The goal of every retailer and manufacturer is to optimise sales, profit margin and company valuein order to secure long-term market success.
Manufacturer of branded products may use price promotions to increase sales, margins, and company value, but they may also use new product introductions for achieving these goals. A team of researchers around Koen Pauwels from Dartmouth College studied the automotive industry.
In today’s article we offer you a brief overview of the effects of the two sales promotion measures on important factors influencing your company’s success.
How do product launches and promotional prices affect margins and profits?
The researchers find that new product introductions have a positive effect on revenues that is, in the long run, twice as high as in the short run. The same holds for improvements in profits, while these are minor in magnitude. The effect on company value is close to zero in the short term, but twice as strong as the effect on profits in the long run. Overall, new product introductions have a positive effect on a company’s financial performance.
Promotional prices as a short-term measure to increase sales
For price promotions, the effect is a bit different. In the short run, there is a positive effect on financial performance measures as well. For sales, the effect is a bit lower than in the case of new product introductions. On profits, the effect is three times as large, with a small but also significant effect on company value. In the long run, the effect on revenues is twice as large as with new product introductions, but the effects on profits and company value are negative.
These findings should make companies cautious when employing pricing promotions as they may harm long-term financial performance of firms, with positive effects only in the short-term. New product introductions, which are, without doubt, very costly, seem to be a much better deal. Overall, the findings are based on one study from the automotive industry, and there may be different mechanisms in other industries. But, in general, reducing a price may only lead to stable margins if the company can benefit from realizing cost-savings in the same order of magnitude, which is, certainly, not always possible.
Adopt this knowledge, as a retailer or manufacturer, and no longer throw away valuable margin or profit potential.
Recognise where you can strengthen your margins and increase sales
For optimal pricing, especially in eCommerce, competitors should not be left out of sight. Only by focusing on the pricing of the competition can long-term success be achieved through better margins and higher sales.
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