PowerPoint Presentations for Small Business Management: Launching and Growing New Ventures, Fifth Canadian Edition Adapted by Cheryl Dowell Algonquin College

Promotional and Pricing Strategies CHAPTER 7 Promotional and Pricing Strategies

Copyright © 2013 by Nelson Education Limited LOOKING AHEAD After studying this chapter, you should be able to: Describe the communication process and the factors determining a promotional mix. Identify advertising options for a small business. Discuss the use of sales promotion tools and describe personal selling activities. Discuss methods of determining the appropriate level of promotional expenditure. Discuss the role of cost and demand factors in setting a price. Apply break-even analysis and markup pricing. Identify specific pricing strategies and create a price quality grid. Copyright © 2013 by Nelson Education Limited

THE COMMUNICATION PROCESS IN PROMOTION Promotional Mix geographic nature target customers product’s characteristics budget Promotion consists of marketing communications that inform consumers about a firm’s product and persuade them to use it. promotional mix: a blend of selling, advertising, and promotional tools aimed at a target market create awareness cost -effective LO 1 Copyright © 2013 by Nelson Education Limited

THE COMMUNICATION PROCESS LO 1 Copyright © 2013 by Nelson Education Limited

ADVERTISING PRACTICES FOR SMALL FIRMS make potential customers aware of a particular product or service and their need for it Product Advertising conveys information about the business itself Institutional Advertising Advertising in traditional media is on the decline while online marketing and advertising is growing at double-digit rates. According to IAB Canada, online advertising revenue in Canada exceeded $1.8 billion in 2009 and is expected to grow at over 15 percent annually for the next several years Advertising seeks to sell by informing, persuading, and reminding customers of the existence or superiority of a firm’s product or service. LO 2 Copyright © 2013 by Nelson Education Limited

FORMS OF ADVERTISING MEDIA PAID OWNED EARNED SOLD HIJACKED According to the consulting firm McKinsey & Company there are three traditional forms of advertising media: paid, owned, and earned. Recently, two new forms of advertising have emerged: sold and hijacked. Traditional paid media include television, radio, newspaper, magazine, Web banner advertisements, pop-up ads and so on. The advertiser pays for the space and controls the message it is sending out to consumers. With owned media, the company uses its own channels to advertise through catalogues, websites, email broadcast, Facebook pages, and its own retail stores. Earned media is where consumers create or share the company’s media. Examples would be keyword searches on search engines, forwarding popular commercials or posting them to YouTube, consumer ratings and reviews, and rankings on community sites. Sold media involves inviting other marketers to place content on a company’s owned media. Two examples of this are an e-commerce website that sells advertising space on its site, and a consumer marketer creating an online community of users and offering advertising space for sale to its members. Hijacked media is a relatively new phenomenon where a company’s advertising campaign is “taken hostage” by consumers who oppose it. This is done in several ways, including using Facebook and Twitter to rally opposition and even making parodies of the company’s advertisements and distributing them through social media or posting them on YouTube. LO 2 Copyright © 2013 by Nelson Education Limited

KEY SHIFTS IN MARKETING LO 2 Copyright © 2013 by Nelson Education Limited

ONLINE MARKETING STRATEGIES Pay- per- clicks (PPC) PAID KEYWORD ADS Search engine optimization (SEO) NATURAL RANKINGS ONLINE NEWSLETTERS ONLINE PRESS RELEASES Facebook, Twitter, YouTube SOCIAL MEDIA MARKETING Other forms can be online newsletters, online press releases and social media marketing. 1. PAID KEYWORD ADS Also known as “pay-per-click” or PPC, or as “search engine marketing,” advertisers can pay search engine providers to have their ad come up on the right side or top of the natural list of sites in response to keyword searches. This form of advertising can be very expensive. While there is no upfront cost beyond creation of the company’s website, the cost per “click” can run from 50 cents to up to two dollars. With a large number of clicks those cents can add up fast, which means the advertiser’s budget may be overspent. The most popular PPC platforms are Google AdWords, Facebook, and Business.com. 2. NATURAL RANKINGS The technique known as “search engine optimization,” or SEO, is a method of having a company’s website come up on the first page of a search-engine search. This is done through two methods: embedding keywords in all of the pages of a company’s website and linking campaigns. Keywords related to the company’s name are very useful if the company has a strong brand. Usually the website ranks well for these. Specific keywords, even if generic, are often quite valuable because they are further down the user’s search path. For example, “flowers” gets the user too much information; “Toronto flowers” is much better. “Toronto Valentine flowers” is better still; it is easier to rank well because it is three words instead of one or two. LO 2 Copyright © 2013 by Nelson Education Limited

