Most of those discounts are based on yearly earnings, so most of the time disconnected of any profitability aspects. You may know what you lose when you promote an article with no margins, but you also know that you may lose way more if you don't go hard on the discount.
But there are other side effects to these promotions, even far more dangerous: it kills the price perceptions.
"Consumers who were offered free bread sticks as a promotion from a pizzeria said they’d be willing to pay $5.06, on average, for them once the promotion ended, only slightly less than the amount consumers were willing to pay when there had been no promotion, say Mauricio M. Palmeira of Monash University in Australia and Joydeep Srivastava of the University of Maryland. By contrast, people who were offered the bread sticks at a discounted price of 50 cents were willing to pay just $2.76 once the promotion was over. "
“Since consumers believe the value of a free product is likely to be consistent
with the value of the purchased product, pairing a free product with a high-end
product may very well increase perceptions of its value,” write authors Mauricio
M. Palmeira (Monash University) and Joydeep Srivastava (University of
Maryland).
These days, companies often offer bonus products for free or at a low discounted
price with a required purchase. For example, high-end cosmetics companies like
Lancôme or Clinique offer free gifts with the purchase of a full-priced product.
In one study, participants were offered a free or discounted package of spaghetti
with the purchase of a jar of organic tomato sauce for $8.95. They were then
asked how much they would pay for the spaghetti individually. People offered
free spaghetti were willing to pay an average of $2.95 for it, but those offered the
spaghetti for $.50 were only willing to pay an average of $1.83.
When a free product is paired with an expensive product, consumers assume it is
worth more than if it was offered at a low discounted price.
For example, if a
luxury jeweler offers a free bottle of wine with a purchase, consumers assume it
isn’t cheap. But, according to the authors, customers might assume the same wine
is cheaper if the jeweler offers it for $1.
“Promotions with low discounted prices devalue products more than free offers.
In fact, free offers may not devalue products at all when they are paired with an
expensive purchase, as consumers will use the price of the focal product to
estimate the value of the supplementary product,” the authors conclude. “If
Mercedes-Benz promotes a car with a free GPS system, we expect the GPS to be
high quality,” the authors explain. "
When you see discounts over 50% off the price tag, how could you consider the standard price tag? You expect to buy your product 50% off. And once you fell in the promotional trap, you are doomed. It is very unlikely you would be able to get out of it.
