Holiday planning is a massive effort, not just for traditional retailers but for anyone doing business with consumers and, nowadays, even for B2B. Very few product or service businesses escape the kind of seasonality that forces active engagement with the market through promotions, offers or specials.
Right now, we’re all bombarded with deals on everything, including digital services and B2B SaaS. After all, nothing captures the holiday spirit quite like an extra terabyte of cloud storage. It’s a surge of activity that’s hard to ignore — especially for someone who pays close attention to how these offers are put together.
Why most promotions miss the mark
It’s fascinating to dissect the offers companies send me. It’s usually clear which companies understand the effects of promotions and design them accordingly and which ones throw an offer together, hoping for a quick sales bump.
Some companies run offers for the wrong reasons and measure them incorrectly. Common reasons include:
- It is usual in our industry at this time of year.
- We need a sales bump.
- We know we sell more when we cut the price.
- Our customers expect it.
Any one of these might be true. But, if they are the only reasons you run a promotion, there’s a good chance the effort will hurt your business results. Too often, a promotion ends up as what I call a margin reduction scheme. Imagine telling your primary 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 must put sincerity before sales
The pricing concepts that shape effective promotions
Pricing is complex and promotions add another layer to that complexity — but two well-known concepts in pricing theory can help you evaluate your promotional activity more effectively: price discrimination and the sales hangover effect.
When price sensitivity shapes demand
Despite its ominous-sounding name, price discrimination means selling to different customers at the prices closest to what they are willing to pay.
As a simplified example, imagine that 200 people are in the market for your product. One hundred are willing to pay $100, and the other 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 cost of producing 100 or 200 units and represents the standard pricing decision that every 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 at $100 and another 100 to the second group at $80, you receive $18,000 in revenue. This is price discrimination — selling to the more price-sensitive group at a lower price without lowering the cost for customers who are willing to pay more.
This last part is often missed when designing a promotion. Many promotions are scattershot and reduce price and margin for everyone. The question is how to sell the same good or service at two different prices.
Dig deeper: Marketers navigating low consumer confidence amid high holiday sales
One classic method is a staple of domestic appliances, most famously kitchen food mixers. Mixers are offered at full price or at a reduced price in unpopular colors. You might think manufacturers should focus only on popular colors, but they purposefully produce the less popular ones and offer them at a discount. This lets them sell at full price to customers willing to pay it and offer a discount to those willing to trade off an unpopular color.
The key is to create a trade-off that allows you to sell separately to more price-sensitive customers. It might be the removal of a minor feature, a time commitment or a limit on availability that prompts an individual to trade off price, bringing in new customers rather than reducing prices for your everyday buyers.
When promotions pull demand forward
The second concept you need 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 pricing promotion run by GM in the summer of 2005. It offered employee pricing to the general public and was hailed as a success, with record sales — until sales slumped in 2006.
Vehicles are long-term, planned purchases, and when a great offer appears, it’s often not the decision to buy that changes, but the timing. Many people who participated brought forward purchases 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 prompted executives to say they would move away from this type of promotion.
Looking beyond the sales bump
Sales and promotions are an essential part of all marketing, but measuring a sales bump isn’t enough. Are you genuinely selling to new customers, who wouldn’t usually pay your full prices or are you just lowering the cost for people who would have paid more now or in the future?
Only by answering these questions can you say 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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