Consumer price promotions — how much, how deep?

A discount can convince new people to try you and prior customers to buy more, but can also teach people to only buy when you are on sale (or maybe that you are a discount brand!) Promotions are often likened to a drug — the boost in sales is a huge rush, and its easy to get hooked. Before you know it, most of your sales are at too low of a price point (and maybe you’ve started a promotional price war with a competitor). Think of Coke and Pepsi in drugstores, trading 2 for $5 deals on 12 packs. Or how we all know that department store sales are right around the corner nearing a holiday and put off large purchases.

Defining the objective of your promotion is the first step. Why are you promoting? Is it to drive trial, potentially of a new product? Or is it to gain back some customers you have lost? Or take share from a particular competitor? Your objective will have important implications on what promotions are right for your business (as well as what products you should promote, how aggressively, and when).

To measure the success of your promotion, in addition to your sales boost, focus on ROI (Return on Investment). In other words, what is the difference in your profit when you promote vs when you don’t. To answer that, you’ll need a good estimate of your sales with / without the promotion, the cost of running the promotion (which can often be hidden, like when consumers ‘pantry load’ during the promotion), and your margin. To measure all of these, historical data, consumer studies, and stakeholder interviews can all give you an idea, but barring that, test & learn is a great way to go! Understand what ROI you are targeting and willing to accept, and even if you aren’t yet breaking even, try to improve ROI every time around.

Some key questions in planning promotions are

• How deep? Look at what discounts are common in your industry and what impact those may have. 20% can often be the threshold under which you can attract a certain number of consumers / drive additional purchases. Beyond it, you risk teaching consumers that you are a brand that promotes deeply, which they will take to heart and wait until you have sales. At which point you’ve basically reduced your price.
• How long? In most cases, you’ll notice a ‘dwindling’ of sales over the course of a promotion. Look at your results by week, and see where it starts to trail off significantly and your ROI erodes. Look at what is common in your industry, and try a few of different lengths.
• How often? How much is too much? This question depends a lot on the depth, but you may find that you are able to offer small, frequent discounts to attract consumers and create news without offering too great a reason to not buy when not on sale. Start conservatively and ramp up — much easier than trying to scale back down.
• When? Many brands will find it effective to start by aligning your promotions to seasonality — when are people searching for your product the most? If it’s a competitive field, as are most, then your competition is likely promoting as well for the same reason. For this reason, many brands will want to compete with reasonable promotions during these valuable days/weeks (e.g., cookies at Christmas, beer around July 4th)
• What kind of promotion? In retail, choices abound ($4.99? 2 for 5? Should I support it with an advertisement?) Online, you may consider a straight discount, a loyalty card ($50 off your next purchase), or a free product. It’s important to research your consumers and use your knowledge of how they buy and use your product to estimate how they may respond to different offerings. In the end, it’s wise to estimate the ROI, but try a few different kinds of promotions to understand which works best.
• What product? If you have multiple offerings, you may have already defined roles for them within your portfolio. One may be your money maker, another may be the one you use to reach the most consumers. And they may also respond very differently to promotions — perhaps a discount on a smaller size offering is effective to drive trial, while consumers still aren’t ready to bite on the larger offering until the value is proven.
• Who foots the bill? Not applicable to all businesses, but in retail, if soda is on sale from $1.99 to $.99, often the retailer will ask a manufacturer to foot the entire bill so they don’t risk any of their margin if the sale isn’t effective. But many other retailers, eager to offer consumers the best prices and most exciting discounts, will invest in a promotion with you and take less margin. If they split the bill with you, your ROI looks a lot better. Consider both parties’ margin %’s as well as margin dollars. A promotion works best when everyone invests in its success.