The Anatomy of a Well-Designed Price Promotion

By offering value, discounts can be a win-win for consumers and the brand.

Posted Nov 26, 2018

 Jayson Hinrichsen/Unsplash
At Starbucks
Source: Jayson Hinrichsen/Unsplash

Whether it’s selling aspirin, power tools, or zoo tickets, virtually every company uses price promotions. You’ve gotten coupons in the mail or through an app, come across BOGO (Buy One Get One Free) signs in a store, or received free shipping for making an online purchase of $25 or more. These are all price promotions, which are price incentives offered by the seller to encourage customers to behave in a certain way. For example, coupons encourage shoppers to choose the seller’s brand over a competitor, or stock up on the discounted product. BOGO promotions entice shoppers to buy two of the same item, particularly helpful when the retailer wants to clear out its inventory. And free shipping encourages customers to increase spending to meet the threshold and avail of the offer.

A price promotion has many decision variables, from the amount and percentage of the offered discount, the conditions for receiving it, and its duration. As consumers, we encounter price promotions all the time. So it’s worth considering how different aspects of a promotion work and the logic behind them, which is what I want to do in this post.

The Starbucks Holiday Cup Promotion

In early November, Starbucks offered a limited-time promotion in its stores in the form of a red holiday cup made with reusable plastic (see the picture). When shoppers purchased one of three holiday drinks — the Caramel Bruleé Latte, Peppermint Mocha and Toasted White Chocolate Mocha — they got their drink in the cup. They could bring the cup after 2 pm for the next two months and receive 50 cents off 16-oz. beverages each time.

Starbucks holiday cup/ Picture by Utpal Dholakia
Source: Starbucks holiday cup/ Picture by Utpal Dholakia

 Why is this a well-designed price promotion? For at least five reasons. Let’s examine each of the attributes that make the Starbucks holiday cup promotion effective.

(1) Creates a sense of obligation.

The promotion obligates the recipient of the reusable cup. Instead of the normal paper cup, when customers were handed this sturdier attractive cup instead, the label prominently said, “Our gift to you.” Sociologists have found that when a person receives a gift, even when it is unexpected or unsolicited, a norm of reciprocity is triggered. The recipient feels obligated to respond in return by offering back in the future, thus building a “complex pattern of give and take [that] helps establish moral standards of social solidarity.”

By pointing out that the cup is a gift prominently on the label, Starbucks is triggering the customer's natural impulse to return the gift by buying from the company.

(2) Requires effortful action by the customer.

Perhaps the most important goal of a price promotion is to discriminate between customers according to their price sensitivity. For example, if a supermarket simply lowers its price on Tide detergent, everyone who buys Tide will get the deal. But if it requires customers to clip or download a coupon and bring it in to get the lower price, only those who really care about saving the money will take the trouble. Others simply won't bother and will pay full price.

The Starbucks promotion does the same thing. Only those who want to save 50 cents on the holiday drink will take the trouble to bring back the cup, others will forget to do so and pay full price. Only those who care about the discount get the discount.

(3) Achieves a desired goal.

Many price promotions fail because of the lack of thinking about what exactly the company is trying to achieve. Consider a bar that offers happy hour prices until 7 pm. If most of its customers stop in for drinks by then, the promotion will fail by selling drinks at a lower price that the bar would have sold anyway. Instead, if the bar offers happy hour prices only from 3-5 pm, it may draw in some new customers during a slow period of the day and increase sales.

The Starbucks promotion is like this second bar. It encourages customers to come to the store and drink a holiday coffee drink later in the day, usually a slow time for sales.

(4) Offers a moderate incentive.

Many price promotions are unsuccessful because they give away too much. Furniture stores are notorious for this. They’ll claim to offer 50%, 75% or 80% off regular prices. This not only arouses suspicion in potential customers, but it also erodes the integrity of regular prices.

In Starbucks’ case, the company offered a moderate incentive of 50 cents on holiday drinks that customers were really interested in consuming. This keeps the premium quality of the company's products intact while rewarding customers.

(5) Builds the company’s brand.

One concern many pricing experts have about price promotions is that they hurt the brand. When a company constantly offers price promotions, customers wonder whether the quality of its products and services is good. They become reluctant to pay full price and wait until the next sale comes along.

Centering the price promotion around the distinctive red-colored cup, symbolic of the holidays gets around this problem. Instead of hurting the Starbucks brand, it provides visibility as customers carry these sturdy cups around and use them again and again.

Not all price promotions are bad.

Price promotions designed with thought, like this one, are balanced and sustainable. They give something that consumers truly value while generating positive outcomes for the company. That’s why they are and should be, an essential part of the marketing strategy of well-run companies.