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The promotions come in quickly and often.
Express interest in a service, signup for a loyalty program, or glance over a product page on your social feedback, and the promotions start to come. You couldn’t open your inbox, social media, or almost any website without getting sales and limited time offers that tempt you to shop (and for the companies and brands hopefully often). Mindful of consumers’ hesitancy to spend due to macroeconomic conditions, retailers and brands-alike are rethinking their promotions strategy, and looking for ways to win new customers through new promo tactics and establish a competitive edge.
For example, as part of their winter holiday strategy, Walmart launched a “Holiday Guarantee” that allowed customers to return items curbside from October through December. Walmart+ customers received the extra perk of scheduling returns right from their doorsteps. When we take a closer look at Walmart’s promotional strategy, we found that they had actually initiated their promotions in the summer. At the time, they introduced their top toys list along with a new budget-friendly category, a strategic bonus to their back to school sales, and announced they would continue releasing thousands of more “rollbacks” until the end of the year.
Companies are coming up with a variety of promotional strategies to tackle business challenges such as inventory surplus, reducing customer spending concerns, and increased competition from other brands and retailers. In addition to addressing challenges, their strategies attempt to manage rising marketing costs and unintentional consequences such as value reduction or in some cases value debt.
There are ways companies can take a structured data-driven approach to their promotions strategy – and avoid some of the pitfalls and challenges that poor promotions strategy can have on the company and its financial results. We set out to take some ambiguity out of the process to help you decide how best to tackle promotions. Let’s first begin by breaking down the fundamentals of a promotional plan.
Promotional strategy is intended to create differentiation from competitors and give your company optionality based on market conditions, customer needs, and business requirements. To achieve success in your promotional strategy, it is important to identify the key goals you want your company to achieve through your promotions. This can include goals such as accelerating revenue growth or increasing new customer acquisition. It can also be to take market share from your competitors or reduce associated costs from existing inventor. Establishing clear goals will make it easier to design and implement the right promotions strategy.
Once your company has established its promotional goals, the next steps is to set clear measurable objectives that will help the company track and adjust promotions as required. If your promotional strategy is not measurable, it is difficult to determine whether strategy has generated the desired outcomes, what actions to do more (or less) in the future, and calculating the investment required to product the outcomes. Start simple. In the beginning, is important that even basic promotional measurements are captured. Examples can include an increase in the number of new trial users, increase order or basket size, or increase in quarterly revenue from A to B. Whatever your goal, make sure it is measurable.
Next, you will need to design the promotional mix that will be implemented to achieve these objectives and address company challenges. One must keep in mind that not one size fits all, so extensive research on your target market and competition will set your company up for success in the short-term, but most importantly in the long-term. A poorly planned promotional strategy will lead a company to not reach their maximum potential, but even worse it may bring unintended consequences.
Studies on promotional tactics may help guide your selection of promotions, however, beware that the findings may not be fully applicable to meet your objectives.
For example, researchers found that consumers perceive price reductions in dollar terms as more significant than percent for high priced products, and vice versa for low priced products. Yet, both don’t seem to affect purchase intention due to perceived costs and value reduction.
Similarly, one study by Graffeo et al. found that consumers with low numeracy skills perceive percent discounts as more attractive than money off discounts, but this effect diminishes when presented near one another.
Many different variables can lead to different outcomes which is why hyper-focus and specificity will be pivotal for the success of your promotional plan.
In order to avoid any unintended consequences, you must be meticulous in the execution of your strategy. Don’t underestimate how much time it takes to launch even a seemingly “simple” promotional campaign. This includes creating marketing assets, timing, identifying cohorts, backend setup including pricing, channel setup (e.g. web vs. IAP), etc.
Starting early will be critical for conducting the necessary research and tests that will make your promotions effective and error proof. An early start will also give you the opportunity to find the competitive advantage necessary for this holiday season, or for any future marketing campaigns. Set measurable timelines for each of your steps so you don’t risk wasting time or falling behind.
