1. 6-1 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPoint Presentation by Thomas M c Kaig, Ryerson University Promotional and Pricing Strategies 6

2. 6-2 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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.Discuss methods of determining the appropriate level of promotional expenditure. 3.Describe personal selling activities. 4.Identify advertising options for a small business. 5.Describe sales promotional tools.

3. 6-3 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Looking Ahead 6. Discuss the role of cost and demand factors in setting a price. 7. Apply break-even analysis and markup pricing. 8. Identify specific pricing strategies. 9. Explain the benefits of credit, factors that affect credit extension, and types of credit. 10. Describe the activities involved in managing credit.

4. 6-4 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Promotion Promotion is marketing communications that informs and persuades customers Promotion is really nothing more than communication between a business and its target market.

5. 6-5 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Promotional Communications 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 Product’s characteristics

6. 6-6 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. The Communication Process in Promotion Communication Process Components  Source—the message sender  Channel—the path the message travels  Receiver—the recipient of the message Forms of Promotional Communication  Nonpersonal—advertising  Personal—personal selling  Special forms—sales promotion

7. 6-7 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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

8. 6-8 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Figure 6.1 Four-Step Method of Determining a Promotional Budget

9. 6-9 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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

10. 6-10 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Importance 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.

11. 6-11 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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

12. 6-12 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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.

13. 6-13 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Practicing 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.

14. 6-14 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Making 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.

15. 6-15 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Overcoming Customer Objections I had problems with a similar product before and don’t want to go through that again! I’m too busy. I like what you have said, but I need to wait. Yes, I understand your attitude, but have you considered... ? That’s why I want to explain how I can save you time by... Let’s figure how much you can save by acting now. Your product sounds just like your competitor’s. There are similarities, but we have... at a better price. I’m not sure I can risk a changeover to your product. Let me tell you how one of your competitors decided to buy from me.

16. 6-16 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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 customer’s point of view. Maintaining high ethical standards in the customer relationship.

17. 6-17 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Compensating Salespeople Nonfinancial Rewards  Personal recognition of employees by the firm Plaques and “Employee of the Month” awards Providing “perks” to superior performers.  Personal satisfaction drawn by salespersons from doing their work well. …continued

18. 6-18 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Compensating Salespeople Financial Rewards  Commissions Compensation paid as percentage of sales productivity. Strong sales motivator  Straight Salary Compensation paid regardless of sales made.  Combination of Commissions and Salary Balance of two compensation forms is adjusted to provide an increasing proportion of commission as salesperson gains experience.

19. 6-19 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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.

20. 6-20 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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 firm’s image.

21. 6-21 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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

22. 6-22 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Advantages and Disadvantages of Traditional Advertising Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 1998), p. 509. Table 6-1

23. 6-23 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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

24. 6-24 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Web Advertising Basic Web Promotions  A Corporate Web site 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

25. 6-25 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Sales Promotion Tools 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

26. 6-26 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Sales Promotion Tools 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

27. 6-27 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Sales Promotion Tools Publicity  Information about a firm and its products or services that appears as a news item, usually free of charge. Provides visibility for the firm Requires regular contacts with the news media …continued

28. 6-28 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Sales Promotion Tools When to Use Sales Promotion  For 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.

29. 6-29 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Setting a Price Price  A specification of what a seller requires in exchange for transferring ownership or use of a product or service. Prices set too low, loss in revenue Price set too high, loss in revenue Credit  An agreement between a buyer and a seller that provides for delayed payment for a product or service.

30. 6-30 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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.

31. 6-31 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Total Cost Selling CostOverhead Cost Salesperson's time Advertising Cost of Goods Sold Storage, Salaries Taxes Example costs: Cost of item Freight charges The Three Components of Total Cost in Determining Price Figure 6.3

32. 6-32 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Price Changes Affect Revenues Situation A Quantity sold x Price per unit = Gross revenue 250,000$3.00$750,000 Situation B Quantity sold x Price per unit = Gross revenue 250,000$2.80$700,000 Difference in Revenue$50,000

33. 6-33 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Cost Structure for a Hypothetical Firm, 2003 Sales revenue (25,000 units @ $8.00)$200,000 Total costs: Fixed costs$75,000 Variable costs ($2.00 per unit) 50,000 125,000 Gross margin$ 75,000 125,000 Gross margin$ 75,000 Average cost = $125,000 = $5.00 25,000 Figure 6-4

34. 6-34 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Cost Structure for a Hypothetical Firm, 2004 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) 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 Figure 6-5

35. 6-35 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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

36. 6-36 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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.

