1. 7-1 Chapter 7 Copyright © 2010 by Nelson Education Limited. Promotional and Pricing Strategies 7 PowerPoint Presentation by Ian Anderson, Algonquin College

2. 7-2 Chapter 7 Copyright © 2010 by Nelson Education Limited. Looking 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.

3. 7-3 Chapter 7 Copyright © 2010 by Nelson Education Limited. Looking 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.

4. 7-4 Chapter 7 Copyright © 2010 by Nelson Education Limited. Promotion Promotion is marketing communications that inform and persuade customers Promotional Mix A 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 Products characteristics

5. 7-5 Chapter 7 Copyright © 2010 by Nelson Education Limited. The Communication Process in Promotion Communication Process Components Sourcethe message sender Channelthe path the message travels Receiverthe recipient of the message Forms of Promotional Communication Nonpersonaladvertising Personalpersonal selling Special formssales promotion

6. 7-6 Chapter 7 Copyright © 2010 by Nelson Education Limited. The Communication Process Exhibit 7-1

7. 7-7 Chapter 7 Copyright © 2010 by Nelson Education Limited. Advertising Practices for Small Firms Advertising The impersonal presentation of a business idea through mass media. Advertising Objectives To 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.

8. 7-8 Chapter 7 Copyright © 2010 by Nelson Education Limited. Types of Advertising Product Advertising The presentation of a business idea designed to make potential customers aware of a specific product or service and create a desire for it. Institutional Advertising The presentation of information about a particular firm, designed to enhance the firms image.

9. 7-9 Chapter 7 Copyright © 2010 by Nelson Education Limited. Advertising Decision Factors Frequency of Advertising With regularity for effectiveness and continuity Introduction of new uses for established products Introduction of new products and services Where to Advertise Appropriate 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

10. 7-10 Chapter 7 Copyright © 2010 by Nelson Education Limited. Advantages and Disadvantages of Traditional Advertising Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 2008), p. 475MediumAdvantagesDisadvantages Newspapers Geographic selectivity and flexibility; short- term advertiser commitments; news value and immediacy; year-round readership; high individual market coverage; co-op and local tie-in availability; short lead time Little demographic selectivity; limited colour capabilities; low pass-along rate; may be expensive Magazines Good reproduction, especially for 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

11. 7-11 Chapter 7 Copyright © 2010 by Nelson Education Limited. Advantages and Disadvantages of Traditional Advertising Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 2008), p. 475MediumAdvantagesDisadvantages 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

12. 7-12 Chapter 7 Copyright © 2010 by Nelson Education Limited. Creating 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

13. 7-13 Chapter 7 Copyright © 2010 by Nelson Education Limited. Web Advertising Basic Web Advertising A Corporate Website A firms 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

14. 7-14 Chapter 7 Copyright © 2010 by Nelson Education Limited. Corporate Websites Make it easy to buy Make a strong first impression Minimize distractions Make it personal Avoid long instructions Provide visual clues to location Show off products Encourage spontaneous purchases Alternate background colours Allow users to collect items Website Design Tips

15. 7-15 Chapter 7 Copyright © 2010 by Nelson Education Limited. Sales Promotion for Small Firms Sales Promotion An inclusive term for any promotional techniques that are neither personal selling or advertising Used in combination with personal selling and advertising. Specialties Tangible 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

16. 7-16 Chapter 7 Copyright © 2010 by Nelson Education Limited. Sales Promotion for Small Firms Trade Show Exhibits Provide 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

17. 7-17 Chapter 7 Copyright © 2010 by Nelson Education Limited. Sales Promotion for Small Firms Strategic Alliances Loyalty Programs –Retail rewards programs Public Relations –Publicity = free advertisement –Sponsorships –Social shopping networks

18. 7-18 Chapter 7 Copyright © 2010 by Nelson Education Limited. Sales Promotion for Small Firms When to Use Sales Promotion For manufacturers To stimulate channel membersretailers and wholesalersto market a firms products. For wholesalers To induce retailers to buy inventories earlier than they normally would. For retailers To persuade customers to make a purchase.

19. 7-19 Chapter 7 Copyright © 2010 by Nelson Education Limited. Promotional Tools Effective for / Tools Getting Customer Trial of Product Increase Seasonal Sales Increase Effectiveness of Advertising Encourage Repeat Purchases Gather Information about Customer Trade shows XX Coupon XXXX Mail-in refunds XXXX Contests XXXXX Loyalty programs X Exhibit 7-5

20. 7-20 Chapter 7 Copyright © 2010 by Nelson Education Limited. Personal Selling Techniques Personal Selling A sales presentation (promotion) delivered in a one-on-one manner. Requires: Product knowledge Well-prepared sales presentation Ability to build goodwill

21. 7-21 Chapter 7 Copyright © 2010 by Nelson Education Limited. Importance of Product Knowledge Salespersons use product knowledge to: Successfully educate customers about the products advantages, uses, and limitations. Answer customer questions and counter customer objections. Personal selling becomes order-taking when a salesperson lacks product knowledge.

