7-1 Chapter 7 Copyright © 2010 by Nelson Education Limited. Promotional and Pricing Strategies 7...

7-1Chapter 7 Copyright © 2010 by Nelson Education Limited.

Promotional and Pricing StrategiesPromotional and Pricing Strategies

77

PowerPoint Presentation by PowerPoint Presentation by

Ian Anderson, Algonquin CollegeIan Anderson, Algonquin College


Looking AheadLooking Ahead

After studying this chapter, you should be able to:

1. Describe the communication process and the factors determining a promotional mix.

2. Identify advertising options for a small business.

3. Discuss the use of sales promotion tools and describe personal selling activities.

4. Discuss methods of determining the appropriate level of promotional expenditure.


Looking AheadLooking Ahead

5. Discuss the role of cost and demand factors in setting a price.

6. Apply break-even analysis and markup pricing.

7. Identify specific pricing strategies and create a price quality grid.


PromotionPromotion

• Promotion is marketing communications that inform and persuade customers

• Promotional MixA blend of nonpersonal, personal, and special forms for

communication techniques aimed at a target market.Makeup of the mix is determined by:

• Geographical nature of target market

• Size of promotional budget

• Product’s characteristics


The Communication Process in PromotionThe Communication Process in Promotion

• Communication Process ComponentsSource—the message senderChannel—the path the message travelsReceiver—the recipient of the message

• Forms of Promotional CommunicationNonpersonal—advertisingPersonal—personal sellingSpecial forms—sales promotion


The Communication ProcessThe Communication Process

Exhibit 7-1


Advertising Practices for Small FirmsAdvertising Practices for Small Firms

• AdvertisingThe impersonal presentation of a business idea through

mass media.

• Advertising ObjectivesTo sell by informing, persuading, and reminding.To serve as a complement to product quality and efficient

service.To properly reflect changes in customer needs and

preferences.


Types of AdvertisingTypes of Advertising

• Product AdvertisingThe presentation of a business idea designed to make

potential customers aware of a specific product or service and create a desire for it.

• Institutional AdvertisingThe presentation of information about a

particular firm, designed to enhance the firm’s image.


Advertising Decision FactorsAdvertising Decision Factors

• Frequency of AdvertisingWith regularity for effectiveness and continuity

• Introduction of new uses for established products• Introduction of new products and services

• Where to AdvertiseAppropriate media mix is determined by:

• Geographical area for target market coverage• Customer type targeted by advertising campaign• Advertising media customarily used by industry • By type of business


Advantages and Disadvantages of Traditional Advertising


Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 2008), p. 475

MediumMedium AdvantagesAdvantages DisadvantagesDisadvantages

Newspapers Geographic selectivity and flexibility; short-term advertiser commitments; news value and immediacy; year-round readership; high individual market coverage; co-op andlocal tie-in availability; short lead time

Little demographic selectivity; limited colour capabilities; low pass-along rate; may be expensive

Magazines Good reproduction, especiallyfor colour; demographic selectivity; regional selectivity; local market selectivity; relatively long advertising life; high pass-along rate

Long-term advertiser commitments;slow audience buildup; limited demonstration capabilities; lack of urgency; long lead time

Radio Low cost; immediacy of message; can be scheduled on short notice; relatively no seasonal change in audience; highly portable; short-term advertiser commitments; entertainment carryover

No visual treatment; short advertising life of message; high frequency required to generate comprehension and retention; distractions from background sound; commercial clutter.

Exhibit 7-2

Mobile Computing Client

I'm not sure if there's room to add the 6th factor (Internet) here or not




Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 2008), p. 475

MediumMedium AdvantagesAdvantages DisadvantagesDisadvantages

Television Ability to reach a wide, diverse audience; low cost per thousand; creative opportunities for demonstration; immediacy of messages; entertainment carryover; demographic selectivity with cable stations

Short life of messages; some consumer skepticism about claims; high campaign cost; little demographic selectivity with network stations; long-term advertiser commitments; long lead times required for production; commercial clutter

Outdoor Repetition; moderate cost; flexibility; geographic selectivity

Short message; lack of media demographic selectivity; high

Internet Fastest-growing medium; ability to reach a narrow target audience; relatively short lead time required for creating Web-based advertising; moderate cost

Difficult to measure ad effectiveness and return on investment; ad exposure relies on clickthrough from banner ads; not all consumers have access to the Internet.

Exhibit 7-2


I'm not sure if there's room to add the 6th factor (Internet) here or not


Creating the Promotional MessageCreating the Promotional Message

• Advertising Agencies Furnish design, artwork, and copy for ads Evaluate and recommend media with greatest “pulling power” Evaluate the effectiveness of advertising appeals Advise on promotion and merchandise displays Conduct market sampling studies Furnish mailing lists

• Other Sources Suppliers Trade Associations


Web AdvertisingWeb Advertising

• Basic Web Advertising A Corporate Website

• A firm’s location on the World Wide Web Banner ads

• Advertisements that appear across a Web page, often as moving rectangular strips

Pop-ups• Advertisements that burst open

on computer screens E-mail promotion

• Advertising delivered by means of electronic mail


Corporate WebsitesCorporate Websites


Sales Promotion for Small FirmsSales Promotion for Small Firms

• Sales PromotionAn inclusive term for any promotional techniques that

are neither personal selling or advertising• Used in combination with personal selling and advertising.