37. 6-37 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Break-Even Charts for Pricing Figure 6-6

38. 6-38 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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. 6-39 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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 ($) Figure 6-7

40. 6-40 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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

41. 6-41 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada 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 demand. Price Lining  Setting a range of several distinct merchandise levels. …continued

42. 6-42 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Selecting a Pricing Strategy What the Market Will Bear  A strategy of charging the highest prices that customers will pay can be used only when the seller has little or no competition. Pricing Situations and Controls  The effect of the introduction of new products into an established product line.  Offering discounts to match the needs of customers.  Competition Act prohibits price fixing.

43. 6-43 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Pricing and a Firm’s 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.

44. 6-44 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Offering Credit Benefits of Credit to Borrowers  Provides working capital  Ability to satisfy immediate needs and pay later  Better records of purchases on credit billing  Better service and greater convenience when exchanging purchased items  Establishment of credit history …continued

45. 6-45 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Offering Credit Benefits of Credit to Sellers  Facilitates increased sales volume.  Brings a closer association with customers.  Fosters easier selling through telephone, mail and Internet.  Helps smooth sales demand since purchasing power is always available.  Provides easy access to a tool with which to stay competitive. …continued

46. 6-46 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Offering Credit Factors That Affect Selling on Credit  Type of Business Durable goods retailers offer more credit.  Credit Policies of Competitors Competitors are expected to match other competitors’ credit offerings.  Income Level of Customers  Availability of Working Capital Credit sales increase the amount of working capital.

47. 6-47 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Types of Credit Consumer Credit  Financing granted by retailers to individuals who purchase for personal or family use. Trade Credit  Financing provided by a supplier of inventory to a given company which sets up an account payable for the amount. Terms of sale may be 2/10, net 30—two percent discount on the invoiced amount if paid in full within 10 days of the invoice date, otherwise the full amount of the invoice is due in 30 days.

48. 6-48 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Types of Consumer Credit Accounts Open Charge Account  A line of credit that allows the customer to obtain a product at the time of purchase. Installment Account  A line of credit that requires a down payment, with the balance paid over a specified period of time. Revolving Charge Account  A line of credit on which the customer may charge purchases at any time, up to a preestablished limit.

49. 6-49 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Types of Credit Cards Bank Credit Cards  Credit cards issued by banks that are widely accepted by retailers who pay a fee to the banks for handling their credit transactions. Entertainment Cards  Business credit cards originally used to purchase services, now widely accepted for merchandise. Retailer Credit Cards  Credit cards issued by firms for specific use in their outlets or for purchasing their products or services.

50. 6-50 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Managing the Credit Process Evaluation of Credit Applicants  Can the buyer pay as promised?  Will the buyer pay?  If so, when will the buyer pay?  If not, can the buyer be forced to pay? The Traditional Five C’s of Credit  Character  Capital  Capacity  Conditions  Collateral

51. 6-51 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Sources of Credit Information Individuals  Customer’s previous credit history  Dun & Bradstreet Business Information Reports Businesses  Financial statements of the firm  Other sellers to the firm  Firm’s banker  Trade-credit agencies  Credit bureaus  Online credit data

52. 6-52 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Hypothetical Aging Schedule for Accounts Receivable Aging Schedule  A categorization of accounts receivable based on the length of time they have been outstanding. Figure 6-8

53. 6-53 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Billing and Credit Procedures  Timely notification is one of the most effective collection methods for keeping bills current.  Warning consumers that they may do damage to their credit if they fail to pay.  Bad debt ratio A number obtained by dividing the amount of bad debts by the total amount of credit sales.