Right now we’re all being bombarded with deals on everything, including digital services and B2B SaaS. After all, nothing puts the holiday spirit in the mood like an extra terabyte of cloud storage. It’s a flurry of activity that’s hard to ignore, especially for someone paying close attention to how these offers are put together.
It’s fascinating to dissect the offers that companies send me. It is usually clear which companies understand the effects of promotions and design them accordingly, and which companies put together an offer in the hope of a quick increase in sales.
Some companies make offers for the wrong reasons and measure them incorrectly. Common reasons are:
- This is common in our industry at this time of year.
- We need a sales bubble.
- We know we will sell more if we lower the price.
- Our customers expect it.
Any of these things could be true. But if this is the only reason you’re running a promotion, chances are the effort will hurt your bottom line. Too often a promotion ends in what I call a margin reduction program. Imagine saying to your key stakeholders, “We’ve found a foolproof way to reduce our margins!” – you probably wouldn’t last long at that company.
Dig deeper: Your holiday marketing playbook should prioritize sincerity over sales
Pricing is complex, and promotions add another layer to that complexity – but two well-known concepts from pricing theory can help you evaluate your promotional activities more effectively: price discrimination and the sales hangover effect.
When price sensitivity determines demand
Despite the ominous-sounding name, price discrimination means selling to different customers at prices closest to what they are willing to pay.
As a simplified example, imagine 200 people searching for your product. One hundred are willing to pay $100, and the remaining 100 are willing to pay $80. How should you price it? At $100, you sell 100 units and receive $10,000. At $80, you sell 200 units and receive $16,000. The best approach depends on the production cost of 100 or 200 units and represents the standard pricing decision that any company must make.
However, we can do better. What if you find a way to sell the same or similar units to each group separately? If you sell 100 to the first group for $100 and another 100 to the second group for $80, you will receive $18,000 in revenue. This is price discrimination: selling to the more price-sensitive group at a lower price without reducing costs for customers who are willing to pay more.
This last part is often missed when designing a promotion. Many promotions are spread out and reduce the price and margin for everyone. The question is how to sell the same good or service at two different prices.
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A classic method is a staple of household appliances, the most famous kitchen mixers. Mixers are offered at full price or at a reduced price in unpopular colors. You might think that manufacturers should only focus on popular colors, but they purposefully produce the less popular colors and offer them at a discount. This allows them to sell at full price to customers willing to pay it, and offer a discount to those willing to trade in an unpopular color.
The key is to make a trade-off that allows you to sell separately to more price-sensitive customers. It could be the removal of a small feature, a time commitment, or a limit on availability that prompts someone to make a price trade-off, bringing in new customers rather than lowering prices for your everyday shoppers.
When promotions pull demand forward
The second concept to consider is related, but more nuanced: understanding where any sales increase actually comes from. In other words, are you just stealing from future sales?
The classic example is the infamous employee awards promotion that GM organized in the summer of 2005. This offered staff awards to the general public and was hailed as a success, with record sales – until sales collapsed in 2006.
Vehicles are planned, long-term purchases, and when a great deal comes along, often it’s not the decision to buy that changes, but the timing. Many participants brought up purchases that they would have made months later at a higher price or margin.
This is known as a sales hangover, and in GM’s case, it is asked executives to say this they would move away from this type of promotion.
Looking beyond the sales bubble
Sales and promotion are an essential part of all marketing, but measuring sales growth is not enough. Are you really selling to new customers who wouldn’t normally pay your full price, or are you just lowering costs for people who would have paid more now or in the future?
Only by answering these questions can you tell whether your offers are on the nice list – or the naughty list.
Dig deeper: How to turn holiday shoppers into loyal friends, not one-time buyers
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