Impacts of Promotional Pricing

Large paper price tag

The basics of marketing have taught us that Price is a strategic tool and a key component of consumer perceptions of value (Price x Quality = Value) for a business or product. So why is it that businesses choose to manage price like a tactical element or promotional tool?

The simple answer is ‘conditioning’ of the management team to the short-term sales/revenue benefits of a price reduction. Assuming the business is relatively elastic, it will see a short-term lift in sales with a meaningful reduction in price. However, the long-term impacts can be brand impacting and limits a businesses opportunity for growth.

A good example of this is in the airline industry that uses price discounts aggressively. I travel quite frequently to Montreal so I take notice of the seat sales and prices for these flights. However, its become a bit of a confusing mess to determine what the value of a flight is these days for one of the regional carriers. I’ve seen the price fluctuate between $85 (50% off) to $113 (40% off) to $119 (up to 50% off) and $124. And just when I need to book a flight online I can’t seem to find a flight at any of these prices.

As a consumer I’m left dazed and confused about the ‘value’ of a flight on this airline and what is reasonable. I have been conditioned to look for flights priced below $100 because that is the new base price for a flight. Not too long ago I was conditioned to believe a reasonable price for a flight to Montreal was $200. Can a business really sustain this kind of price erosion?

Now I’m sure the airline filled its planes when it ran the first $85 price promotion but what happens after? I’m sure they see diminishing sales results when they offer promotional prices that are above this new water mark. The result is further pressure to take prices lower than $85 to realize the same sales increase. And what is the impact? Margin erosion because fixed costs haven’t changed.

The old adage applies here…’s easy to take prices down but it’s another matter when you want to raise them. Profit generation becomes harder and harder when a new (lower) price point is established in the market and the consumer is conditioned to recalculate the value equation. To offset this pricing spiral a business needs to match pricing reductions with cost reductions in order to maintain margins.

What the airline could have done to limit the brand impacts is use segmented promotional pricing to offer the $85 price point on multiple purchases only. Something like “book 2 or more flights and pay only…….” This way they would likely target frequent travelers that would purchase multiple flights and reduce the impacts on their base pricing.

I’ll be watching future promotional programs with considerable interest especially when it comes time to report quarterly results.

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