1. Price Promotions
Chapter 7

2. Agenda How does a price promotion improve profitability?
Do price promotions mostly grow the market or grow the share within the existing market?
Are price promotions a good means of price segmentation?
What are common examples of price promotion?

3. Positive effects of Price promotions
An effective Segmentation Hedge
Capturing market share
Increase in the profitability

4. Price Segmentation
Targeted discounts enable a company to charge different prices to different customers
Allows the price sensitive to purchase at a lower price
Keeps the utility sensitive purchasing at the higher “list” price
Incremental sales at a discounted price above marginal unit cost enhances profitability
Revenue w/o Discounting
Additional Revenue
Gained from Discounting
Price
Marginal Unit Cost
Demand
Quantity

5. Promotional discounts grab market size and share
Promotional Discounts tend to increase sales volume
The increase in volume will come
Primarily from capturing share from you competitor
Secondarily from growing the overall market
Note: Short term reactions to downward price movements tend to be larger than long-term reactions

6. Promotional Discounting benefits from Prospect Theory
People place more weight on “pain” than on an equal “gain”
To help people appreciate the gain
Unbundle the sources of gain and highlight them
Bundle the sources of pain
Value +
Value Function A
Losses
Gains B
Discounts are a form of
Extra Unbundled Gain
Value -
Surcharges are a form of
Extra Pain
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7. Negative Effect of Price Promotions
Imperfect segmentation hedge
Price promotions can provide unnecessary price concessions to customers that otherwise would have paid the full price
Dilution / cannibalization of otherwise higher margin sales
Customer Churn
Price promotions improve profitability by encouraging brand switching among customers. If customers who switch are not captured, the result is simply a high-customer-acquisition cost with the loss of customer retention profits

8. Resets Price Expectations
Promotional discounts reset price expectations to a lower level, dampening demand in future periods when the product is offered at full price
Full price periods will increase price expectations, increasing demand during promotional periods
Reference
Price
Observed
Price
Price
Time

9. Increases Price Sensitivity
Price promotions enhance buyer sensitivity to price
Promotions highlighting brand and price alone increase price sensitivity
Marketing communications highlighting features and benefits increase utility sensitivity and decrease price sensitivity
Customers that tend to be sensitive to advertising also tend to be more price sensitive
Market growth from promotional discounting is likely to contribute to the size of the price sensitive segment

10. Promotional Design
Targeted
Temporary
Special
Irregular

11. Examples Couponing Trial Offers Rebates Promotional Bundles
Manufacturers coupons to induce trial
Store coupons to induce patronage
Key metric – portion of customers from couponing resulting from incremental sales rather than displacing normal sales
Trial Offers
Effective with products that will be purchased frequently, have a low incremental production cost, and have benefits that are self-evident after one use
Rebates
Can be used with a high degree of targeting
Promotional Bundles

12. Evaluating Promotions
Consider
Cost (distribution, process, etc)
Redemption Rates
Discount Depth
Sales volume induced
Type of customer redeeming the promotion
Conduct a Break Even Incremental Sales per Redemption analysis

13. Coupon Face Value
$ 0.50
Processing Fee
$ 0.07
Price
$ 3.00
Margin
40%
Newspaper
In-Store
Coupons Distributed
1,000,000
62,500
Cost / 1000 Distributed $
$ 100
Distribution Costs (Coupons Distributed X Cost / 1000 Distributed)
$ 10,000
$ 6,250
Redemption Rate 5%
80%
Coupons Redeemed (Coupons Distributed X Redemption Rate)
50,000
Redemption Costs (Coupons Redeemed X (Face Value + Processing Fee))
$ 28,500
Total Campaign Costs ( Distribution Costs + Redemption Costs )
$ 38,500
$ 34,750
Cost per Buyer (Total Costs / Coupons Redeemed ) $ $
Total Campaign Profit ( Coupons Redeemed X Price X Margin )
$ 60,000
ROI ( (Incremental Profit – Total Costs)/Total Costs )
36%
42%
Break-even Incremental Unit Sales per Redemption (Total Costs)/Total Profits)
64%
58%

14. Summary
Price promotions are a form of price segmentation in which prices are reduced for those with a lower willingness to pay and regular prices are offered to those with a higher willingness to pay.
Price promotions generate increased sales primarily through encouraging brand switching and secondarily through increasing the size of the market.
Because price promotions focus the customer’s attention on price, they can also increase price sensitivity.
In general, price promotions should strive to be targeted towards marginal customers. Other design criteria for price promotions include a desire for them to be temporary, special, and irregular.
Price promotions include specially marked packages, coupons, trial offers, trade deals, promotional sales, discounts, promotional bundles, and rebates.