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7
Promotional and
Pricing Strategies
PowerPoint Presentation by
Ian Anderson, Algonquin College
Chapter 7
Copyright © 2010 by Nelson Education Limited.
7-1
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.
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Copyright © 2010 by Nelson Education Limited.
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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.
Chapter 7
Copyright © 2010 by Nelson Education Limited.
7-3
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
• Product’s characteristics
Chapter 7
Copyright © 2010 by Nelson Education Limited.
7-4
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
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The Communication Process
Exhibit 7-1
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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.
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7-7
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.
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Copyright © 2010 by Nelson Education Limited.
7-8
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:
•
•
•
•
Chapter 7
Geographical area for target market coverage
Customer type targeted by advertising campaign
Advertising media customarily used by industry
By type of business
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Advantages and Disadvantages
of Traditional Advertising
Medium
Advantages
Disadvantages
Newspapers Geographic selectivity and flexibility; short- Little demographic selectivity; limited
term advertiser commitments; news value
and immediacy; year-round readership;
high individual market coverage; co-op and
local tie-in availability; short lead time
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
Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 2008), p. 475
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Advantages and Disadvantages
of Traditional Advertising
Medium
Advantages
Disadvantages
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; longterm 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
Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 2008), p. 475
Chapter 7
Copyright © 2010 by Nelson Education Limited.
7-11
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
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7-12
Web 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
Chapter 7
Copyright © 2010 by Nelson Education Limited.
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Corporate Websites
Website
Design
Tips
Chapter 7
•
•
•
•
•
•
•
•
•
•
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
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7-14
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
Chapter 7
Copyright © 2010 by Nelson Education Limited.
7-15
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
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7-16
Sales Promotion for Small Firms
• Strategic Alliances
• Loyalty Programs
– Retail rewards programs
• Public Relations
– Publicity = free advertisement
– Sponsorships
– Social shopping networks
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7-17
Sales Promotion for Small Firms
• 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.
Chapter 7
Copyright © 2010 by Nelson Education Limited.
7-18
Promotional Tools
Effective
for /
Tools
Getting
Increase
Increase
Encourage
Gather
Customer Seasonal Effectiveness
Repeat
Information
Trial of
Sales
of
Purchases
about
Product
Advertising
Customer
Trade
shows
X
Coupon
X
Mail-in
refunds
X
Contests
X
X
X
X
X
X
X
X
X
X
X
X
Loyalty
programs
Chapter 7
X
Copyright © 2010 by Nelson Education Limited.
Exhibit 7-5
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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
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7-20
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.
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7-21
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
Chapter 7
Copyright © 2010 by Nelson Education Limited.
7-22
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.
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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.
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Copyright © 2010 by Nelson Education Limited.
7-24
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.
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7-25
Customer Goodwill and
Relationship Selling
• Relationship selling
Building customer goodwill for future sales to
satisfied customers through:
•
•
•
•
•
Chapter 7
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.
Copyright © 2010 by Nelson Education Limited.
7-26
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.
Chapter 7
Copyright © 2010 by Nelson Education Limited.
…continued
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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
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7-28
Four-Step Method of Determining
a Promotional Budget
Determining
What It Will Take
to Do the Job
Using
a a
Using
Percentage
percentage
of Sales
of sales
Deciding How
Much Can Be
Spared
Spending as
Much as the
Competition Does
Comparison Process
Decision
Promotional Budget
Chapter 7
Copyright © 2010 by Nelson Education Limited.
Exhibit 7-6
7-29
Setting a Price
• 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.
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Copyright © 2010 by Nelson Education Limited.
7-30
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.
Chapter 7
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7-31
The Three Components of Total Cost
in Determining Price
Total Cost
Cost of Goods
Offered
Selling Cost
Overhead Cost
Example costs:
Example costs:
Example costs:
Cost of item
Freight charges
Salesperson's time
Advertising
Storage, Salaries
Taxes
Exhibit 7-7
Chapter 7
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7-32
Cost Structure for a Hypothetical Firm,
2009 and 2010
Sales revenue (25,000 units @ $8.00)
Total costs:
Fixed costs
Variable costs ($2.00 per unit)
$200,000
$75,000
50,000
125,000
$ 75,000
Gross margin
Average cost = $125,000 = $5.00
25,000
Sales revenue (10,000 units @ $8.00)
Total costs:
Fixed costs
Variable costs ($2.00 per unit)
$80,000
$75,000
20,000
Gross margin
Average cost = $95,000 = $9.50
10,000
95,000
$ (15,000)
Average pricing overlooks the reality of higher average costs at lower sales levels Exhibits 7-8,7 -9
Chapter 7
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7-33
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
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Copyright © 2010 by Nelson Education Limited.
7-34
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.
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7-35
Break-Even Graphs for Pricing
Costs and
Revenue ($)
Costs and
Revenue ($)
Sales (Price = $12)
900
Profit
700
500
900
Sales
(Price = $7)
Total
Cost
Total Cost
700
Total
Variable
Costs
Break-Even
Point
Sales
Sales
(Price = $18) (Price = $12)
500
300
300
Loss
Total
Fixed Costs
100
10
30
50
Units
70
Break-Even
Points
100
90
10
30
(a)
Chapter 7
50
Units
(b)
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70
90
Exhibit 7-10
7-36
A Break-Even Graph Adjusted
for Estimated Demand
900
Costs and
Revenue ($)
Sales
(Price = $18)
Sales
(Price = $12)
Sales (Price = $7)
Total Cost
700
Sales Curve from
Demand Schedule
500
Price
($)
Demand
(Units)
Revenue
($)
7
90
630
12
60
720
18
15
270
300
100
10
30
50
70
90
Units
Exhibit 7-11
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7-37
Pricing System: Markup Pricing
• Markup Pricing
 Cost plus pricing system that adds a markup percentage
to cover:
• Operating expenses
• Subsequent price reductions
• Desired profit
Markup
 100  Markup as a percentage of selling price
Selling Price
Markup
 100  Markup as a percentage of cost
Cost
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7-38
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
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7-39
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.
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7-40
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.
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7-41
Pricing Situations and Controls
• Competition Act prohibits price fixing
• Continually adjusting a price to meet
changing marketing conditions
 Costly to seller
 Confusing to buyers
Chapter 7
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7-42