Promotion and Pricing Strategies

Integrated Marketing Communications

Marketers choose from among many promotional options to communicate with potential customers. Each marketing message a buyer receives—whether through a television or radio commercial, a newspaper or magazine ad, a Web site, a direct-mail flyer, or a sales call—reflects the product, place, person, cause, or organization promoted in the content. Through integrated marketing communications (IMC), marketers coordinate all promotional activities—media advertising, direct mail, personal selling, sales promotion, and public relations—to produce a unified, customer-focused promotional strategy. This coordination is designed to avoid confusing the consumer and to focus positive attention on the promotional message.

PROMOTIONAL OBJECTIVES

Promotional objectives vary by organization. Some use promotion to expand their markets; others, to defend their current position. As FIGURE 13.1 illustrates, common objectives include providing information, differentiating a product, increasing sales, stabilizing sales, and accentuating a product's value.

• Provide Information A major portion of U.S. advertising is information oriented. Credit card ads provide information about benefits and rates. Ads for hair care products include information about benefits such as shine and volume. Ads for breakfast cereals often contain nutritional information. Television ads for prescription drugs, a nearly $2 billion industry, are sometimes criticized for relying on emotional appeals rather than providing information about the causes, risk factors, and especially the prevention of disease.²

  positioning the act of establishing a product in the minds of customers by communicating meaningful distinctions about the attributes, price, quality, or use of a good or service.

• Differentiate a Product Promotion can differentiate a firm's offerings from the competition. Applying a concept called positioning, marketers attempt to establish their products in the minds of customers. The idea is to communicate to buyers meaningful distinctions about the attributes, price, quality, or use of a good or service.
• Increase Sales Increasing sales volume is the most common objective of a promotional strategy. Naturalizer became the third-largest seller of women's dress shoes by appealing to Baby Boomers. But as these women age, they buy fewer pairs of shoes. To keep these customers but also attract younger ones, Naturalizer developed a new line of trendy shoes. The promotional strategy included ads in Elle and Marie Claire—magazines read by younger women—featuring models in beach attire and Naturalizer shoes. The ads yielded a substantial increase in department store sales.
• Stabilize Sales Firms can stabilize sales during slack periods through sales contests that motivate salespeople with such prizes as vacations, TVs, smart phones, and cash to those who meet certain goals. Companies attempt to stimulate sales during the off-season by distributing sales promotion materials such as calendars, pens, and notepads to customers. Jiffy Lube puts that little sticker on your windshield to remind you when to schedule your car's next oil change; regular visits help stabilize Jiffy Lube sales. A stable sales pattern brings several advantages. It evens out the production cycle, reduces some management and production costs, and simplifies financial, purchasing, and marketing planning. An effective promotional strategy can contribute to these goals.
• Accentuate the Product's Value Explaining the hidden benefits of ownership can enhance a product's value. Carmakers offer long-term warranty programs; life insurance companies promote certain policies as investments. The creation of brand awareness and brand loyalty also enhances a product's image and increases its desirability. Advertising with luxurious images supports the reputation of premium brands like Jaguar, Tiffany, and Rolex.

PUSHING AND PULLING STRATEGIES

Before developing its promotional plan, a firm's marketers need to consider two general promotional strategies: a pushing strategy or a pulling strategy. A pushing strategy relies on personal selling to market an item to wholesalers and retailers in a company's distribution channels. So companies promote the product to members of the marketing channel, not to end users. Sales personnel explain to marketing intermediaries why they should carry particular merchandise, usually supported by offers of special discounts and promotional materials. All of these strategies are designed to motivate wholesalers and retailers to “push” the good or service to their own customers.

A pulling strategy attempts to promote a product by generating consumer demand for it, traditionally through advertising and sales promotions and more recently through Internet searches, social media, video-sharing sites, blogs, and other business directory/review services. From these sources, potential buyers develop favorable impressions of the product and then request that suppliers—retailers or local distributors—carry the product, thereby “pulling” it through the distribution channel. Given the success of the iRobot Roomba^® robotic vacuum cleaner, many consumers wondered why they can't use similar technology to mow the grass. In response to this consumer demand (market pull), a number of leading lawn equipment manufacturers created automatic lawn mowers. Robotic mowers are projected to be among the most-demanded U.S. outdoor tools in the near future, according to Research and Markets, an international market research and data firm. A spokesman for Kyodo America Industries Co., the Atlanta-based manufacturer of LawnBott robotic mowers, stated, “In this next one- to three-year period, the market for robotic mowing in the United States is going to just explode.”³

THE PROMOTIONAL MIX

Once the objectives and strategy are set, marketers create a promotional mix that blends various facets of promotion into a cohesive plan. This mix consists of two broad components—personal and nonpersonal selling. Marketers combine elements of both personal and nonpersonal selling to effectively communicate their message to targeted customers.

