What are the risks and benefits of a promotional pricing strategy?

A promotional pricing strategy can increase sales and customer base but may also risk profit margins and brand perception.

Promotional pricing strategy is a marketing tool designed to attract customers by temporarily reducing the price of goods or services. This strategy can be highly beneficial in several ways. Firstly, it can significantly boost sales in the short term. When customers perceive that they are getting a good deal, they are more likely to make a purchase. This can be particularly effective during product launches or seasonal sales when businesses aim to attract a large number of customers.

Secondly, promotional pricing can help businesses expand their customer base. By offering products or services at a lower price, businesses can attract new customers who may not have considered purchasing from them before. Once these customers have been attracted, businesses have the opportunity to convert them into regular customers, thereby increasing their long-term sales.

Thirdly, promotional pricing can help businesses to clear out old or excess stock. By reducing the price of these items, businesses can encourage customers to purchase them, thereby freeing up storage space and reducing the costs associated with holding inventory.

However, there are also several risks associated with a promotional pricing strategy. One of the main risks is that it can erode profit margins. While promotional pricing can increase sales volume, it also reduces the profit made on each sale. If the increase in sales volume does not offset the reduction in profit per sale, then the overall profitability of the business may be negatively impacted.

Another risk is that promotional pricing can damage the perception of the brand. If customers become accustomed to purchasing products or services at a reduced price, they may perceive the regular price as being too high. This can lead to a decrease in sales once the promotional period ends. Furthermore, if a business frequently uses promotional pricing, it may be perceived as a 'discount' brand, which can deter customers who associate lower prices with lower quality.

Lastly, promotional pricing can lead to a 'race to the bottom' with competitors. If one business reduces its prices, others may feel compelled to do the same in order to remain competitive. This can result in a downward spiral of prices, which can be detrimental to all businesses involved.