be especially useful when a business is trying to offload excess inventory or drive short-term traffic.

First-time customer discount

Acquiring new customers can be expensive, but offering a first-time shopper discount can be a cost-effective and straightforward way to get a foot in the door. Examples of this tactic include price discounting, free shipping, and free products.

Tiered spending discounts

Many top-performing brands offer tiered pricing incentives for shoppers that spend a certain amount. For example, Amazon offers free shipping on eligible items when shoppers spend $25 or more. By establishing a minimum spending threshold to unlock discounts, big spenders add more items to their carts than they otherwise would have.

Customer loyalty program

Retaining loyal customers is often easier than acquiring new ones. That’s why companies incentivize customer loyalty by offering exclusive deals and discounts to frequent shoppers. For example, Starbucks lets customers earn “stars” for every dollar they spend, which can be redeemed at a later visit.

Seasonal sales

A seasonal sale is designed to move merchandise during a time that’s relevant to a target audience. For example, a retailer might offer discounts on backpacks during the back-to-school season or exclusive deals on swimsuits during summertime.

There isn’t a formula for choosing any of the above strategies, but a deep understanding of your business and your audience will help you offer the right offer to the right shopper at the right time.

Final thoughts

Promotional pricing is kind of like coffee—it’s ideal when you need a quick boost, but too much can throw you out of whack. Whether you’re launching a new business or spurring interest in a decades-old brand, price is vital for generating consumer demand. With the right insights and a thoughtful plan, promotional pricing can yield quick results on the way to reaching your long-term goals.