Pricing Strategy: Discounts & Promotions (Example)
How would discounting and promotions work for Doug’s Desserts, my hypothetical company?
Doug’s Desserts is turning five years old! To celebrate, I will offer $5.00 coupons to the first 500 people who like my Facebook post. In this example, the discount is unexpected (so customers aren’t trained to wait for it), creates a sense of urgency (because of the limited time and availability), and generates buzz around my business being around for five (hence $5.00 and 500 people) years. There is a small risk of arbitrage, but I’ve limited the quantity and the $5.00 discount is small enough it is probably not worth someone’s time to do.
For my online subscription service, as standard policy, I will offer a 14-day free trial for any of the Individual or Family plans to allow customers to see the value of my site before paying for a subscription.
To promote my baked goods to existing customers, I will include one random cookie flavor with every cake order that I make to broaden my customer’s experience with the variety of baked good options I have available.
In order to drive more subscribers, I will provide a holiday menu planning guide to each current subscriber who refers a new paying subscriber. In this example, the promotion grows my customer base with limited cost to me. Also, I’ll provide a 10% discount for customers that pay a full year’s subscription instead of the month-to-month plan.
If I’m selling my chocolate chip cookies for $6.00 per dozen and my COGS are $4.00 per dozen, then I lose $3.00 per dozen on the discount, or $1,500 (500 customers * $3.00 / dozen). Suppose that of the 500 customers, 80% were new customers. Of those, 400 customers (or 75%) loved my cookies so much that they bought a dozen a month for the next three months. Then I’ve made $1,800 in profit (300 customers * $2.00 / dozen profit * 3 months) on these customers, or $300 more than the cost of the promotion. Because it made more revenue than it cost and I’ve avoided long-term risks of devaluing my product, the promotion should be considered a success!
You can always adjust your discounts or promotions in the future. For example, suppose I was finding that the vast majority of my customers are buying the discounted annual subscription compared to the monthly subscription. This might be because my 10% discount is too generous; I could try discounting by 5% and see how customers respond.
Pricing Strategy Wrap-up
Thanks for joining me on this pricing strategy discussion the past two weeks. Because your company’s objectives and the environment in which you operate is continuously changing, you should repeatedly revisit your pricing decisions multiple times per year. If you have any questions about pricing, or just want to talk baking, I’m always here for you.
Recipe of the day: Cook’s Illustrated German Chocolate Cake with Coconut-Pecan Filling (free trial / subscription required; I do not receive any compensation for this link)