Each component in the promotional mix has its own advantages and disadvantages, as described in TABLE 13.1

Different Types of Advertising

According to one survey, consumers receive from 3,000 to 20,000 marketing messages each day, many of them in the form of advertising.⁴ Advertising is the most visible form of nonpersonal promotion—and the most effective for many firms. Advertising is paid nonpersonal communication usually targeted at large numbers of potential buyers. Although Americans often regard advertising as a typically American function, it is a global activity. In a recent report, the spending on global advertising is expected to continue to grow and reach $518 billion as the global economy gets stronger. The report also indicated that spending for online advertising will overtake spending on print advertising in just a few years.⁵

Advertising expenditures vary among industries, companies, and media. The top five categories for global advertisers are consumer goods, entertainment, industry and services, health care, and automotive. The categories recently showing the greatest percent change were telecommunications and consumer goods. Because advertising expenditures are so great and because consumers around the world are bombarded with messages, advertisers need to be increasingly creative and efficient at attracting consumers' attention.⁶

TYPES OF ADVERTISING

The two basic types of ads are product and institutional advertisements. Product advertising consists of messages designed to sell a particular good or service. Advertisements for Nantucket Nectars juices, iPods, and Capital One credit cards are examples of product advertising. One relatively recent form of product advertising is the practice of product placement. A growing number of marketers pay placement fees to have their products showcased in various media, ranging from newspapers and magazines to television and movies. Coca-Cola gets prominent placement on American Idol, which features as many as 102 product placements in a single month.

Institutional advertising involves messages that promote concepts, ideas, philosophies, or goodwill for industries, companies, organizations, or government entities. Each year, the Juvenile Diabetes Research Foundation promotes its “Walk for the Cure” fund-raising event, and your college may place advertisements in local papers or news shows to promote its activities.

A form of institutional advertising that is growing in importance, cause advertising, promotes a specific viewpoint on a public issue as a way to influence public opinion and the legislative process about issues such as literacy, hunger and poverty, and alternative energy sources.

ADVERTISING AND THE PRODUCT LIFE CYCLE

Both product and institutional advertising fall into one of three categories based on whether the ads are intended to inform, persuade, or remind.

• Informative advertising builds initial demand for a product in the introductory phase of the product life cycle. Highly publicized new product entries attract the interest of potential buyers who seek information about the advantages of the new products over existing ones, warranties provided, prices, and places that offer the new products.
• Persuasive advertising attempts to improve the competitive status of a product, institution, or concept, usually in the late growth and maturity stages of the product life cycle. One of the most popular types of persuasive product advertising, comparative advertising, compares products directly with their competitors—either by name or by inference.
• Reminder-oriented advertising often appears in the late maturity or decline stages of the product life cycle to maintain awareness of the importance and usefulness of a product, concept, or institution.

ADVERTISING MEDIA

Marketers must choose how to allocate their advertising budget among various media. All media offer advantages and disadvantages. Cost is an important consideration in media selection, but marketers must also choose the media best suited for communicating their message. As FIGURE 13.2 indicates, the three leading media outlets for advertising are television, the Internet, and newspapers.

• Television Television is still one of America's leading national advertising media. Television advertising can be classified as network, national, local, or cable. The four major national networks—ABC, CBS, NBC, and Fox—broadcast almost one-fifth of all television ads. Despite a decline in audience share and growing competition from cable TV, network television remains the easiest way for advertisers to reach large numbers of viewers—10 million to 20 million with a single commercial. Automakers, fast food restaurants, and food manufacturers are heavy users of network TV advertising.
• Internet Advertising Online and interactive media have already changed the nature of advertising. Starting with simple banner ads, Internet advertising has become much more complex and sophisticated. Miniature television screen images, called widgets or gadgets, can carry marketing messages only a few inches high on a Web site, blog, or desktop display. Another example is viral advertising, which creates a message that is novel or entertaining enough for consumers to forward it to others, spreading it like a virus. The great advantage is that spreading the word online, which often relies on social networking sites like Facebook, YouTube, and Twitter, costs advertisers little or nothing.

