lesson six

price promotions
Lesson Objectives
When you finish this chapter, you should answer the
following:
1. Understand how does a price promotion improve
profitability.
2. Discuss how price promotions mostly grow the
market or grow the share within the existing
market?
3. Understand price promotions as good means of
price segmentation
Lesson Objectives
4. Understand what customer behavior and
psychological influences are affected by price
promotions, and are these good for the firm?
5. Discuss how how a price promotion be designed?
6. Discuss what are the common examples of price
promotions?
Lesson Objective 1
• What is price promotions?

- is a sales strategy in which brands

temporarily reduce the price of a product or
service to attract prospects and customers.
By lowering the price for a short time, a
brand artificially increases the value of a
product or service by creating a sense of
scarcity.
Positive Effects of Price Promotions
• PRICE SEGMENTATION - positioning price
promotion in the context of price segmentation
hedges helps us reveal many of the positive
aspects and methods of improving price
promotions.
• MARKET SIZE AND SHARE - during a price
promotion, sales can increase substantially. For
the manufacturer, increased sales come from two
different sources: market size increases and
brand switching.
Negative Effect of Price Promotions
• IMPERFECT SEGMENTATION HEDGE - Price
promotions are, at best, an imperfect segmentation
hedge. Although they can induce some customers
who would not otherwise buy to do so, they also can
provide unnecessary price concessions to otherwise
loyal customers
• CUSTOMER CHURN - price promotions can
encourage brand switching. While encouraging brand
trial will improve sales during the price promotion,
one of the key metrics of the long-term success of a
price promotion is the ability of the product to
capture brand-loyal customers during regular price
times.
Negative Effect of Price Promotions
• LOSS OF PRICE CREDIBILITY - When the price
fluctuates wildly between promotional levels and
regular levels, and customers begin to notice the
wide differential, they may simply stop buying at
full price.
• REFERENCE PRICE EFFECT - In this model, the
current price that customers expect to pay is
informed by the last price observed. Following a
price promotion, prices return to their regular
level from the latest promotional level
Negative Effect of Price Promotions

• INCREASE OF PRICE SENSITIVITY - price

promotions can take attention away from
the issue of product value, the features and
attributes that give rise to benefits from
which customers derive utility.
Price Promotion Design

• TARGETED - targeted price promotions are

better at price segmentation than more-
diffuse price pro- motions. For a price
promotion to act as a strong price
segmentation hedge, it should specifically
encourage marginal customers to purchase
Price Promotion Design

• TEMPORARY - price promotions should be

temporary and time-dependent. One of the
positive aspects of price promotions is their
ability to increase sales immediately.
Price Promotion Design

• SPECIAL - when possible, price promotions

should be positioned as special, such as
related to a unique event or a reward to
specific customer groups. Making a price
promotion special reduces the potential for
customers to perceive it as the new, regular
price
Price Promotion Design

• IRREGULAR - in keeping with the desire to

avoid resetting price expectations, some
manufacturers have turned to using
irregular price promotions. Irregularity is
found in timing, such as pricing the product
at $2, $2.20, and $2.40 at various times but
varying the inter-promotion delay in an
irregular pattern.
Examination of Popular Forms of Price
Promotions

• COUPONS - nanufacturer coupons are

perhaps the most proliferative form of price
promotions, but not all coupons are equally
valuable for the firm. Manufacturer coupons
can appear on product packages, in direct
mail, in newspaper cutouts, on websites,
and within email.
Examination of Popular Forms of Price
Promotions

• TRIAL OFFERS - trial offers are simple price

promotions that the seller uses to induce
trial of its product. Trial offers are made in
the form of free samples, small packages
priced at a significantly lower price point, or
leased services and software as a service
wherein the cost to enter the market is
greatly reduced from the full, regular price.
Examination of Popular Forms of Price
Promotions

• REBATES - rebates provide a monetary

incentive to purchase, like other forms of
price promotion. They provide advantages
in their ability to be highly targeted in the
type of customers who redeem rebates and
to whom the rebate is extended.
Examination of Popular Forms of Price
Promotions

• PROMOTIONAL BUNDLES - firms can use

promotional bundles to disguise price
promotions. Promotional bundling, like
bundling in general, is the sale of two or
more distinct products in a single
transaction and at a single price.
Tradeoffs between Popular Price
Promotions

• NEWSPAPER VERSUS IN-STORE COUPONS

• MAIL-IN VERSUS INSTANT REBATES
• HI-LO VERSUS EDLP