Many companies use sales promotions as a tool to increase short-term profits. Sales promotions often involve discounted rates, and advertisements with details of the promotions are placed online, in television commercials or in newspapers. Such sales promotions increase the public's exposure to the firm and sometimes result in increased product sales. Despite the benefits, sales promotions often prove quite costly.
Upfront Expense
A company realizes no benefit from a sales promotion if the only people who find out about the promotion are the firm's regular clients. To reach new clients, the firm must proactively promote the sale using the promotional mix. The promotional mix involves using different kinds of marketing to promote the sale. Therefore, a firm must spend a significant sum of money up front to cover advertising costs and contend with the risk that the sale may not generate enough revenue to cover those costs. Companies must weigh the risk that too few ads will not generate enough sales and that spending too much on ads will make it difficult or impossible for the firm to recapture its upfront costs.
Cost
Companies price products and services by taking into account factors such as the cost of producing goods, labor costs and the company's need to generate a profit. To entice customers from rival brands, firms must offer price discounts during sales promotions. However, reduced prices mean reduced profit margins, and in some instances a firm may price a product so low that it does not even make a profit during the promotion. In such situations, companies hope that people who buy products during the promotion will become long-term customers who start to buy regularly priced items. However, bargain shoppers may simply deplete the firm's inventory and then look for new vendors once the promotion ends.
Reputation
Before a major firm releases a new product, it usually conducts market research to find out about the kind of products that different segments of the population are interested in buying. Some people are attracted to products and services that are promoted as being high-end or for the wealthy. If a so-called high-end firm engages in too many sales promotions, it may lose its regular client base because the products become more commonplace and no longer have the allure that enabled the firm to charge high prices. The company may then have to keep prices low in order to win a new client base of less affluent clients.
Confusion
Sales promotions are usually only available for a limited amount of time, and people have to follow certain procedures such as mailing in rebate forms or coupons if they want to benefit from the promotions. Within a large company, it can prove difficult to ensure that all staff members are aware of the precise terms of the current sales promotions. Firms lose production time when managers hold meetings to explain promotions but also lose money when ill-informed employees charge the wrong prices for items after promotions have ended.
Clients who misunderstand the terms of a promotion may also become unhappy and complain when they discover that they are ineligible to benefit from the promotion.
Therefore, sales promotions are difficult to manage for big firms and can create customer ill will.
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