• Newspapers Daily and weekly newspapers continue to dominate local advertising. Marketers can easily tailor newspaper advertising to local tastes and preferences. Advertisers can also coordinate advertisements with other promotional efforts such as discount coupons from supermarkets and one-day sales at department stores. One disadvantage is the relatively short lifespan of daily newspapers; people usually discard them soon after reading. Retailers and automobile dealers rank first among newspaper advertisers. Most newspapers now maintain Web sites, some of which offer separate material and features to complement their print editions.
• Radio Despite the proliferation of other media, the average U.S. household owns five radios—including those in cars—a market penetration that makes radio an important advertising medium. Advertisers like the captive audience of listeners as they commute to and from work. As a result, morning and evening drive-time shows command top ad rates. In major markets, many stations serve different demographic groups with targeted programming. Internet radio programming also offers opportunities for yet more focused targeting.
• Magazines Magazines include consumer publications and business trade journals. Time, Reader's Digest, and Sports Illustrated are consumer magazines, whereas Advertising Age and Oil & Gas Journal fall into the trade category. Magazines are a natural choice for targeted advertising. Media buyers study the demographics of subscribers and select magazines that attract the desired readers. American Express advertises in Fortune and Bloomberg Businessweek to reach businesspeople, while PacSun clothes and Clearasil skin medications are advertised in Teen Vogue.
• Direct Mail The average U.S. household receives about 550 pieces of direct mail each year, including 100 catalogs. The huge growth in the variety of direct-mail offerings combined with the convenience they offer today's busy, time-pressed shoppers has made direct-mail advertising a multibillion-dollar business. E-mail is a low-cost form of direct marketing. Marketers can target the most interested Internet users by offering Web site visitors an option to register to receive e-mail. Companies like Amazon.com, Gardener's Supply, and Abercrombie & Fitch routinely send e-mails to regular customers.
• Outdoor Advertising In one recent year, outdoor advertising accounted for almost $6.4 billion in advertising revenues.⁷ The majority of spending on outdoor advertising is for billboards, but spending for other types of outdoor advertising, such as signs in transit stations, stores, airports, and sports stadiums, is growing fast. Advertisers are exploring new forms of outdoor media, many of which involve technology: computerized paintings; digital billboards; “trivision,” which displays three revolving images on a single billboard; and moving billboards mounted on trucks. Other innovations include ads displayed on the Goodyear blimp, using an electronic system that offers animation and video.

  

  Technology plays an important role in advertising, especially for outdoor media.

• Sponsorship One of the hottest trends in promotion offers marketers the ability to integrate several elements of the promotional mix. Sponsorship involves providing funds for a sporting or cultural event in exchange for a direct association with the event. NASCAR, the biggest spectator sport in the United States, thrives on sponsorships. Sponsorships can run in the tens of millions. Hendricks Motorsports, currently the wealthiest and most successful NASCAR team, has more than $115 million in sponsorships from firms such as PepsiCo, DuPont, Lowes, and Farmers Insurance Group.⁸

Tasks in Personal Selling

Many companies consider personal selling—a person-to-person promotional presentation to a potential buyer—the key to marketing effectiveness. Unless a seller matches a firm's goods or services to the needs of a particular client or customer, none of the firm's other activities produces any benefits. Today, sales and sales-related jobs employ about 13.8 million U.S. workers.⁹ Businesses often spend five to ten times more on personal selling than on advertising. Given the significant cost of hiring, training, benefits, and salaries, businesses are very concerned with the effectiveness of their sales personnel.

How do marketers decide whether to make personal selling the primary component of their firm's marketing mix? In general, firms are likely to emphasize personal selling rather than advertising for sales promotion under four conditions:

1. Customers are relatively few in number and are geographically concentrated.
2. The product is technically complex, involves trade-ins, or requires special handling.
3. The product carries a relatively high price.
4. The product moves through direct-distribution channels.

