A sales promotion is a marketing strategy in which a business uses a temporary campaign or offer to increase interest or demand in its product or service.
There are many reasons why a business may choose to use a sales promotion (or ‘promo’), but the primary reason is to boost sales. Sales boosts may be needed to reach a quota as a deadline approaches, or to raise awareness of a new product.
Increasing revenue is a common goal for sales promotions. Often, sales promotions restrict your profit potential, but they allow you to generate more revenue in the short run due to increased sales volume. This also means more cash flow, which is why companies struggling to meet near-term financial obligations often turn to discounts. To realize greater revenue, you need more customers to buy more products at the reduced price.
Sales promotions are typically used as a price inducement to attract price-conscious buyers not interested in products regular prices. This is common when companies want to build a customer base, such as at a grand opening, when a competitor goes out of business, or in a highly competitive industry. In some cases, sales promotions on one product, known as a “price leader” or “loss leader,” are used to get customers into the store so you can sell them other, more profitable items.
One of the more risky or negative effects of sales promotions is that they can lead to a price orientation amongst customers. This is especially true if you overuse them or maintain discounts for an extended period. Customers psychologically connect the promotion price with the value of the product, and a price hike down the road may not work.
Effective sales promotions lead to inventory reductions because customers buy more product. In fact, this is why companies hold them regularly at the end of a buying season. For example, when Halloween is over, you often see retailers discount decor and candy to make room on the shelves for other products. While this often results in a gross loss on the excess inventory, you at least get some revenue rather than throwing out expired or obsolete products.
The effect of Sales Promotion on Sales Volume
Short Vs. Long-Term Impact
Although an effective sales promotion will increase sales in the short-term, generally there no longer-term impact. For established brands, many customers will wait for the promotion to buy and to take advantage of the lower price. And, for many brands, most buyers were already familiar with the brand before the promotion. The promotion may have done little to attract new buyers or to encourage brand switching.
Sales Promotions in Highly Competitive Markets
Sales promotions have their place in marketing even though they tend to instill a higher degree of price sensitivity among consumers. For new product introductions in competitive markets where there is a need to familiarize a group of consumers with a new product, sales promotions are a highly effective tool. And, in established competitive markets where gains in market share count for the bragging rights the increased share might offer, sales promotions are also an effective method to increase sales volume.
Effectiveness vs. Goals
Deciding whether your promotional campaign was effective depends on what goals were established. This varies by the established strategy at the start of the campaign. For example, if the goal of the campaign was to garner an increase in market share of 2 percentage points and the campaign yielded 3, then the campaign was successful. But, this also has to be examined in light of cost. If the cost of the additional market share was well beyond the budget set aside for the promotional push, then the campaign’s effectiveness is mixed.