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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
7-2Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-3Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-4Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-5Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-6Chapter 7 Copyright © 2010 by Nelson Education Limited.
The Communication ProcessThe Communication Process
Exhibit 7-1
7-7Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-8Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-9Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-10Chapter 7 Copyright © 2010 by Nelson Education Limited.
Advantages and Disadvantages of Traditional Advertising
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
7-11Chapter 7 Copyright © 2010 by Nelson Education Limited.
Advantages and Disadvantages of Traditional Advertising
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
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
7-12Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-13Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-14Chapter 7 Copyright © 2010 by Nelson Education Limited.
Corporate WebsitesCorporate Websites
7-15Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-16Chapter 7 Copyright © 2010 by Nelson Education Limited.
Sales Promotion for Small FirmsSales Promotion for Small Firms
• 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
7-17Chapter 7 Copyright © 2010 by Nelson Education Limited.
Sales Promotion for Small FirmsSales Promotion for Small Firms
• Strategic Alliances
• Loyalty Programs– Retail rewards programs
• Public Relations– Publicity = free advertisement– Sponsorships– Social shopping networks
7-18Chapter 7 Copyright © 2010 by Nelson Education Limited.
Sales Promotion for Small FirmsSales Promotion for Small Firms
• 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.
7-19Chapter 7 Copyright © 2010 by Nelson Education Limited.
Promotional ToolsPromotional Tools
Exhibit 7-5
7-20Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-21Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-22Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-23Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-24Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-25Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-26Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-27Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-28Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-29Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-30Chapter 7 Copyright © 2010 by Nelson Education Limited.
• 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
7-31Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-32Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-33Chapter 7 Copyright © 2010 by Nelson Education Limited.
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 = $9.50
10,000 10,000
Average pricing overlooks the reality of higher average costs at lower Average pricing overlooks the reality of higher average costs at lower sales levelssales levels
7-34Chapter 7 Copyright © 2010 by Nelson Education Limited.
Applying a Pricing SystemApplying a Pricing System
• Break-Even AnalysisA comparison of alternative cost and revenue
estimates in order to determine the acceptability of each price.
Steps in the analysis• Examining revenue-cost relationships: the quantity at
which the product will generate enough revenue to start earning a profit.
• Incorporating actual sales forecasts into the analysis.…continued
7-35Chapter 7 Copyright © 2010 by Nelson Education Limited.
Applying a Pricing SystemApplying a Pricing System
• Examining Cost and Revenue RelationshipsBreakeven Point
• The sales volume at which total sales revenue equals total costs (fixed and variable).
• The point at which profitability starts and losses cease.
• Incorporating Sales ForecastsAdjusted Break-Even Analysis
• Price has a variable impact and influence on demand.
• Adjusting for the indirect effect of price allows for a more realistic profit area to be identified.
7-36Chapter 7 Copyright © 2010 by Nelson Education Limited.
900
700
500
300
100
10 30 50 70 90Units
(a)
Costs andRevenue ($)
Break-EvenPoint
Sales (Price = $12)
TotalVariable
Costs
TotalFixed Costs
TotalCostProfit
Loss
900
700
500
300
100
10 30 50 70 90Units
(b)
Costs andRevenue ($)
Break-EvenPoints
Sales(Price = $12)
Sales(Price = $7)
Sales(Price = $18)
Total Cost
Break-Even Graphs for PricingBreak-Even Graphs for Pricing
Exhibit 7-10
7-37Chapter 7 Copyright © 2010 by Nelson Education Limited.
A Break-Even Graph Adjustedfor Estimated Demand
A Break-Even Graph Adjustedfor Estimated Demand
900
700
500
300
100
10 30 50 70 90Units
Costs andRevenue ($)
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
7-38Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-39Chapter 7 Copyright © 2010 by Nelson Education Limited.
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
7-40Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-41Chapter 7 Copyright © 2010 by Nelson Education Limited.
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.
7-42Chapter 7 Copyright © 2010 by Nelson Education Limited.
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