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CHAPTER 14

Small Business Marketing: Price and Promotion

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Learning Objectives

• Identify the three main considerations in setting a price for a product

• Explain what breakeven analysis is and why it is important for pricing in a small business

• Present examples of customer-oriented and internal-oriented pricing

• Explain factors affecting small businesses getting paid

• Describe the advertising, personal selling, public relations, and sales-promotion tools that a small business owner uses to compile a promotional mix

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LO - 14.1Identify the three main considerations in setting a price for a product

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Economics of Pricing

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Economics of Pricing

Competition Costs

Economic factors that impact product pricing

Customer demand

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Competition

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Customer Demand

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Figure 14.1 - Demand Curves

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Customer Demand

Availability of product

substitutes

Share of the purchase to the

consumer’s total budget

Factors influencing price elasticity

Necessity of the product

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Costs

Fixed costs Variable costs

Categories of cost

• Costs that do not change with the number of sales

made

• Rent, property taxes

• Costs that change in direct proportion to sales

• Sales commissions, labor

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LO - 14.2Explain what breakeven analysis is and why it is important for pricing in a small business

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Breakeven Analysis

• Breakeven point (BEP): Point at which total costs equal total revenue and the business neither makes nor loses money

• BEP (units) = Total fixed costs Unit price - Average variable cost • Average variable cost equals total variable cost

divided by quantity

• BEP (dollars) = Total fixed costs 1 - Average variable costs Unit price

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Figure 14.2 - Breakeven Analysis

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Figure 14.3 - How Price Changes Affect the Breakeven Point

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LO - 14.3Present examples of customer-oriented and internal-oriented pricing

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Customer-Oriented Pricing Strategies

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Types of Psychological Pricing

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Internal-Oriented Pricing Strategies

• Cost-plus pricing • Markup: Amount added to the cost of a product in

setting the final price • Formulas to calculate markup

• Selling price = Cost + markup • Markup = Selling price - cost • Cost = Selling price - markup

• Target-return pricing • Setting price to produce a given rate of return • Target return price = [(Fixed costs + target return) ÷

unit sales] + variable cost

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LO - 14.4Explain factors affecting small businesses getting paid

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Payment Methods

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Credit Policies

Consumer credit Trade credit

Types of credit

Credit extended to customers for the purchase of goods or

services

Credit extended from one business to another for

purchasing goods

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Trade Credit

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Consumer Credit

Carry the debt on

account

Accept credit cards

Extending consumer credit

Arrange bank loan

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Credit Policies

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Figure 14.4 - Show Me the Money

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LO - 14.5

Describe the advertising, personal selling, public relations, and sales-promotion tools that a small business owner uses to compile a promotional mix

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Promotion

Advertising

Personal selling

Public relations

Sales promotions

Tools used in developing a

promotional mix

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Advertising

Print media

Outdoor media

Choices of media

Broadcast media

• Newspapers • Magazines • Direct mail • Yellow pages

• Billboards or posters placed

on public and other

transportation

• Radio • Television • Computer

billboards

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Advertising

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Table 14.1 - Advertising Costs by Different Types of Businesses

Source: Almanac of Business and Industrial Financial Ratios (2013) by Leo Troy. Published in 2013 by Aspen Publishers, Inc.

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Advertising

Comparative messages

Slice-of-life messages

Fantasy messages

Common advertising strategies

Testimonials

Humor

Sensual or sexual messages

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Advertising

Response tracking

Split ads

Telephone surveys

Statement questionnaires

Measuring the effectiveness of

advertisingIn-store opinions

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Advertising

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Advertising

Advertising agencies

Radio and TV studios,

newspapers and, magazines

Media agencies Art and graphic design services

Professional advertising services

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Personal Selling

• Personal presentation by a salesperson for the purpose of making sales and building relationships with customers

• Objectives • Identify customer needs • Match needs with products • Illustrate the match between customers’ need and

the product

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Personal Selling

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Pre-approach

Approach

Questioning

Demonstration

Handling objections

Closing the deal

Suggestion selling and follow-up

Personal Selling

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Public Relations (PR)

• Involves promotional activities that build and sustain goodwill between a business and its stakeholders

• Publicity: Aspect of PR consisting of a message about the company communicated through the mass media

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Table 14.2 - Relationship between Marketing and Public Relations

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Promotion

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Sales Promotions

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Figure 14.5 - Short-Term Ratchet Effect of Sales Promotion

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Promotional Mix

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Promotional Mix