Sales promotions can take the form of discounts, percentage-off deals and rebates. They represent short-term incentives used by companies to boost sales. Missed revenue opportunities and potential brand degradation are concerns with these marketing tactics.
Sales Promotion Advantages
The primary benefit of sales promotions is that they induce customer traffic and sales by offering a lower price and better value proposition. Taking 25 percent off the price of a good without altering its benefits increases the customer's perception of value.
Companies also use sales promotions to achieve other non-revenue-generating objectives. When a new business launches, for instances, promotions are a way to attract customers away from competitors. A start-up may prioritize establishing a customer base before it focuses on profits. Companies also use sales promotions to clear out excess inventory at the end of a season. Even when you don't make a profit, generating cash with the unsold items enables you to meet near-term expense obligations and to buy inventory for the next season. Sales promotions also enable upselling and cross-selling opportunities, and can lead to viral word-of-mouth that expands your customer base further.
Sales Promotion Disadvantages
The short-term motive of sales promotions can work against the typical long-term goals of companies, including creating customer loyalty. Excessive price discounting trains buyers to focus on the low price as the source of value with a particular business or good. After customers get used to certain discounted price points, it is difficult to get them to pay regular price.
Sales promotions naturally limit your per-transaction revenue opportunities. If you discount a $10 item to $8, you miss $2 in revenue. While discounts may improve volume, they narrow profit margins. Narrow margins require you to sell a higher volume of goods to generate strong profits. This point is especially true if many customers would pay $10 eventually for the item if it were not available at a discount.
With certain types of sales promotions, it is difficult to control the nature and timing of purchasing. You can't prevent a customer who would pay regular price from taking advantage of a discount in most cases. Even with an expiration date on a promotion, customers may delay coupon use until the final moments, which delays revenue. Alienating customers with incorrect prices at the register and the costs of administering certain types of promotions also are concerns.