Many companies don’t have a clear idea of what “success” looks like when they launch a promotional campaign. Having measurable objectives will remove ambiguity on the performance of your strategy, and this also applies for your overall company pricing strategy. If you don’t have clear data beforehand to determine the goals of your upcoming promotional campaign, it’ll be difficult to properly measure and execute your plan. Equally, whether your strategy succeeds or doesn’t meet all your objectives, continuously collect data to further improve your future promotions.
Are the customers you win through a promotion, customers you can nurture and increase loyalty? Or will you be spending good money for little return? The promotional mix you employ will influence how your consumers will perceive your brand. What may have seemed as an effective strategy in the short-term may lead to drawbacks in the long run such as high returns or early subscription cancellations after free trials. Many companies inadvertently overextend themselves with their offers and deals, putting the company at risk of value debt. Your campaign should still highlight your value, and not be perceived by your customers as a failing company’s attempt to stay afloat during a downturn.
By not starting early enough on your promotional plan could lead you and your team to rush through the process and potentially leave room for error and unintended consequences. What you may have discovered in your market research may no longer be applicable to your promotional strategy. If you don’t precisely lay out each step you may run the risk of missing opportunities to maximize revenue from your campaign, and timing is especially vital if the majority of your sales depend on seasonality.
Your promotions is a powerful growth driver if done thoughtfully and strategically. With increasing pressure and competition for customer attention and acquisition, an effective promotional strategy is even more relevant for companies.
It is essential for companies to set the right goals and be surgical in their execution in order to gain the greatest outcomes from their promotional plans. It takes a lot of time to research and narrow down the promotional mix that may be the right fit for your brand and overall goals – but with the right preparation a lot of long-term pain can be avoided.
Therefore, to manage the numerous aspects of a promotional campaign and address any issues that may arise, you must start early on your planning so your campaign will be successful and devoid of unforeseen errors.
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Have you ever subscribed to a service because they offered “the first month free”? Have you ever downloaded an app because it is free but then spent more money for the “premium version”? Or have you been surprised when being promised a free iPhone for switching to a new mobile operator?
There is a good chance you have experienced one or all of these situations since “free” can be such a powerful strategy.
It is why we see free – and commonly, the freemium model – used as a popular and effective pricing strategy used by brands and company around the world.
For businesses purposes, “free” does not always mean “free”. As the old saying goes, “there ain’t no such thing as a free lunch.” By offering free or freemium strategies, companies are looking to generate benefits such as attracting potential customers and decreasing the overall cost of acquisition.
Therefore, “free” is actually a pricing strategy designed to influence behavior and share perceptions. This can come by reducing friction to try a product or service. Free can also reduce resistance to monetization due to perceptions of affordability.
Let’s explore some of the advantages of offering free, and smart ways to start applying this strategy.
“Free” itself is a great attraction.
It makes customers feel that they can gain something at virtually no cost. Therefore, pricing “free” leads to a broad range of people knowing your product or service and increasing your potential customer base.
Renowned behavioral economics Professor Dan Ariely ran an experiment to test the power of free. Professor Ariely did a test offering two products: a Lindt Truffle and a Hershey’s Kiss. The Lindt Truffle was offered for $0.26 and the Hershey’s Kiss at $0.01. With this offer, 40% chose to buy the Lindt Truffle, and another 40% went with the Hershey’s Kiss.
Now the experimenters decided to drop the price $0.01, where the new prices were $0.25 for the Link Truffle, and $0.00 or free for the Hershey’s Kiss. While the relative difference in price remains similar, 90% ended up choosing Hershey’s Kiss. This is one example of the power of free and how this can influence customer behavior.
One benefit of free is the potential cost savings of acquiring or winning a customer.
For many companies, there is an inherent cost to market to- and win- and customer. This can be substantially higher if it requires more customer engagement (marketing isn’t free after all). If the product is offered for free – either as a trial or reduced product – the willingness to try is potentially higher. So instead of spending more to win an unwilling customer at the start of the buying journey, companies can spend more effectively after a customer experience the product and hopefully get value.
To assess whether this strategy is right for your company, consider how well you can stand up to these three tests:
If one or more of these tests do not hold up, then the effectiveness of the strategy may be at risk.
