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Why Retail Promotions Fail: Your Retail Pricing Strategy Is Not Aligned with Your Retail Discounting Strategy 

By Fabrizio Fantini • 16 May 2024

In the highly competitive retail landscape, promotions are a crucial tool for driving sales and attracting customers. However, many retailers find that their promotions often fail to deliver the expected results. In our first blog post, we explored the diminishing returns of discounting in a market saturated with promotions. This second installment delves into a critical issue: the misalignment between retail pricing strategies and retail discounting strategies. By understanding and optimizing the key elements of pricing, retailers can better align these strategies to unlock hidden pricing opportunities and drive success. 

Key Elements of Effective Pricing

There are four critical levers of pricing that define your overall pricing strategy. Much of the misalignment between list price and promotions comes directly from a failure to consider all four elements, and in turn neglecting the impact it will have on your promotion. By mastering these levers, retailers can better align their pricing and discounting strategies to achieve optimal results. 

The Four Levers of Pricing 

  1. List Price: The initial price before any discounts. 
  2. Product Range: The assortment of products, including the introduction or removal of items. 
  3. Promo Intensity: The percentage of items offered at a discount. 
  4. Promo Depth: The extent of the discount offered. 

These four levers are fundamental tools that retailers can manipulate to influence their overall pricing strategy. 

Misalignment Between Pricing and Discounting Strategies 

Promotions often fail because retailers do not align their discounting strategies with their overall pricing strategies. Let’s explore how each of the four levers can help identify and correct these misalignments. 

Lever 1: Direct List Price Changes 

Direct List Price Changes

When people think of pricing strategy, it is generally the list price that they think of. The base list price is generally what determines if a retailer is pursuing an everyday low price (EDLP), high/low, or luxury position.  Directly altering the list price is the most straightforward method of adjusting pricing. For instance, raising the price of a product from $10 to $12 will directly impact the average price. Many discounts depend solely on this lever, as well: thinking only of the list a direct price cut by dollar or percent off.  

However, if changing this list price is not supported by an understanding of customer value perception or competitive positioning, it can backfire. Retailers often undermine their list price with promos that muddle the strategy. If you are positioning yourself as an EDLP and still can regularly give large discounts, customers become wary of your low price claims. On the other side, any discount at all can erode the high-end feel of a luxury brand.  

Solution: Ensure that list price changes are based on thorough market analysis and customer value perception. Align these changes with promotional messaging to justify the new price points, as well as with each other—if you are raising prices one week and drastically discounting the next, you are undermining your own position. Make sure that you have a clear idea of your pricing strategy overall and carefully follow the market expectations for that positioning. 

Lever 2: Product Range Adjustments 

Product Range Adjustments

Product range is another way to adjust your pricing strategy. If you change the assortment of products available, you can change your margin and revenues without changing a single price on the price list. Often when store rebrands based on pricing strategy, this lever is the first they will pick: moving up to a premium perception by removing all discount items or moving closer to EDLP by removing the most expensive SKUs.  
The range of products in promotions is an important way to control its success or failure. It’s critical to balance the mix to meet customer expections, as well as protect margin. If a retailer only promotes high-end products without adjusting the product mix, they may alienate budget-conscious customers. If they discount SKUs that already have a tight margin, they similarly risk discount ROI. Both lead to failed promotions. 

Solution: Balance the product range to include both premium and budget options. This ensures that promotions appeal to a wider audience and align with overall pricing strategies. Be careful, however, to optimize the items in that promotion according to your own margin demands. Otherwise, it will fail to achieve ROI, no matter how appealing the offer is to customers.  

Lever 3: Promo Intensity 

The Short-Term Focus Trap: Balancing Immediate Gains with Long-Term Sustainability

Promo intensity refers to the percentage of items on discount. Retailers often fail by either over-promoting, which can erode brand value, or under-promoting, which can lead to missed sales opportunities. Interestingly, under-promoting can be just as dangerous as over-promoting, the danger of which is more obvious on its face. However, under-promotion has taken down many a retailer. J.C. Penny eliminated promotions for just a short time back in 2012, which dropped sales drastically—and they are still suffering from that promotional failure today.  

Solution: Use data-driven insights to determine the optimal percentage of items to promote. This ensures that promotions are impactful without diluting the brand or overwhelming inventory. Make especially sure to match your direct competitors. If you are taking a promotional strategy from a retailer using a different pricing strategy, you are not going to get the same results—and will quickly rack up a number of costly discounting failures. 

Lever 4: Promo Depth 

The Unprofitable Cycle: Escaping the Discount Spiral

Promo depth involves changing the discount rate itself. Retailers may offer deep discounts that undermine the perceived value of their products or shallow discounts that fail to attract attention. A 5% discount will hardly catch any attention from customers in a discount store, while it may be just the push you need to get more sales in a premium brand. It’s a matter of pricing strategy—and of course marketing around the discount.  

Solution: Implement strategic discounting that balances attracting customers with maintaining product value. Analyze competitor pricing and customer response to find the sweet spot for discount rates. Remember that the psychology of pricing also comes into play, and sometimes the way you share a discount impacts its success.  

Pricing Levers in Action 

So how do these pricing levers play out in the real world? When we think about failed promotions, it’s often because we are relying too heavily on the wrong lever or pulling the wrong one entirely.  

British Wine Pricing 

British Wine Pricing 

A notable example of product range involves the pricing of wine in the UK during the Covid pandemic. To understand the impact of this dimension, consider the price change waterfall, a method that breaks down price changes into comprehensible parts. This approach reveals how different elements, such as product range and promotional strategies, cumulatively contribute to overall price changes. 

By analyzing data, we found that changes in product range in wine retailers significantly contributed to price increases. When cheaper wines sold out, only the more expensive options were left, raising the average price. This indirect outcome demonstrates how supply chain dynamics and product availability can impact pricing. Retailers who strategically adjusted their promotions to highlight the remaining premium products saw better alignment and improved sales. 

Vegas Hotel Pricing 

Vegas Hotel Pricing

On the other hand, hotel pricing in Las Vegas often uses promo depth to influence customer perception. By listing a higher reference price, hotels create the illusion of a deal, leveraging consumer anchoring bias to drive bookings. This strategy highlights how businesses can use perceived value to enhance their pricing strategies. Hotels that aligned their discounting strategy with their overall pricing strategy achieved higher occupancy rates and customer satisfaction. 

Creating Synergy Between Retail Pricing and Retail Promotions 

A robust understanding of the key elements of pricing and their alignment with discounting strategies is crucial for successful promotions. By dissecting price changes into actionable components, retailers can uncover hidden opportunities to optimize their promotional efforts. Aligning pricing and discounting strategies not only reveals unseen price increases but also provides strategic avenues for value creation, ultimately leading to more successful promotions and improved profitability. 

For more insights on why promotions fail, be sure to follow other blogs in this series, where we explore the importance of understanding customer behavior and the pitfalls of poorly timed promotions. 

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