• SpecialtiesTangible and enduring functional items of worth

distributed personally to recipients that serve as reminders of the firm.• Pens, key chains, magnets, and clothing imprinted with the name,

logo, or slogan of the firm.

…continued



• Trade Show ExhibitsProvide hands-on experience with products.Are less costly than personal selling.

–Creating Effective Trade Show Exhibits Create moving billboards Make the booth interactive Qualify sales leads immediately Create a presence on the sales floor Plan ahead how to use the trade show time Recruit customers actively

…continued



• Strategic Alliances

• Loyalty Programs– Retail rewards programs

• Public Relations– Publicity = free advertisement– Sponsorships– Social shopping networks



• When to Use Sales PromotionFor manufacturers

• To stimulate channel members—retailers and wholesalers—to market a firm’s products.

For wholesalers• To induce retailers to buy inventories earlier than they

normally would.For retailers

• To persuade customers to make a purchase.


Promotional ToolsPromotional Tools

Exhibit 7-5


Personal Selling TechniquesPersonal Selling Techniques

• Personal SellingA sales presentation (promotion) delivered in a

one-on-one manner.Requires:

• Product knowledge

• Well-prepared sales presentation

• Ability to build goodwill


Importance of Product KnowledgeImportance of Product Knowledge

• Salespersons use product knowledge to:Successfully educate customers about the

product’s advantages, uses, and limitations.Answer customer questions and counter

customer objections.

Personal selling becomes order-taking when a salesperson lacks product knowledge.


The Sales Presentation: ProspectingThe Sales Presentation: Prospecting

• ProspectingA systematic process of continually looking for new

customers

• Prospecting TechniquesPersonal referrals

• Salesperson initiates customer contact through referral by another party known to the customer.

Impersonal referrals• Information on potential new

customers developed from public records and published sources.

…continued


The Sales Presentation: ProspectingThe Sales Presentation: Prospecting

• Prospecting TechniquesMarketer-initiated contacts

• Market surveys are used to identify prospects

Customer-initiated contacts• Potential customers are identified

through their contacts with the firm.


Practicing the Sales PresentationPracticing the Sales Presentation

• Improves the salesperson’s success rate.• Prepares salesperson for customer objections

related to price, product, timing, service, or need.Techniques for dealing with objections:

• Convert the objection into the form of a question.

• Use third party testimonials or experiences.

• Use the boomerang or positive conversion technique.

• Use comparisons.


Making the Sales PresentationMaking the Sales Presentation

• Adapting the sales approach to the customers’ needs:Avoid a “canned” sales talk.Speak the customer’s “language”.Answer every objection explicitly

and adequately.Be enthusiastic, friendly, and

persistent.Be personally supportive of

the customer.


Customer Goodwill andRelationship Selling

Customer Goodwill andRelationship Selling

• Relationship sellingBuilding customer goodwill for future sales to

satisfied customers through:• Maintaining a good personal appearance.• Having a pleasant personality.• Using professional etiquette in all customer contacts.• Understanding the customer’s point of view.• Maintaining high ethical standards in the customer

relationship.


Compensating SalespeopleCompensating Salespeople

• Nonfinancial Rewards Personal recognition of employees by the firm

• Financial Rewards Commissions

• Compensation paid as percentage of sales productivity.

Straight Salary Combination of Commissions/Salary

• Balance of two compensation forms is adjusted to provide an increasing proportion of commission as salesperson gains experience.

…continued


Determining the Promotional BudgetDetermining the Promotional Budget

• “How much should a small business spend on promotion?”Allocating a percentage of salesDeciding how much can be sparedSpending as much as the competitionDetermining what it takes to do the job


Exhibit 7-6

Using apercentageof sales

Deciding HowMuch Can Be

Spared

Spending asMuch as the

Competition Does

Comparison Process

Decision

Promotional Budget

Using aPercentageof Sales

DeterminingWhat It Will Take

to Do the Job

Four-Step Method of Determininga Promotional Budget

Four-Step Method of Determininga Promotional Budget


• PriceA specification of what a seller requires in

exchange for transferring ownership or use of a product or service.• Direct impact on gross revenues• Indirect impact on quantity sold

• CreditAn agreement between a buyer and a seller that

provides for delayed payment for a product or service.

Setting a PriceSetting a Price


Cost Determination for PricingCost Determination for Pricing

• Total CostThe sum of cost of goods sold, selling expenses, and

overhead costs.

• Total Variable CostsCosts that vary with the quantity produced or sold.

• Total Fixed CostsCosts that remain constant as the quantity product or sold

varies.