Selling luxury items such as the Porsche 918 Spyder hybrid ($630,000) or a John Lennon–themed Steinway piano ($90,000) would require a personal touch. Then there's the $35,000 home theater device offered by Prima Cinema, which automatically sends Hollywood films to customers' home systems the same day they premiere. Installation, including instructions on how to use the system, would require personal selling.¹⁰

Personal selling can occur in several environments, each of which can involve business-to-business or business-to-consumer selling. Sales representatives who make sales calls on prospective customers at their businesses are involved in field selling. Companies that sell major industrial equipment typically rely heavily on field selling. Over-the-counter selling describes sales activities in retailing and some wholesale locations, where customers visit the seller's facility to purchase items. Telemarketing sales representatives make their presentations over the phone. A later section reviews telemarketing in more detail.

SALES TASKS

All sales activities involve assisting customers in some manner. Although a salesperson's work can vary significantly from one company or situation to another, it usually includes a mix of three basic tasks: order processing, creative selling, and missionary selling.

• order processing form of selling, mostly at the wholesale and retail levels, that involves identifying customer needs, pointing them out to customers, and completing orders.

• Order Processing Although both field selling and telemarketing involve this activity, order processing is most often related to retail and wholesale firms. The salesperson identifies customer needs, points out merchandise to meet them, and processes the order. Route sales personnel process orders for such consumer goods as bread, milk, soft drinks, and snack foods. They check each store's stock, report inventory needs to the store manager, and complete the sale. Most of these jobs include at least minor order-processing functions.

  creative selling persuasive type of promotional presentation.

• Creative Selling Sales representatives for most business products and some consumer items perform creative selling, a persuasive type of promotional presentation. Creative selling promotes a good or service whose benefits are not readily apparent or whose purchase decision requires a close analysis of alternatives. Sales of intangible products such as insurance rely heavily on creative selling, but sales of tangible goods benefit as well.

  Most retail salespeople just process orders, but many consumers are looking for more in the form of customer service, which is where creative selling comes in. Personal shoppers at upscale Topshop help customers create entire looks from three floors of clothing. They also offer customers refreshments and the option to ring up purchases at a special cash register without waiting in line.

  missionary selling indirect form of selling in which the representative promotes goodwill for a company or provides technical or operational assistance to the customer.

• Missionary Selling Sales work also includes missionary selling, an indirect form of selling in which the representative promotes goodwill for a company or provides technical or operational assistance to the customer. Many businesses that sell technical equipment, such as Oracle and Fujitsu, provide systems specialists who act as consultants to customers. These salespeople work to solve problems and sometimes help their clients with questions not directly related to their employers' products.

TELEMARKETING

Personal selling conducted by telephone, known as telemarketing, provides a firm with a high return on its marketing expenditures, an immediate response, and an opportunity for personalized, two-way conversation. Many firms use telemarketing because expense or other obstacles prevent salespeople from meeting many potential customers in person. Telemarketers can use databases to target prospects based on demographic data. Telemarketing takes two forms. A sales representative who calls you is practicing outbound telemarketing. And outbound telemarketers must abide by the Federal Trade Commission's 1996 Telemarketing Sales Rule. Congress enacted another law in 2003 that created the National Do Not Call registry, intended to help consumers block unwanted telemarketing calls. On the other hand, inbound telemarketing occurs when you call a toll-free phone number to get product information or place an order.

THE SALES PROCESS

The sales process typically follows the seven-step sequence shown in FIGURE 13.3: prospecting and qualifying, the approach, presentation, the demonstration, handling objections, closing, and the follow-up. Remember the importance of flexibility, though; a good salesperson is not afraid to vary the sales process based on a customer's responses and needs. The process of selling to a potential customer who is unfamiliar with a company's products differs from the process of serving a long-time customer.

PROSPECTING, QUALIFYING, AND APPROACHING

At the prospecting stage, salespeople identify potential customers. They may seek leads for prospective sales from such sources as business associates, existing customers, friends, and family. The qualifying process identifies potential customers who have the financial ability and authority to buy.

Companies use different tactics to identify and qualify prospects. Some companies rely on business development teams, passing responses from direct mail along to their sales reps. Others believe in personal visits. Many firms are now using social media, which costs little or nothing, to boost sales. Online newsletters, virtual trade shows, podcasts, Webinars, and blogs are good examples. Experts advise developing a clear strategy in order to be successful with social media.¹¹

Successful salespeople make careful preparations, analyzing available data about a prospective customer's product lines and other pertinent information before making the initial contact. They realize the importance of a first impression in influencing a customer's future attitudes toward the seller and its products.