Another advantage is that “free” itself can be a distribution strategy.
For the free product or service, once it has high quality and offers a great user experience, the existing users will be more willing to invite others to join or have a try.
When done right, organic word-of-mouth spread about the product is some of the best advertising and cost-efficient conversion strategies a company can have.
Freemium pricing is one of the most common pricing models that utilize people’s preference for “free”.
“Freemium”, the combination of free and premium, means offering all customers an essential service as free but charges some customers for an enhanced version or more content. Freemium pricing aims to attract many customers using the free version on offer, where a proportion of these users will be converted to the premium.
Evernote, a popular note-taking app that owns more than 225 million users, is free for anyone to download. Still, you can only access the basic version to simply take notes. However, if you want to enjoy the core features such as forward emails, annotate PDFs, you will need to upgrade to the premium for $7.99 a month.
Companies can also offer the customers free versions for a certain period or limited usage as a “free trial”.
Spotify is one of the world’s best-known music streaming platforms. It offers the customers a month free trial for the premium. After one month of free, the customers can cancel at any time.
Using this strategy, Spotify is reducing friction to signup, and create a separate pathway to get more consumers to upgrade for premium. According to Spotify Usage and Revenue Statistics(2020), among 286 million monthly active users of Spotify, there were 130 million Spotify Premium subscribers – nearly 45% of their active user base.
Among these subscribers, some may gradually get used to the premium version. Some may even forget to cancel subscriptions and, therefore, be kept charged, which happens more often. According to one report in Yahoo Finance, 48% of people forget to cancel a free trial before they’re charged with auto-renewal.
Applying “free” as a pricing strategy can highly increase potential customers’ pool by lowering the barrier between customers and the product.
However, it is also essential to know when and where to offer “free,” or it can end up being a free gift.
One goal of providing free is to attract a broader audience. Therefore, a free product or version must be compelling. Verizon, the U.S. telecommunication company, offers a free phone for anyone to switch to them or add a new line. Even if there will be other costs later on, “free phone” itself is a great attraction for customers (and future revenue).
Suppose you have sufficient top-of-the-funnel traffic, but few of them choose to pay for premium. In that case, your free offer may be too generous, decreasing the willingness-to-pay for a paid or more premium version. In this situation, you may want to consider a redesign of your offer and what is offered for free.
In 2011, the New York Times (NYT) announced a digital subscription plan that gave readers the ability to read 20 articles for free per month. If people wanted more, readers need to buy digital news packages. After launching the digital plan, NYT found 20 articles per month was sufficient for readers – decreasing the number of potential paying readers. By 2012, the number of free articles was reduced to 10; eventually reducing the free articles to 5 today. By assessing willingness-to-pay through reading behavior and pricing research, the NYT found a balance between offering attractive “free” versions and encouraging people to subscribe.
Free is great for customers, and companies using a free pricing strategy must also get an equal exchange. Designing and using “free” effectively can not only bring in new prospective customers, but improve the costs associated with winning those customers.
At its core, the product and service must have value drivers that increase willingness-to-pay. It is vital to make a free pricing strategy work. Absent this, companies may be giving customers a gift that does not give back – and that is a strategy worth reassessing.
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Promotions.
As consumers, we all love them. As a company, how do they work for you and drive the results you need?
When it comes to promoting certain products, there is so much to consider:
1. What type of promotion are you planning?
2. What product or service are you promoting?
3. Should your price change be permanent or temporary?
4. What is the target audience you’re trying to reach?
5. When are you going to do this price change?
This list goes on and on. In fact, we found that companies when using discounting promotions, only 16% found that the discounting they did was effective.
Let’s break it down.
Before offering a promotion to your customers, you must establish specific and quantifiable goals that are consistent with your pricing and business strategy. Do you want to increase sales volume, focus on customer retention, or concentrate on new customer acquisition?
Take a look at Aeropostale Inc (AERO). Like many apparel companies, AERO wanted to have a seasonal promotion to ring in the Fall season. Their goal is clear: to increase sales volume and reach customers that are more price sensitive.