22. 7-22 Chapter 7 Copyright © 2010 by Nelson Education Limited. The Sales Presentation: Prospecting Prospecting A systematic process of continually looking for new customers Prospecting Techniques Personal 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

23. 7-23 Chapter 7 Copyright © 2010 by Nelson Education Limited. The Sales Presentation: Prospecting Prospecting Techniques Marketer-initiated contacts Market surveys are used to identify prospects Customer-initiated contacts Potential customers are identified through their contacts with the firm.

24. 7-24 Chapter 7 Copyright © 2010 by Nelson Education Limited. Practicing the Sales Presentation Improves the salespersons 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.

25. 7-25 Chapter 7 Copyright © 2010 by Nelson Education Limited. Making the Sales Presentation Adapting the sales approach to the customers needs: Avoid a canned sales talk. Speak the customers language. Answer every objection explicitly and adequately. Be enthusiastic, friendly, and persistent. Be personally supportive of the customer.

26. 7-26 Chapter 7 Copyright © 2010 by Nelson Education Limited. Customer Goodwill and Relationship Selling Relationship selling Building 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 customers point of view. Maintaining high ethical standards in the customer relationship.

27. 7-27 Chapter 7 Copyright © 2010 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. …continued

28. 7-28 Chapter 7 Copyright © 2010 by Nelson Education Limited. Determining the Promotional Budget How much should a small business spend on promotion? Allocating a percentage of sales Deciding how much can be spared Spending as much as the competition Determining what it takes to do the job

29. 7-29 Chapter 7 Copyright © 2010 by Nelson Education Limited. Exhibit 7-6 Four-Step Method of Determining a Promotional Budget

30. 7-30 Chapter 7 Copyright © 2010 by Nelson Education Limited. Price A 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 Credit An agreement between a buyer and a seller that provides for delayed payment for a product or service. Setting a Price

31. 7-31 Chapter 7 Copyright © 2010 by Nelson Education Limited. Cost Determination for Pricing 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 product or sold varies.

32. 7-32 Chapter 7 Copyright © 2010 by Nelson Education Limited. Total Cost Selling CostOverhead Cost Salesperson's time Advertising Cost of Goods Offered Storage, Salaries Taxes Example costs: Cost of item Freight charges The Three Components of Total Cost in Determining Price Exhibit 7-7

33. 7-33 Chapter 7 Copyright © 2010 by Nelson Education Limited. Cost Structure for a Hypothetical Firm, 2009 and 2010 Sales revenue (25,000 units @ $8.00)$200,000 Total costs: Fixed costs$75,000 Variable costs ($2.00 per unit) 50,000 125,000 Gross margin$ 75,000 Average cost = $125,000 = $5.00 25,000 125,000 Gross margin$ 75,000 Average cost = $125,000 = $5.00 25,000 Exhibits 7-8,7 -9 Sales revenue (10,000 units @ $8.00)$80,000 Total costs: Fixed costs$75,000 Variable costs ($2.00 per unit) 20,000 95,000 Gross margin$ (15,000) Average cost = $95,000 = $9.50 10,000 95,000 Gross margin$ (15,000) Average cost = $95,000 = $9.50 10,000 Average pricing overlooks the reality of higher average costs at lower sales levels

34. 7-34 Chapter 7 Copyright © 2010 by Nelson Education Limited. Applying a Pricing System Break-Even Analysis A 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

35. 7-35 Chapter 7 Copyright © 2010 by Nelson Education Limited. Applying a Pricing System Examining Cost and Revenue Relationships Breakeven 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 Forecasts Adjusted 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.

36. 7-36 Chapter 7 Copyright © 2010 by Nelson Education Limited. Break-Even Graphs for Pricing Exhibit 7-10

37. 7-37 Chapter 7 Copyright © 2010 by Nelson Education Limited. A Break-Even Graph Adjusted for Estimated Demand 900 700 500 300 100 10 3050 7090 Units Costs and Revenue ($) Sales (Price = $12) Sales (Price = $7) Sales (Price = $18) Total Cost Fig. 16.5 Sales Curve from Demand Schedule Profit 7 12 18 Demand (Units) 90 60 15 Revenue ($) 630 720 270 Price ($) Exhibit 7-11

38. 7-38 Chapter 7 Copyright © 2010 by Nelson Education Limited. Pricing System: Markup Pricing Markup Pricing Cost plus pricing system that adds a markup percentage to cover: Operating expenses Subsequent price reductions Desired profit

39. 7-39 Chapter 7 Copyright © 2010 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 Pricing Using a particular competitor as a model in setting prices …continued

40. 7-40 Chapter 7 Copyright © 2010 by Nelson Education Limited. Selecting 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.

41. 7-41 Chapter 7 Copyright © 2010 by Nelson Education Limited. Pricing and a Firms Competitive Advantage Pricing and Competitive Advantage Customers will demand and pay more for a product or service that they perceive as important to their needs. Prestige Pricing Setting 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.

42. 7-42 Chapter 7 Copyright © 2010 by Nelson Education Limited. Pricing Situations and Controls Competition Act prohibits price fixing Continually adjusting a price to meet changing marketing conditions Costly to seller Confusing to buyers