PRESENTATION AND DEMONSTRATION

At the presentation stage, salespeople communicate promotional messages. They may describe the major features of their products, highlight the advantages, and cite examples of satisfied consumers. A demonstration helps reinforce the message that the salesperson has been communicating—a critical step in the sales process. Department store shoppers can get a free makeover at the cosmetics counter. Anyone looking to buy a car will take it for a test drive before deciding whether to purchase it.

HANDLING OBJECTIONS

Some salespeople fear potential customers' objections because they view the questions as criticism. But a good salesperson can use objections as an opportunity to answer questions and explain how the product will benefit the customer. Responding to a customer's objection that a product's price is too high, a salesperson might remind the individual that the product is exclusive and that a high price prevents the product from being widely available to everyone.

CLOSING

The critical point in the sales process—the time at which the salesperson actually asks the prospect to buy—is the closing. If the presentation effectively matches product benefits to customer needs, the closing should be a natural conclusion. If there are more bumps in the process, the salesperson can try some different techniques, such as offering alternative products, offering a special incentive for purchase, or restating the product benefits. Closing the sale—and beginning a relationship in which the customer builds loyalty to the brand or product—is the ideal outcome of this interaction. But even if the sale is not made at this time, the salesperson should regard the interaction as the beginning of a potential relationship anyway. The prospect might very well become a customer in the future.

FOLLOW-UP

A salesperson's post-sale actions may determine whether the customer will make another purchase. Follow-up is an important part of building a long-lasting relationship. After closing, the salesperson should process the order efficiently. By calling soon after a purchase, the salesperson provides reassurance about the customer's decision to buy and creates an opportunity to correct any problems.

Sales Promotion Activities

Traditionally viewed as a supplement to a firm's sales or advertising efforts, sales promotion has emerged as an integral part of the promotional mix. Sales promotion consists of activities that support advertising and personal selling.

Both retailers and manufacturers use sales promotions to offer consumers extra incentives to buy. Examples include samples, coupons, contests, displays, trade shows, and dealer incentives. Beyond the short-term advantage of increased sales, sales promotions can also help marketers build brand equity and enhance customer relationships.

CONSUMER-ORIENTED PROMOTIONS

The goal of a consumer-oriented sales promotion is to get new and existing customers to try or buy products. In addition, marketers want to encourage repeat purchases by rewarding current users, increase sales of complementary products, and boost impulse purchases. FIGURE 13.4 shows how marketers allocate their consumer-oriented spending among the categories of promotions.

PREMIUMS, COUPONS, REBATES, AND SAMPLES

Nearly six of every ten sales promotion dollars are spent on premiums—items given free or at a reduced price with the purchase of another product. Cosmetics companies such as Clinique often offer sample kits with purchases of their products. Customers redeem coupons for small price discounts when they purchase the promoted products. Such offers may persuade a customer to try a new or different product. Rebates offer cash back to consumers who mail in required proofs of purchase. Rebates help packaged-goods manufacturers increase purchase rates, promote multiple purchases, and reward product users. A sample is a gift of a product distributed by mail, door to door, in a demonstration, or inside packages of another product.

TRADE-ORIENTED PROMOTIONS

Sales promotion techniques can also contribute to campaigns directed to retailers and wholesalers. Trade promotion is sales promotion geared to marketing intermediaries rather than to consumers. Marketers use trade promotion to encourage retailers to stock new products, continue carrying existing ones, and promote both new and existing products effectively to consumers. Successful trade promotions offer financial incentives. They require careful timing, attention to costs, and easy implementation for intermediaries. These promotions should bring quick results and improve retail sales. Major trade promotions include point-of-purchase advertising and trade shows.

Point-of-purchase (POP) advertising consists of displays or demonstrations that promote products when and where consumers buy them, such as in retail stores. Marketing research has shown that consumers are more likely to purchase certain products when such displays are present. Sunscreen, painting supplies, and snacks are typically displayed this way.

Manufacturers and other sellers often exhibit at trade shows to promote goods or services to members of their distribution channels. These shows are often organized by industry trade associations and attract large numbers of exhibitors and attendees each year.

Publicity as a Promotional Tool

A final element of the promotional mix, public relations (PR)—including publicity—supports advertising, personal selling, and sales promotion, usually by pursuing broader objectives. Through PR, companies attempt to improve their prestige and image with the public by distributing specific messages or ideas to target audiences. Cause-related promotional activities are often supported by PR and publicity campaigns. In addition, PR helps a firm establish awareness of goods and services and then builds a positive image of them.

