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Promotional Traps: Core Hazards And How Not To Get Stuck In The Discount Loop

Digital Marketing
March 19, 2024
10 mins
Content

The promotional, ad spiral embraces the continuous use of discounts to attract customers. Rather than sales growth, the tactic eventually results in margins drop and brand dilution. In today’s article, Ksenia Mykhailenko, Media Director at Promodo, explains the ways to avoid killing your business through discounts, and how strong brand building will help here. 

Understanding the Risks of Promotional Traps

The ultimate goal of a business is clear - to gain profit. You've launched a product, produced a certain amount of product, and want to sell it as quickly as possible. In 99% of cases, you don't operate alone, while there are competitors, the market, and consumers who do not spot your product. To cope with the challenge, businesses often apply discounts because that’s a sound way to stand out from the crowd and attract consumer attention. With that, most fall into discount traps.

Discounts are effective while sales and profits are going up. And there’s the problem here: once a discount offer is off, the sales go down immediately. So, what does a company do next? It applies the discount once again, and its sales start growing again. However, the same problem remains unsolved: once a company ceases the discount, its cash flow starts dropping even faster than the first time. Once in a vicious circle, when accounting reports are negative, a company is ready to set discounts again and again, until it goes beyond the reasonable and the goods are sold without a margin or at a loss. That's what we call a promotional trap.

Promo Spiral
Promo Spiral Loop

The above situation features a promotional spiral. Some even call it a "promotional death spiral", alluding to the dead end for a product or company that follows this path.

You may take it as an imaginary situation while no business acts that way; it’s clear that it is not profitable to work with a minimum margin and companies set reasonable pricing and discounts. 

Nonetheless, millions of people use popular services and search for goods there. A notional iPhone is represented there by both official sellers and ‘gray’ dealers. The latter set prices $5-30 lower. Meanwhile, the prices set by official resellers remain the same or are even higher. And more often than not, official resellers sell larger volumes than their unauthorized ‘gray’ counterparts. 

Now, here’s the question: why do the buyers seduced by lower prices, still purchase from official sellers? Here we are not talking about a particular product like the iPhone 15 or other high-end Apple devices, but about the network selling it. Another example is when a company is nationalized. Does that mean that the branded products are getting less expensive? More to that, the nationalized brand does not have to resort to dumping or apply discounts continuously to retain its customers. The answer here sounds simple, though is difficult to implement: companies should bet on brand building and promotion.  Ksenia Mykhailenko, Media Director at Promodo.

The Power of Strong Branding Over Discounts

‍The word brand" may sound something like hackneyed, though let's be honest - it's the only thing that makes you stand out in the competitive market. Imagine a customer entering a supermarket and sticking to the water rack. While many will naturally opt for the lower price, your brand is the only trigger that will make customers buy your product at a higher cost and without a discount. That's why the brand is always the story of staying priceless. 

What does a brand need most? Communications! You should work closely with your consumers and tell them about yourself and your product. This is the story about the value a person will get from you or your outstanding product. And that’s crucial to forward the message that value your unique value is not about making a discount. 

In most cases, people would never become aware of innovative brands and their products without proper communication campaigns. The ultimate conclusion here is that the more you invest in your brand, the less you rely on discounts.   

Investing in brand awareness has proved as the best way of making people look for your product or service. Convenient location and fast delivery will make consumers trust you more without the need to set discounts. That means that customers are not merely looking for the lowest price.

Is this to say you should never give discounts? Of course not! Statistically, almost ⅔ of US shoppers search for discount coupons on Google. Even Apple offers discounts. This is to emphasize that a brand should attract a buyer’s attention not solely through the lowest offers, but with an added value. And that’s what will help avoid the promotional spiral when you make your profit grow by lowering your margin.  Ksenia Mykhailenko, Media Director at Promodo.

Key Insights: Avoiding Discount Traps 

Investing in a brand is a lifetime story. You can't invest a large sum of money once a time and cease it then. 

According to our client surveys, companies spend 9-13% of their budget on marketing annually.

Our hands-on experience proves that launching digital display advertising can instantly increase branded traffic to a website by 75% while connecting TV will bring an additional 20% of visitors.

Large brands often strive to reduce ad budgets. Seemingly, they would enjoy the point of growth and a substantial market share. However, there’s a point of plateau when sales stop growing. Whenever that’s the case, there’s a great likelihood of falling into the promotional spiral: for the sake of faster profits, businesses are launching discounts, time and time again. That’s not the finest option after all. 

While discounts are only part of your strategy, be sure to right balance your options. 

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Written by
Ksenia Mykhailenko

Media Director at Promodo

Published:
March 19, 2024
Updated:
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