6-1 Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPoint...

6-1Chapter 6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.

PowerPoint Presentation by PowerPoint Presentation by

Thomas MThomas MccKaig, Ryerson UniversityKaig, Ryerson University

Promotional and Promotional and Pricing StrategiesPricing Strategies

66


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. 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.


Looking AheadLooking 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.


PromotionPromotion

• Promotion is marketing communications that informs and persuades customers

• Promotion is really nothing more than communication between a business and its target market.


Promotional CommunicationsPromotional Communications

• 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


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


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


Figure 6.1

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


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


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.


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


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.


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.


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.


Overcoming Customer ObjectionsOvercoming Customer Objections

I had problems with a similar I had problems with a similar product before and don’t want product before and don’t want to go through that again!to go through that again!

I’m too busy.I’m too busy.

I like what you have said, but I I like what you have said, but I need to wait.need to wait.

Yes, I understand your attitude, but Yes, I understand your attitude, but have you considered . . . ?have you considered . . . ?

That’s why I want to explain how I can That’s why I want to explain how I can save you time by . . .save you time by . . .

Let’s figure how much you can save Let’s figure how much you can save by acting now.by acting now.

Your product sounds just like Your product sounds just like your competitor’s.your competitor’s.

There are similarities, but we have . . . There are similarities, but we have . . . at a better price.at a better price.

I’m not sure I can risk a I’m not sure I can risk a changeover to your product.changeover to your product.

Let me tell you how one of yourLet me tell you how one of yourcompetitors decided to buy from me.competitors decided to buy from me.


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.


Compensating SalespeopleCompensating Salespeople

• Nonfinancial RewardsPersonal 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


Compensating SalespeopleCompensating 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.


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.


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.


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


Advantages and Disadvantages of Traditional Advertising

Advantages and Disadvantages of Traditional Advertising

Medium Advantages Disadvantages

Newspapers Geographic selectivity and flexibility; short-term commitments; short lead time; immediacy; year-round readership

Little demographic selectivity; limited colour capabilities; low pass-along rate; may be expensive

Magazines Good reproduction; demographic and regional selectivity; relatively long life; high pass-along rate

Long-term commitments; slow audience buildup; long lead time

Radio Low cost; immediacy; highly port able; short-term commitments; entertainment carryover

No visual treatment; short message life; commercial clutter

Television Wide, diverse audience; creative opportunities for demonstration; immediacy; entertainment carry-over

Short message life; high campaign cost; long-term commitments; long lead times; commercial clutter

Outdoor media Repetition; moderate cost; flexibility; geographic selectivity

Short message; lack of demo-graphic selectivity; distracting noise levels

Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 1998), p. 509. Table 6-1


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


Web AdvertisingWeb 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


Sales Promotion ToolsSales Promotion Tools

• 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



• Trade Show ExhibitsProvide hands-on experience with products.Are less costly than personal selling.

• Creating Effective Trade Show ExhibitsCreate moving billboardsMake the booth interactiveQualify sales leads immediatelyCreate a presence on the sales floorPlan ahead how to use the trade show timeRecruit customers actively

…continued



• PublicityInformation 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



• 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.


Setting a PriceSetting a Price

• PriceA 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

• CreditAn agreement between a buyer and a seller that

provides for delayed payment for a product or service.


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.


Total Cost

Selling Cost Overhead Cost

Salesperson's timeAdvertising

Cost of Goods Sold

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

Figure 6.3


Price Changes Affect RevenuesPrice Changes Affect Revenues

Situation ASituation AQuantity sold x Price per unit = Gross revenueQuantity sold x Price per unit = Gross revenue

250,000250,000 $3.00$3.00 $750,000$750,000

Situation BSituation BQuantity sold x Price per unit = Gross revenueQuantity sold x Price per unit = Gross revenue

250,000250,000 $2.80$2.80 $700,000$700,000

Difference in RevenueDifference in Revenue $50,000$50,000


Cost Structure for a Hypothetical Firm, 2003


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$ 75,000

Average cost = Average cost = $125,000$125,000 = $5.00 = $5.00 25,000 25,000

Figure 6-4




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 = $9.5010,000 10,000

Average pricing overlooks the Average pricing overlooks the reality of higher average costs at reality of higher average costs at

lower sales levelslower sales levels Figure 6-5


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


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.


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)


Break-EvenPoints

Sales(Price = $12)

Sales(Price = $7)

Sales(Price = $18)

Total Cost

Break-Even Charts for PricingBreak-Even Charts for Pricing

Figure 6-6


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


A Break-Even Graph Adjustedfor Estimated Demand

A Break-Even Graph Adjustedfor Estimated Demand

900

700

500

300

100

10 30 50 70 90Units


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($)

Figure 6-7


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



• 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



• 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.


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.


Offering CreditOffering Credit

• Benefits of Credit to BorrowersProvides working capitalAbility to satisfy immediate needs and pay laterBetter records of purchases on credit billingBetter service and greater convenience when

exchanging purchased itemsEstablishment of credit history

…continued



• Benefits of Credit to SellersFacilitates 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



• Factors That Affect Selling on CreditType of Business

• Durable goods retailers offer more credit.Credit Policies of Competitors

• Competitors are expected to match other competitors’ credit offerings.

Income Level of CustomersAvailability of Working Capital

• Credit sales increase the amount of working capital.


Types of CreditTypes of Credit

• Consumer CreditFinancing granted by retailers to individuals who

purchase for personal or family use.

• Trade CreditFinancing 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.


Types of Consumer Credit AccountsTypes of Consumer Credit Accounts

• Open Charge AccountA line of credit that allows the customer to obtain a

product at the time of purchase.

• Installment AccountA line of credit that requires a down payment, with the

balance paid over a specified period of time.

• Revolving Charge AccountA line of credit on which the customer may charge

purchases at any time, up to a preestablished limit.


Types of Credit CardsTypes of Credit Cards

• Bank Credit CardsCredit cards issued by banks that are widely accepted by

retailers who pay a fee to the banks for handling their credit transactions.

• Entertainment CardsBusiness credit cards originally used to purchase

services, now widely accepted for merchandise.

• Retailer Credit CardsCredit cards issued by firms for specific use in their

outlets or for purchasing their products or services.


Managing the Credit ProcessManaging the Credit Process

• Evaluation of Credit ApplicantsCan 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 CreditCharacterCapitalCapacityConditionsCollateral


Sources of Credit InformationSources of Credit Information

• IndividualsCustomer’s previous credit historyDun & Bradstreet Business Information Reports

• BusinessesFinancial statements of the firmOther sellers to the firmFirm’s bankerTrade-credit agenciesCredit bureausOnline credit data


Hypothetical Aging Schedule for Accounts Receivable

Hypothetical Aging Schedule for Accounts Receivable

• Aging ScheduleA categorization of accounts receivable based on the length of

time they have been outstanding.

Account Status 001 002 003 004 005 Total

Days past due

120 days — — $50,000 — — $50,000

90 days — $10,000 — — — 10,000

60 days — — — $40,000 — 40,000

30 days — 20,000 20,000 — — 40,000

15 days $50,000 10,000 — — 60,000

Total overdue $50,000 $30,000 $80,000 $40,000 $ 0 $200,000

Not due (beyond discount period) $30,000 $10,000 0 $10,000 $130,000 $180,000

Not due (still in discount period) $20,000 $100,000 0 $90,000 $220,000 $430,000

Credit rating A B C A B C Figure 6-8


Billing and Credit ProceduresBilling and Credit Procedures

• Billing and Credit ProceduresTimely 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.

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