Public relations refers to an organization's communications and relationships with its various public audiences, such as customers, vendors, news media, employees, stockholders, the government, and the general public. Many of these communication efforts serve marketing purposes. Public relations is an efficient, indirect communications channel for promoting products. It can publicize items and help create and maintain a positive image of the company.

The public relations department links a firm with the media. It provides the media with news releases and video and audio clips, as well as holding news conferences to announce new products, the formation of strategic alliances, management changes, financial results, and similar developments. Publications issued by the department include newsletters, brochures, and reports.

PUBLICITY

The type of public relations that is tied most closely to promoting a company's products is publicity—nonpersonal stimulation of demand for a good, service, place, idea, event, person, or organization by unpaid placement of information in print or broadcast media. Press releases generate publicity, as does news or TV coverage. Publicity can even help find investors to grow a business. Shawn Davis appeared on the reality TV show Shark Tank recently hoping to have the show's entrepreneurs invest in his company. The investors didn't bite, but when the episode aired Davis received calls from other interested parties. He negotiated a deal and is moving forward with his plans to grow his food business.¹²

Not-for-profit organizations benefit from publicity when they receive coverage of events such as the Susan G. Komen Race for the Cure, which raises money for breast cancer research, community health outreach, advocacy, and programs. When a for-profit firm teams up with a not-for-profit firm in a fund-raising effort, the move usually generates good publicity for both organizations.

Pricing Objectives and Strategies

Price, the last element of the marketing mix, can best be thought of as the sum of all the other parts. If a firm has a unique product, creates a world class distribution strategy, or has an inventive promotional campaign, they become a price setter such as Apple. On the other hand, if a firm sells an undifferentiated product, with no distribution or promotional advantages, they are most likely a price taker. While firms have the freedom to set their prices at any level they choose, their success will be determined by how the firm's competitors and customers react to their prices. For example, if a firm sets prices too high relative to the perceived value of the product, customers will not purchase the product and the firm will generate little revenue. Alternately, if they set their prices too low, the firm may sell all their products but not make needed profits.

In making pricing decisions, businesspeople seek to accomplish certain objectives. Pricing objectives vary from firm to firm, and many companies pursue multiple pricing objectives at the same time. Some try to improve profits by setting higher prices, while others set lower prices to attract new business. Whatever a company's objectives, determination of price generally falls into two areas, those based on external market issues and those based on a firm's production costs. The following sections detail both approaches, identifying the pricing objective and the strategies that support the objective.

MARKET-BASED PRICING

Economic theory assumes that a market price will be set at the point at which the amount of a product demanded and the amount supplied are equal. Recall the supply and demand discussion from Chapter 3. In many lines of business, this holds true, as firms in any particular industry set their prices to match those of established leaders. In these markets, price becomes a nonissue and consumers will make their purchase decisions based on other attributes of the product or firm. Gas stations are a good example of this type of pricing. However, once a firm knows the equilibrium market price, the competitive price, they can choose to price their products at that price or move higher or lower to achieve specific business objectives. The following section describes pricing objectives that cause a firm to deviate from the equilibrium price.

VOLUME OBJECTIVE

Marketers attempting to build market share may use price to achieve their goal. The volume objective makes pricing decisions based on market share, the percentage of a market controlled by a certain company or product. One firm may seek to achieve a 25 percent market share in a certain product category, and another may want to maintain or expand its market share for particular products.

Family Dollar Stores relies on volume sales to make a profit, and these types of retailers typically price products lower than their competition to build sales. The nationwide chain of stores, which sells everything from ice cube trays to holiday decorations—for a dollar each—must find ways to attract as much traffic and sell as much product as possible on a given day.

PRESTIGE PRICING

On the other end of the spectrum, prestige pricing establishes a relatively high price to develop and maintain an image of quality and exclusiveness. Marketers set such objectives because they recognize the role of price in communicating an overall image for the firm and its products. People expect to pay more for a Mercedes, Christian Louboutin shoes, or a vacation on St. Barts in the Caribbean. Much of the value that consumers place on these types of products comes from the fact that they are expensive. A Rolex would not be a Rolex without a hefty price tag.

