Remember Your Objectives
A price promotion I stumbled across on social media recently serves as a good example of what happens when your tactics don't align with your objectives.
PC Express was offering a reduced price on their grocery pickup surcharge: what would normally cost $5 was going to be reduced to $2 during the promotional period.
But why reduce the price to $2 instead of reducing it all the way to "free"?
Think about it: what's the most likely reason why Zehrs, owned by Loblaw Corporation Ltd (LCL), might want to temporarily lower the price of their PC Express pick-up service?
In other words, what would most likely be the company's objective for doing so?
Would it be:
a) To do something nice by giving existing PC Express customers a deal.
b) To do something charitable, because LCL knows it made a lot of money in 2022 and Canadians living in a high-interest, inflationary environment might be in for a tough 2023.
c) To drive consumer trial of PC Express by giving in-store customers an incentive to try the service in the hopes they'll like it enough to continue using it once the promo period is over.
In what should be a surprise to no one reading this, the best answer is "c".
When companies reduce prices, the most probable reason for doing so is because they believe they'll more than make up the revenue with increased volume.
Unless Loblaw is losing money on every PC Express order (and doesn't expect this situation to change with scale), it's logical for the company to want more people to use the service, especially if they have data that suggests PC Express customers will shop more often, spend more money, or both. (And if that sounds unlikely, I have two words for you: Amazon Prime.)
Theoretically, lowering the price from $5 to $2 should entice more people to try PC Express.
But this is a great example of why you need to "reality check" your theories.
Because how many potential PC Express customers would refuse to use the service if it cost $5 but would be open to using it regularly if that price was reduced to $3? For how many potential customers is $2 a deal-breaker for using the service?
I'd bet the answer to both questions is "not many"; while reducing the price from $5 to $2 represents a 60% decrease, in real dollar terms, a $2 savings just isn't significant compared to an average grocery shop. Would you change an ingrained habit for just $2? (I didn't think so.)
When you consider the competition, things look even worse. LCL grocery competitor Walmart charges $0 for its pick-up service if your order is at least $35. I knew this without having to look it up because my family uses Walmart's "click and collect" service at least three times every week, and we most certainly would not do that if the cost was not $0.
This means Loblaw's promotional price is still $3 more than Walmart's everyday price. Very loyal Loblaw customers might be willing to pay for PC Express to gain access to LCL's exclusive (and delicious) private-label products, but the average convenience-seeker?
Let's just say it's tough to compete with free.
In short, if Loblaw's objective was to get customers to try PC Express, the easiest way to do that would be to not charge anything at all and drop the price all the way to "free".
So why didn't they do that? I can think of only two reasons:
Loblaw's accountants correctly pointed out that a) there was a cost to running the PC Express service, b) $2 is more money than $0, and c) charging something for the service during the promotional period would mean covering at least a portion of the service's costs... which was better than nothing. And the accountants were persuasive.
Loblaw wanted quantifiable data to answer the question I asked above (i.e. "for how many potential customers is $2 per pick-up a deal-breaker for using the service?") and decided to run a test. Because if my assumption is incorrect, and people really would use the service if it costs $2 (but not if it costs $5), then LCL may as well keep their accountants (and shareholders) happy.