Discount promotions are everywhere these days. Whether strolling through the shopping mall or shopping online, retailers and brands are always trying to attract our attention with short-term discount campaigns and ultimately convert us into buyers. There are no limits to the creativity - or rather the apparent hopelessness - of some retailers and brands these days.
For example, retailers sometimes advertise discounts for users on condition that they subscribe to their newsletter. The following is an example from the luggage manufacturer "Horizn Studios". Users who subscribe to the newsletter receive a 10% discount on their first order.
But what effect do the sometimes obscure discount campaigns have on the perception of the brand? Do discount campaigns lead to an increase in sales and what other measures are there to achieve a short-term increase in sales? All these questions are addressed in the following article.
The article cannot be considered finished after publication, as I will regularly add new insights and ideas.
What impact do discount campaigns have on the perception of a brand?
Too many and too regular discount campaigns can damage brands in the long term, see Internships with the regular 20% discount campaigns on the product range (except pet food). Discount promotions have the effect, particularly for products with low contribution margins, that extremely high additional demand must be generated in order to compensate for the loss of margin. Furthermore, customers are often tempted by such discount promotions to wait for further discount promotions, which often leads to hoarding purchases.
Repeated price reductions can have negative after-effects. This is because if customers frequently come across low prices, the brand's reference price will fall. Finally, customers will also become accustomed to receiving price-related information from the brand. This habituation increases price awareness and possibly reduces awareness of other important brand characteristics.
Do discount campaigns lead to an increase in sales?
Discount promotions increase sales volume in the short term, but how much is actually involved? The term that discusses this question is called price elasticity - the percentage change in volume for an 1% price change. For example, if a price is reduced by 5% and the sales volume then increases by 10%, the elasticity is -2 (10/5) = 2. The minus means that price and volume move in opposite directions.
Studies have shown an average price elasticity of -2.5.
These results indicate that, on average, we can expect an increase in sales of around 25% with a 10% price reduction.
The short-term profitability of a price reduction depends on these three factors: (After: John Dawes: What Price Promotions really do? / How Brand grow? p. 165)
- the brand's contribution margin at the normal price
- the amount of the price reduction
- the price elasticity of the brand
Now let's take a look at how high the additional sales would have to be for a discount campaign to lead to an increase in profit.
|30% Contribution margin at normal price||40% Contribution margin at normal price||50% Contribution margin at normal price|
|Price reduction in %||Additional sales required to offset contribution margin||Additional sales required to offset contribution margin||Additional sales required to offset contribution margin|
In conclusion, it can be said that in the case of a low contribution margin, a massive increase in sales is required to reach the break-even point. With a high contribution margin, a price reduction can generate more profit even with a moderate increase in sales. (Cf. How Brands grow? p. 165)
Alternative measures to discount campaigns
1. free products with the purchase of a main product
Instead of reducing the price, it is often advisable to increase the value of the product. Depending on the category of the respective products, this can be achieved through various measures.
Instead of offering a discount on new cars, a car dealership can also advertise free additional services, such as the annual change of winter tires.
Holzrichter Berlin - a supplier of leather bags, does not offer a direct discount. Instead, every customer who purchases a travel bag from Holzrichter Berlin on Amazon receives a free additional product. This results in an indirect price reduction, as the value purchased is now higher due to the provision of the additional product.
Excessive discount promotions and price reductions send a signal to the customer. Ultimately, a price reduction signals to the customer that the retailer can also offer the product at a lower price. As a result, the value of the product tends to decrease for the customer. An elegant alternative to avoid this signal effect is to offer an additional product free of charge. On the one hand, the effect of discount promotions decreases the more frequently they are offered. Secondly, it leads to a reduction in margins. However, the use of additional products should also be used with caution. The conventional price of the additional product should correspond to the discount otherwise granted. Such "buy 2 pay 1 promotions" will sooner or later have the same effect as the use of discounts and are therefore not a suitable alternative.
2. communication of future price increases
Another way to increase sales in the short term is to communicate future price increases for the product. By stating future price increases, a one-off increase in sales can be expected. However, a not insignificant part of the sales gained in the short term comes from future orders that would be generated even without the communication of the price increase. For this reason, the effect of future price increases should not be overestimated.
Who is known for applying future price increases?
Rolex is known for its annual price increases, which are communicated in advance. In the weeks leading up to the price increases, Rolex receives advance purchases that would usually have been made even without the price increase being communicated.
Future price increases are communicated in the event business in particular. For example, there are different prices depending on when the event ticket is ordered. The following is an example from SMX - a search engine marketing conference.
When communicating future price increases, these should also be actual price increases and not just communicated increases that are ultimately not implemented. It should also be noted that an increase in the sales price usually results in a decrease in demand.
Another way of expressing this would be that most products are offered in price-elastic markets. Price elasticity is the change in sales per 1% change in price. On average, the elasticity of brand prices is -2.5, i.e. if the price rises by 1%, sales fall by 2.5%. However, this assumption does not apply to hoarding purchases, in which a price increase leads to increased demand.
3. communication of limited product units
The goal of increasing sales in the short term can also be achieved by communicating the number of products currently available for remaining stock. For products with a limited number of units, communicating that only a few products are still available can have a similar effect to providing discounts without affecting your own margin. The communication of limited product units is practiced by eBay, among others, as can be seen below.
Put simply, if a product is not available, it suddenly becomes more attractive, which ultimately leads to increased demand.
4. gift vouchers as an alternative to price reductions
Another way to escape the price reduction and still meet the customer's needs in terms of price is to offer gift vouchers when purchasing a product. For example, a customer buys a laptop for €1000 and receives a gift voucher worth €200 for their next purchase. This is not a cash-back promotion, as the gift voucher can only be used for a purchase from the company's product range. MediaMarkt and Amazon in particular are known for such promotions in Germany.
These types of price promotions undoubtedly have a double effect. Firstly, the customer has the feeling of receiving a discount on the original purchase, but also experiences this feeling on the second purchase when the gift voucher is actually redeemed.
The key take-out is that when consumers receive a free gift card for a future purchase, they feel they will spend less on the two purchases than if they received a discount on the first purchase instead. The end result shows that gift cards tend to lead to higher total spend (over two purchases) than pure discounts.
The double effect of gift vouchers has also been scientifically proven:
Conclusion Alternatives to price reductions:
Discount campaigns are omnipresent these days. It feels like sales are on all year round and in online retail, customers receive a voucher code just for signing up for a newsletter. On the one hand, consumers are happy about this development, but on the other hand, companies often lose a considerable part of their contribution margin. Negative price adjustments are generally not a bad thing, but the amount of the price adjustment and the regularity of the discount campaigns should be well thought out, otherwise your own company could end up like Praktika.
There are certainly alternatives to price reductions: I have presented four possible alternatives today. There are no limits to creativity when it comes to developing further alternatives - which should ultimately be the main task of every marketing department.