Cost Effective? Part 3 of 3

In the final part of this three-part series on how catalogers’ pricing strategies are evolving in response to the Web’s effect on branded products, this week I’ll look at the economic factors that can affect promotional pricing strategies.

(For part 1, click here; for part 2, click here.)

While using a promotional pricing strategy can prove effective, there are a number of economic issues you should concern yourself with. Pricing below existing market prices has a number of pitfalls, including the following issues.

1. Can the incremental sales produce enough incremental profit to offset the loss in margin from lower prices? The increase in sales needed to offset the loss in margin is significant.

2. Once your price is at the lowest market price, decreasing prices below this level may shift little market share away from other low-priced merchants. The shift in market share between being the lowest price vs. 5 percent below the market price vs. 10 percent below the market price may be negligible.

3. Pricing below market price can have some unintended consequences. For one, other competitors can match the lower prices. Now your margins have shrunk, and any incremental sales are likely split among all the vendors who’ve matched the new, lower market price.
Also, suppliers can react negatively to lower market prices. They can cut cooperative advertising funds, enforce minimum advertised price policies or cut the distributor’s margin to retaliate for price-cutting below the lowest market prices. Manufacturers typically don’t want price wars.

4. Customers become hooked on buying based solely on lowest price and will respond poorly to higher priced offers.

5. And price, of course, is just one of the four P’s of marketing. The product, packaging and promotion strategy are the other marketing levers that can be used to increase sales.

Be Tactful With Promotions
Promotional offers can be risky as well. Before rolling out an aggressive promotional offer, consider the following.

1. Customers become dependent on promotions and only buy promoted items. They become conditioned to wait for the next promotion and won’t buy from catalogs without a promotional offer. After a series of promotional offers, customer response may fall to levels prior to the promotions. The lift in response from offering promotions may disappear over time. And response rates without promotions may fall well below historical response rate levels.

2. The end of a promotion ends the effective selling life of a catalog. Ending a promotion can cut off the “tail” of a catalog’s life. A catalog’s life cycle needs to be in sync with the expiration date of a promotion. The expiration date should be six weeks to eight weeks after a catalog’s in-home date.

3. Promotional offers should be priced to be profitable. Customers have become conditioned to expect the highest dollar-value promotions previously offered. So don’t offer promotions that are unprofitable.

4. Promotional prices affect the margin of all products, not just those products that are price-sensitive. Catalogers typically group products into categories — “A” products are price-sensitive commodity products while “B” products are available in alternative locations but aren’t purchased on price. “B” products are purchased based on availability, brand preference or some other criteria other than price. “C” products are unique to a single merchant and are typically not price-sensitive. Catalogers avoid global price-cutting, preferring to maintain margin in “B” and “C” products and selectively cut prices in some “A” items.

Jim Coogan is president of Catalog Marketing Economics, a Santa Fe, N.M.-based consulting firm focused on catalog circulation planning. You can reach him at (505) 986-9902 or jcoogan@earthlink.net.