If you recall…and I know you do, in Part 1 I pointed out the sales advantages to your company offering discount (price) promotions. You probably offer discounts at various times and for numerous reasons. But, are you doing it in a well-researched and well-planned manner…or just “willy-nilly”? I’m here to help you from being all “willy-nilly” about the whole discount-pricing thing.
Would you get a kick out of maximizing your short and long-term revenue by being as efficient as possible when offering discounts to customers? And you say to that, “Well, duh?”
That being the case, I would like to give you some research findings that may help you maximize your short-term and long-term revenue. Oh, now I have your attention!
So, researchers Wilcox, Howell, Kuzdrall and Britney (1987) report the advantages of providing price quantity discounts:
- Sellers save by selling fewer, larger orders – lower sales costs – fewer sales calls made.
- Lowered cost of raw materials – quantity discounts to seller.
- Time value of money – larger revenues are available for re-investment for longer periods.
- Longer production runs with lower costs on holding inventory.
Here’s another excellent reason to systematically use a discount pricing strategy. A recently-identified benefit to offering discounts is that YOUR profit can be maximized by modifying YOUR buyer’s order policy. In other words, give your customer’s the incentive (A DISCOUNT) to place higher-volume orders. You both win! This principle does apply to consumer-based orders as well as business-to-business customers.
Both research teams of Fraccastoro, Burton and Biswas (1993) and Sigue and Karray (2007) provide important findings that will create efficiencies when you incorporate discounts into your price strategy.
Some very useful guidelines are presented by Fraccastoro, Burton and Biswas (1993) in regard to offering promotional discounts. Your company would benefit from utilizing 2 very specific tactics.
1. Promote your maximum discount level (Ex. save up to “X” percent).
2. Promote store-wide promotional discounts
There are 2 positive impacts for offering store-wide discounts. They are:
1. Greater effect on consumer shopping
2. Increase in overall store foot traffic
Sigue and Karray (2007) suggest that if you were to choose not to offer promotional discounts, another viable strategy is for you to promote and brand yourself with an “Everyday Low Price” (EDLP) strategy. This strategy would be most beneficial to your business if brand loyalty is high. Sigue and Karray (2007) add, “It does not pay to offer larger promotional discounts to attract competitor’s customers, because a discount would also benefit your loyal customers.”
The practice of higher pre-discount prices and deeper discounts (high-low pricing) is advisable when products are less differentiated such as in books, software and music CD’s. This same strategy is also very effective and applicable to products that customers are easily able to stockpile such as, paper tissue, pasta, tomato sauce etc. (Sigue and Karray 2007).
Sigue and Karray (2007) provide this for your evaluation, “When promotions are expected to significantly increase future sales, keep both the regular price and discount rate relatively low.” In fact, Sigue and Karray (2007) clarify, “you will find that a reduction in the regular price has a stronger impact than a promotional discount, the regular price and the price discount rate decrease with higher long-term promotional effects.” This strategy works best when products and/or services are differentiated from competitors.
Be aware that profits increase with the long-term effects of promotional pricing and decrease with price competition intensity. Keep in mind that you will reap smaller profits with products that customers are able to stockpile – this factor greatly decreases post-promotional purchases. Obviously, if you are able to start with a moderately-high regular price followed by offering the same product at a deep discount, and revert the product to a moderate to moderately-high regular price – this will stimulate post-promotional sales, and guess what? Increase your profits!
Fraccastoro, K., Burton, S., & Biswas, A. (1993), Effective use of Advertisements promoting sale price. [10 pages] The Journal of Consumer Marketing. Available: http://proquest.umi.com
Licata, J., Biswas, A. & Krishnan, B. (1998 Summer), Ambiguity and exaggeration in price promotion: Perceptions of the elder and nonelder consumer. [26 pages] The Journal of Consumer Affairs. Available: http://proquest.umi.com
Sigue, S. & Karray, S. (2007 June), Price Competition During and After Promotions. [14 pages] Canadian Journal of Administrative Sciences. Available: http://proquest.umi.com
Wilcox, J., Howell, R., Kuzdrall, P. & Britney, R. (1987 July), Price Quantity Discounts: Some Implications for Buyers and Sellers. [5 pages] BioCycle. Available: http://proquest.umi.comTweet