Promotional pricing is one of the most widely used marketing techniques employed by retailers to generate customer traffic. In many cases in which promotional pricing is utilized, the technique involves an attractive price reduction on a well-known product. As we discuss in our Setting Price: Part 2 tutorial, the most common form of promotional pricing include temporary markdown, where a product is offered at a lower price for a short period, and loss leader pricing, where a product is offered at a price that is so low that the marketer is often losing money on each item sold.
Yet, while promotional pricing is an attractive marketing option, designing these campaigns are not easy. The key challenge is to figure out what the ultimate goal will be. If executed correctly, promotional pricing will not only result in increased sales of the product with a reduced price, but will also lead to increased sales of other products that are often sold a full price. That is, customers do not just cherry-pick the low-price product and then leave the store; they purchase more.
However, sometimes a promotional pricing approach just seems too inviting for customers. They are so drawn to what they view as a great deal that they buy large quantities of the low-price product and leave without generating significant demand for other products.
For instance, mid-level restaurant chain TGI Fridays has just announced a promotion that makes you wonder if customers will only be interested in the promoted product. As discussed in this NBC News story, TGI Fridays is offering an all-you-can-eat appetizer promotion for only $10. That means anyone can eat as many Buffalo wings as he or she wants for just $10. Now, as one might guess, there are restrictions on this promotion. One restriction is that the deal only applies to one appetizer item per person. So if a customer orders wings they cannot switch to mozzarella sticks. The second restriction is that appetizers cannot be shared. Of course, almost anyone reading this post will have the same thought – this restriction will be impossible to enforce. So it would be expected that a table full of customers will each order a different appetizer and then sharing will take place.
On the surface there is little doubt the promotion will increase appetizer sales, especially at outlets in communities populated by a large number of millennial, such as college towns. However, it is not the number of diners ordering appetizers that will determine whether the promotion is a success or not. It is the additional purchases made to go along with the appetizers. Certainly, TGI Fridays is betting big on the promotion attracting many customers but also having these customers purchase full meals and desserts. Given the promotion, it will interesting to see how many will decide to stick around for burgers and cheesecake.