Sales promotions can take the form of discounts, percentage-off deals and rebates. They represent short-term incentives used by companies to boost sales. Get these tactics wring, however, and you could miss vital revenue opportunities or damage the reputation of your brand.
Advantage: Entice Customers
The primary benefit of sales promotions is that they induce customer traffic and sales by offering a lower price and better value proposition. Everyone loves a bargain, right? 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.
Advantage: Clear Excess Inventory
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. At the very least, you'll be clearing storage space in your store or warehouse that could be costing your money.
Advantage: Upselling and Cross Selling
Sales promotions also enable upselling, where you persuade a customer to buy a more expensive item, and cross-selling, where you sell an associated product to the customer. For example, you could display some excess t-shirts near a more expensive blazer, and offer the t-shirt free with every blazer sold. Sales can also lead to viral word-of-mouth that expands your customer base further and encourage loyalty among customers.
Disadvantage: Changes Customers' Price Perceptions
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.
Disadvantage: Limits Your Revenue
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.
Disadvantage: Alienating Customers
With certain types of sales promotions and discounts, it can be difficult to control the nature and timing of purchasing. You cannot try to 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. For high-end brands, even the act of holding a sale can alienate customers. These customers have a perception of luxury, quality and exclusivity. Regularly holding sales could undermine this perception and damage the reputation of your brand.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.