5 Pitfalls of Price Promotions

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Everyone loves a sale, right?

Everyone, that is, except for the businessperson who watches as the competitive advantage that he or she thought would result from a price promotion turns into a competitive DIS-advantage.

What happened?

1. Price promotions can train your customers that your prices aren’t real. Customers then tend to “wait for the sale” and are less likely to buy at full price.
2. Price promotions can cost more than they bring in. Higher volumes are nice, but not at the expense of profits. Unless the promotion creates new, loyal customers, you may not have gained anything but some extra work.
3. Frequent price promotions can signal weakness to your competition.
4. When done too frequently, consumers may assume there is something wrong with your product and that it is not actually worth full price.
5. Your ability to deliver quality goods or services may suffer if you become known only for promotional pricing.

As with the rest of running a business, there's a right way to run your price promotions and a wrong way. Let's start with the wrong way.

The Not-So-Profitable Price Promotion

As a young professional, I worked for a small family-owned retail chain whose tagline was “Only the Best for Less”. This business owner always had several brand name items on sale at a better price than the other stores in the area. The remaining items in the stores were priced just barely under, or the same as, everyone else’s prices. Each week, the promotional items changed.

The hope, of course, was that consumers would come in for the specials and purchase the remainder of their needed items at the same time whether those items were on sale or not. The success of this strategy varied widely, depending on the items that were on special, how deep the discount was, and whether or not the other local store owners decided to match the sale price. Frequently, they did.

In the end, the strategy backfired and the business decided to drop their tagline and change their marketing approach, but not before some damage was done.

What happened?

Price conscious customers caught on pretty quickly, and it wasn’t unusual for someone to complain that the claim of “Only the Best for Less” was not always true. While the business owner had a policy of meeting other pharmacy’s prices if a customer showed him their ad, he couldn’t compete with the big box stores when they started opening in his area. He had never established a reputation for service and quality, only for price, and making that change was expensive, painful, and not very successful.

Price Promotions Done Well

One of the best-known examples of a successful promotional pricing policy is the one used by Nordstrom. They have managed to avoid all five problems.

To begin with, Nordstrom has many different value/price levels for their regularly priced merchandise — you can buy a pair of shoes for $50, $500, or anywhere in between. In this way, they appeal to consumers at all price levels.

In addition, they have three widely anticipated sale events per year. These events are not closeouts of leftover merchandise — they are true sales on new merchandise, much of it brought in for the sale. However, not everything in the store is on sale at those times — far from it.

A customer who shops during non-sale times knows that they have to purchase at full price, or take their chances with the once-in-a while season-end clearance rack, because it’s highly unlikely that the item they like will ever be available at a less than full price.

In addition, the sale events themselves are great marketing vehicles. They bring lots of customers into the store, and many of them buy non-sale merchandise while they’re at the sale. But better yet, many of those customers return at non-sale times because the quality of the sale event turns them into loyal Nordstrom customers.

Keep Your Price Promotions Proper

The ultimate goal of a price promotion is to get and keep new customers, and to encourage existing customers to buy goods or services they may be buying elsewhere from you instead. Ultimately, you want both types of customers to come for the price, but stay for the selection, quality, and service.

These principles apply to all businesses, not just retail businesses. Whether you sell goods or services, and no matter what type of customers you serve, you can benefit from promotional pricing — as long as you keep that ultimate goal in mind.