Outlining your specific goal and target customer clarifies what your promotion will be like, making the next steps in the process that much easier.
When it comes to figuring out the target audience, consider the following: Are you trying to get the attention of stingy or once-in-a-blue-moon customers in order to turn them into loyal shoppers? Or are you targeting the customers that value high-quality products that are worth potentially higher prices? This will help you determine what promotions to offer.
Creating a pricing inventory helps you list the inputs you need, have, and won’t obtain which will make pricing decisions easier and more effective. In order to use pricing to reach your objectives, you need to understand the market you’re entering, your competitors, the customers, and your product or service.
After you have a clear idea of the direction you’re heading, the promotion has to be on a product (or set of products) that matters to your target audience and that’s going to make them purchase during the promotion. If it’s not relevant or highly demanded, the promotion will not bring the desired results.
In one of our studies, we found that when acquiring new customers was the business objective, companies found discount promotions were effective only 15% of the time. In the case of a sales increase objective, only 24% of companies felt discounting promotions were effective. It is important that the promotion strategy drives the desired goals.
This is a good time to remember a key element of your value proposition: how you price your product is a direct message on how you view your own product. If you lower your price relative to your competitors, you’re telling your customers that your product is a bargain and an overall “good deal.”
However, if the product in question is highly-valued (think technology or designer brands) then with promotions – particularly large price discounts – customers may associate your product with inferior quality. Understanding your value proposition helps to do promotions better while defending the overall value.
The Amazon Echo is also a great example. Amazon takes pride in its value proposition that combines high quality with affordable prices. Their product is already accessible to many customers, including those that are price sensitive. To incentivize customers to purchase, even more, Amazon still discounts Echos on days like Black Friday and Prime Day. This is something Apple does differently. Apple’s HomePods sell for around $200 which has made the purchasing process a bit more difficult for customers given the high cost. Apple’s ambiguous value proposition has cost them additional sales.
The important thing to do is to focus on customer behavior. The promotion is about them.
This is where exclusivity, scarcity, and value come into play. If a promotion is only applied to an exclusive set of customers, they will begin to feel special and a sense of belonging to a selective group. For example, think about those times you’ve signed up for a company’s email list. At times, email subscribers are given access to promotional deals before companies advertise online or in-stores. The customer’s excitement and sense of superiority for having “insider access” can push them to purchase more regularly from your company.
In addition, if the product is scarce (and popular), that means it is low in stock and only a few people will be able to purchase. Scarcity alone can increase the value of a promotion by creating a sense of urgency. When something is limited, it can make people push the “buy now” button quicker leaving little room for any second guesses or pensive questions of “Do I really need this?” In fact, FOMO also comes into play here. People want to feel unique and having an item that is in high demand will do just that.
Overall, promotions will give customers an opportunity to experience your product or service which reflects on your company and brand as a whole. This is your chance to provide something valuable and beneficial to customers that they would’ve otherwise not experienced had your promotion not pushed them to purchase.
However, you must be careful. While consumer behavior shifts with price changes, it can also change depending on how frequent your promotions are.
Don’t underestimate the element of surprise.
If consumers can predict when you’re going to have a promotion, you’re doing something wrong. Switch it up a bit and don’t make promotions happen during the same time each week or year. This will encourage customers to “wait it out,” and I wouldn’t blame them. Because why should they purchase your product for full price today when you have promotions every first Monday of the month? Not only will you lose sales on full-price items, but your promotions will lose their effect as customers will just hold out and expect it.
Ultimately, promotions are targeted, and short-term pricing moves. If you use a price discount promotion, you can attract more customers (new and old) and ultimately increase your sales volume to make up for the lower profit margins.
How you manage promotions can be as important as the promotions themselves. Frequency, availability, and rules should not be underestimated. This influences the value of not only the products on promotion but also on the overall company and brand. It can also shape customer’s perceptions of fairness where “gotcha” promotions create bad customer experiences. An example is a BOGO promotion, but the rules are so specific to items customers do not value that the promotion itself and the response to future “deals” decreases.
Done right, promotions can positively impact your business. It all comes down to your own goal: what are you looking to get out of this promotion?
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