SALES PROMOTION FOR SMALL FIRMS sales promotion: an inclusive term for any promotional techniques that are neither personal selling nor advertising Popular sales promotional tools include specialties, contests, premiums, trade show exhibits, point-of-purchase displays, free merchandise, sampling, and coupons. The distinguishing characteristic of specialties is their enduring nature and tangible value. Specialties are referred to as the “lasting medium.” The most widely used specialty item is a calendar. LO 3 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited TRADE SHOW CHECKLIST Plan ahead Create a presence on the show floor Create moving billboards Make the booth interactive Qualify leads immediately Recruit customers Refer to page 198 for full details The cost of being in a trade show varies with the prominence of the show. Small, regional or niche-focused shows may charge exhibitors as little as $1,500 to $2,500; large shows with heavy traffic could cost as much as $100,000. In addition, the exhibitor will need a booth display, which can cost from $5,000 to over $50,000, although the booth can be used for numerous shows. In addition, the exhibitor has to plan for additional advertising expenses and the cost of the giveaways at the show. Trade show promotion is not inexpensive, but can be a cost-effective way of reaching a large number of potential customers. LO 3 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited MARKETING vs. SELLING personal selling—promotion delivered in a one-on-one environment. Personal selling includes the activities of both the inside salespeople of retail, wholesale, and service establishments and the outside sales representatives who call on business customers and final consumers. prospecting, a systematic process of continually looking for new customers. personal referrals: such referrals come from friends, customers, and other businesses impersonal referrals from media publications, public records, and directories. Newspapers and magazines, particularly trade magazines, often identify prospects by reporting on new companies and new products LO 3 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited SALES PRESENTATION OBJECTIONS SUGGESTIONS Price Product Timing Source Service Need Direct denial Indirect denial Boomerang Technique Compensation method Pass-up method • Direct denial: Deny the prospect’s objection and give facts to back up the denial. • Indirect denial: Express concern about the prospect’s objection and follow with a denial. • Boomerang technique: Turn the valid objection into a valid reason to buy. • Compensation method: Admit to agreeing with the objection and then proceed to show compensating advantages. • Pass-up method: Acknowledge the concern expressed by the prospect and then move on. LO 3 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited SALES PRESENTATION Adapting the sales approach to the customers’ needs: Avoid “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 LO 3 Copyright © 2013 by Nelson Education Limited

COMPENSATING 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 LO 3 Copyright © 2013 by Nelson Education Limited

PROMOTIONAL BUDGET STEPS Promotional spending: • Allocating a percentage of sales • Deciding how much can be spared • Spending as much as the competition does • Determining what it will take to do the job LO 4 Copyright © 2013 by Nelson Education Limited

CREATING A PRICING STRATEGY Situation A Quantity Sold × Price per Unit = Gross Revenue 250,000 × $3.00 = $750,000 Situation B Quantity Sold × Price per Unit = Gross Revenue 250,000 × $2.80 = $700,000 Price: a specification of what a seller requires in exchange for transferring ownership or use of a product or service Credit: an agreement between a buyer and seller that provides for a delayed payment for a product or service total sales revenue depends on just two components—sales volume and price— even a small change in price can drastically influence revenue. The price per unit in Situation B is only $0.20 lower than that in Situation A. However, the total reduction in revenue is $50,000! Clearly, a small business can lose significant revenues if a price is set too low LO 5 Copyright © 2013 by Nelson Education Limited

CREATING A PRICING STRATEGY Price: a specification of what a seller requires in exchange for transferring ownership or use of a product or service Credit: an agreement between a buyer and seller that provides for a delayed payment for a product or service total sales revenue depends on just two components—sales volume and price— even a small change in price can drastically influence revenue. Situation A Quantity Sold X Price per Unit = Gross Revenue 250,000 X $3.00 = $750,000 Situation B Quantity Sold X Price per Unit = Gross Revenue 250,000 X $2.80 = $700,000 The price per unit in Situation B is only $0.20 lower than that in Situation A. However, the total reduction in revenue is $50,000! Clearly, a small business can lose significant revenues if a price is set too low LO 5 Copyright © 2013 by Nelson Education Limited

COST STRUCTURE OF A HYPOTHETICAL FIRM total cost: the sum of cost of goods sold, selling expenses, and overhead costs total variable costs: costs that vary with the quantity produced or sold total fixed costs: costs that remain constant as the quantity produced or sold varies average pricing: an approach in which total cost for a given period is divided by quantity sold in that period to set a price LO 5 Copyright © 2013 by Nelson Education Limited

APPLYING A PRICING SYSTEM comprehensive break-even analysis has two phases: examining revenue–cost relationships and incorporating actual sales forecasts into the analysis. break-even point: sales volume at which total sales revenue equals total costs LO 6 Copyright © 2013 by Nelson Education Limited

BREAK-EVEN GRAPH ADJUSTED FOR ESTIMATED DEMAND LO 6 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited MARKUP PRICING Cost plus pricing system that adds a markup percentage Must cover: Operating expenses Subsequent price reductions Desired profit LO 6 Copyright © 2013 by Nelson Education Limited

SELECTING 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 Using a particular competitor as a model in setting prices 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 LO 7 Copyright © 2013 by Nelson Education Limited

SELECTING A PRICING STRATEGY Bundling Offering several products for one combined price Odd-Even Make the price appear to be lower. Ending in 0.99 Unit Pricing Comparison where a product may be sold in different sizes Price Lining Setting a range of several distinct merchandise levels Loss Leader Products offered at or slightly below cost to attract people What the market will bear Charging as high a price as possible before resistance LO 7 Copyright © 2013 by Nelson Education Limited

SELECTING A PRICING STRATEGY Pricing and Competitive Advantage Customers demand and pay more for a product or service that they perceive as important Prestige Pricing Setting a high price to convey an image of high quality or uniqueness (competitive advantage) Markets with low levels of product knowledge are candidates for prestige pricing LO 7 Copyright © 2013 by Nelson Education Limited