EVERYDAY LOW PRICING AND DISCOUNT PRICING

Everyday low pricing (EDLP) is a strategy devoted to maintaining continuous low prices rather than relying on short-term price-cutting tactics such as cents-off coupons, rebates, and special sales. This strategy has been used successfully by retailers such as Walmart and Lowes to consistently offer low prices to consumers; manufacturers also use EDLP to set stable prices for retailers and create the impression among consumers that they do not need to shop the “sales” to find a good deal at these stores.

SKIMMING PRICING

A shorter-term strategy, skimming pricing, sets an intentionally high price relative to the prices of competing products. The term comes from the expression “skimming the cream.” This pricing strategy often works for the introduction of a distinctive good or service with little or no competition, although it can be used at other stages of the product life cycle as well. A skimming strategy can help marketers set a price that distinguishes a firm's high-end product from those of competitors. It can also help a firm recover its product development costs before competitors enter the field. This is often the case with prescription drugs.

PENETRATION PRICING

Another shorter-term approach and a variant of volume pricing is penetration pricing, a strategy that sets a low price in an effort to enter competitive markets. When using penetration pricing, businesses may price new products noticeably lower than competing offerings of competing brands. These firms may even price their products below their cost to gain market share. Once the new product achieves some market recognition through consumer trial purchases stimulated by its low price, marketers may increase the price to the level of competing products. However, stiff competition might prevent the price increase.

COST-BASED PRICING

Economic theory might lead to the best pricing decisions, but businesses may not have all the information they need to make those decisions. Additionally, many well-crafted pricing strategies end up costing the firm significant profits. So, firms almost always review their market-based strategies against their product costs using cost-based pricing formulas. Approaching pricing this way allows a firm to determine how much investment they will have to make to complete their strategy.

BREAKEVEN ANALYSIS

Businesses often conduct a breakeven analysis to determine the minimum sales volume a product must generate at a certain price level to cover all costs. This method involves a consideration of various costs and total revenues. Total cost is the sum of total variable costs and total fixed costs. Variable costs change with the level of production, as labor and raw materials do, while fixed costs such as insurance premiums and utility rates charged by water, natural gas, and electric power suppliers remain stable regardless of the production level. Total revenue is determined by multiplying price by the number of units sold.

FINDING THE BREAKEVEN POINT

The level of sales that will generate enough revenue to cover all of the company's fixed and variable costs is called the breakeven point. It is the point at which total revenue just equals total costs. Sales beyond the breakeven point will generate profits; sales volume below the breakeven point will result in losses. The following formulas give the breakeven point in units and dollars:

A product selling for $20 with a variable cost of $14 per unit produces a $6 per-unit contribution to fixed costs. If the firm has total fixed costs of $42,000, it must sell 7,000 units to break even on the product, as shown in FIGURE 13.5. The calculation of the breakeven point in units and dollars is as follows:

Marketers use breakeven analysis to determine the profits or losses that would result from several different proposed prices. Because different prices produce different breakeven points, marketers could compare their calculations of required sales to break even with sales estimates from marketing research studies. This comparison can identify the best price—one that would attract enough customers to exceed the breakeven point and earn profits for the firm.

NOTES

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2. Jackie Judd, “FDA Calls Prescription Drug Ads Misleading,” ABC News, January 3, 2013, http://abcnews.go.com.

3. Dave Larson, “Robotic Lawn Mowers See Growing Demand,” Dayton Daily News, March 16, 2013, http://www.daytondailynews.com.

4. David Lamoureux, “How Many Marketing Messages Do We See in a Day?” Fluid Drive Media, February 23, 2012, http://www.fluiddrivemedia.com.

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7. Kantar Media, “2012 January-December Outdoor Advertising Expenditures,” Outdoor Advertising Association of America, February 2013, http://www.oaaa.org.

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9. U.S. Department of Labor, “Occupational Employment and Wages, May 2012,” Occupational Employment Statistics, Bureau of Labor Statistics, June 12, 2013, http://www.bls.gov.

10. John Sciacca, “Prima Cinema Brings in-the-Theater Movies Home for $500 Each … and It's Worth It,” Digital Trends, April 1, 2013, http://www.digitaltrends.com.

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12. Carol Tice, “How One Entrepreneur Used the Law of Publicity to Get Investors,” Entrepreneur, accessed September 20, 2013, http://www.entrepreneur.com.