Total Cost

Selling Cost Overhead Cost

Salesperson's timeAdvertising

Cost of Goods Offered

Storage, SalariesTaxes

Example costs: Example costs: Example costs:

Cost of itemFreight charges

The Three Components of Total Costin Determining Price

The Three Components of Total Costin Determining Price

Exhibit 7-7


Can you please insert the Exhibit 7-7 here?


Cost Structure for a Hypothetical Firm, 2009 and 2010

Cost Structure for a Hypothetical Firm, 2009 and 2010

Sales revenue (25,000 units @ $8.00)Sales revenue (25,000 units @ $8.00) $200,000$200,000

Total costs:Total costs:Fixed costsFixed costs $75,000$75,000Variable costs ($2.00 per unit)Variable costs ($2.00 per unit) 50,000 50,000

125,000125,000Gross marginGross margin $ 75,000$ 75,000Average cost = Average cost = $125,000$125,000 = $5.00 = $5.00

25,000 25,000

Exhibits 7-8,7 -9

Sales revenue (10,000 units @ $8.00)Sales revenue (10,000 units @ $8.00) $80,000$80,000

Total costs:Total costs:Fixed costsFixed costs $75,000$75,000Variable costs ($2.00 per unit)Variable costs ($2.00 per unit) 20,000 20,000

95,00095,000Gross marginGross margin $ (15,000)$ (15,000)Average cost = Average cost = $95,000$95,000 = $9.50 = $9.50

10,000 10,000

Average pricing overlooks the reality of higher average costs at lower Average pricing overlooks the reality of higher average costs at lower sales levelssales levels


Applying a Pricing SystemApplying a Pricing System

• Break-Even AnalysisA comparison of alternative cost and revenue

estimates in order to determine the acceptability of each price.

Steps in the analysis• Examining revenue-cost relationships: the quantity at

which the product will generate enough revenue to start earning a profit.

• Incorporating actual sales forecasts into the analysis.…continued


Applying a Pricing SystemApplying a Pricing System

• Examining Cost and Revenue RelationshipsBreakeven Point

• The sales volume at which total sales revenue equals total costs (fixed and variable).

• The point at which profitability starts and losses cease.

• Incorporating Sales ForecastsAdjusted Break-Even Analysis

• Price has a variable impact and influence on demand.

• Adjusting for the indirect effect of price allows for a more realistic profit area to be identified.


900

700

500

300

100

10 30 50 70 90Units

(a)

Costs andRevenue ($)

Break-EvenPoint

Sales (Price = $12)

TotalVariable

Costs

TotalFixed Costs

TotalCostProfit

Loss

900

700

500

300

100

10 30 50 70 90Units

(b)


Break-EvenPoints

Sales(Price = $12)

Sales(Price = $7)

Sales(Price = $18)

Total Cost

Break-Even Graphs for PricingBreak-Even Graphs for Pricing

Exhibit 7-10


A Break-Even Graph Adjustedfor Estimated Demand

A Break-Even Graph Adjustedfor Estimated Demand

900

700

500

300

100

10 30 50 70 90Units


Sales(Price = $12)

Sales (Price = $7)

Sales(Price = $18)

Total Cost

Sales Curve fromDemand SchedulePro

fit

7

12

18

Demand(Units)

90

60

15

Revenue($)

630

720

270

Price($)

Exhibit 7-11


Pricing System: Markup PricingPricing System: Markup Pricing

• Markup PricingCost plus pricing system that adds a markup percentage

to cover:• Operating expenses• Subsequent price reductions• Desired profit

price selling of percentage a as Markup100PriceSelling

Markup

cost of percentage a as Markup100Cost

Markup


Selecting a Pricing StrategySelecting a Pricing Strategy

• Penetration Pricing Setting lower than normal prices to hasten market acceptance

of a product or service or to increase market share.

• Skimming Pricing Setting very high prices for a limited period before reducing

them to more competitive levels.

• Follow-the-Leader Pricing Using a particular competitor as a model in setting prices

…continued


Selecting a Pricing StrategySelecting a Pricing Strategy

• Variable Pricing Setting more than one price for a good or service in order to

offer price concessions to certain customers.

• Flexible Pricing Offer different prices to reflect differences in customer

• Bundling Offering several products for one combined price

• Price Lining Setting a range of several distinct merchandise levels.


Pricing and a Firm’sCompetitive Advantage

Pricing and a Firm’sCompetitive Advantage

• Pricing and Competitive AdvantageCustomers will demand and pay more for a product or

service that they perceive as important to their needs.

• Prestige PricingSetting a high price to convey an image of high quality or

uniqueness (competitive advantage).Customers associate price with quality.Markets with low levels of product knowledge are

candidates for prestige pricing.


Pricing Situations and ControlsPricing Situations and Controls

• Competition Act prohibits price fixing

• Continually adjusting a price to meet changing marketing conditions

Costly to seller Confusing to buyers

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