Chapter eight

Pricing and Promotion

Chapter Outline

Factors affecting pricing occasions

Objectives

Pricing practice and strategies

Promotion and promotional plans

 Introduction to Pricing

• We need to set price when we have a new product, or when we enter a new
market with an existing product.

• In a business firm, among various marketing decisions, the decision relating to

pricing of products are the most significant decision because they are the very
basis of survival and growth of the firm
 Meaning of Price

• The amount of money charged for a product or service,

or the sum of the values that consumers exchange for the
benefits of having or using the product or service.
(Kotler and Armstrong)
• Different terms are used to refer to price depending on what's being paid
for –
• rent, fare, fee,rate, interest, tuition,toll, premium, salary, bride price,
commission
 Pricing cont…

• Pricing Objectives
Pricing cont…
• Factors affecting Price Decision
 Pricing cont…

• Internal factors :
Marketing objectives
Market positioning influences strategy
Other pricing objectives:
Survival
Current profit +maximization
Market share leadership
Product quality leadership
Marketing mix strategies
Pricing must be carefully coordinated with the other marketing mix
elements (product, promotion, place)
Target costing is often used to support product positioning strategies based
on price
 Factors affecting Pricing cont…

Costs
 Types of costs:
 Variable
 Fixed
 Total costs
 How costs vary at different production levels will influence price-
setting
 Experience (learning) curve effects on price
Organizational considerations
 Who sets the price?
 Small companies: CEO or top management
 Large companies: Divisional or product line managers
 Price negotiation is common in industrial settings
 Some industries have pricing departments
Stage of the product in the PLC
Factors affecting Pricing cont…

• External Factors
Nature of market and demand
Types of markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Consumer perceptions of price and value
Price-demand relationship
Demand curve
Price elasticity of demand
Factors affecting Pricing cont…

Competitors’ costs, prices, and offers

Consider competitors’ costs, prices, and possible

reactions when developing a pricing strategy.
Pricing strategy influences the nature of competition
Low-price low-margin strategies inhibit competition
High-price high-margin strategies attract competition
Benchmarking costs against the competition is
recommended.
Factors affecting Pricing cont…

Other environmental elements

Economic conditions

Affect production costs

Affect buyer perceptions of price and value

Reseller reactions to prices must be considered

Government may limit or restrict pricing options

Social considerations may be taken into account

 Pricing Strategies
There are around four pricing strategies
1. Skimming pricing :
 Charging a high price initially and reducing the price over time.
 Commonly used when introducing new & innovative products .
2. Penetration pricing :
 Charging a low price when entering the market to capture market share.
 Used when competitors are closing in with similar or better products.
3. Premium pricing :
 Pricing somewhere in between the skimming strategy and the penetration
strategy.
4. Cost plus pricing/ Mark Up pricing
cost + profit=price
Which one do you think is better for new start-up business?
Price Adjustment Strategies
 Price Adjustment Strategies

1. Discount and allowance pricing : reduces prices to reward customer

responses such as paying early or promoting the product.
• Discounts
• Allowances

Discounts
 Cash discount for paying promptly

 Quantity discount for buying in large volume

 Functional (trade) discount for selling, storing, distribution, and

record keeping
 Pricing strategy

 Allowances
 Trade in allowance for turning in an old item when buying a new one

 Promotional allowance to reward dealers for participating in advertising or sales

support programs

2. Segmented pricing
 Is used when a company sells a product at two or more prices even though the
difference is not based on cost.
 Customer segment pricing
 Product form segment pricing
 Location pricing and time based pricing
 Pricing strategy cont…

3. Psychological pricing
 Occurs when sellers consider the psychology of prices and not simply the
economics.
 Reference prices are prices that buyers carry in their minds and refer to when
looking at a given product.
• Noting current prices
• Remembering past prices
• Assessing the buying situations
4. Promotional pricing
 Is when prices are temporarily priced below list price or cost to increase demand
 Loss leaders
 Special event pricing
 Cash rebates
 Low interest financing
 Longer warrantees
 Free maintenance
5.Geographical pricing
 Is used for customers in different parts of the country or the world
 Uniformed delivery pricing
 Zone pricing
 Basing point pricing
 Freight absorption pricing
6. Dynamic pricing
 Is when prices are adjusted continually to meet the characteristics and needs of the
individual customer and situations.
7. International pricing
 Is when prices are set in a specific country based on country-specific factors
 Economic conditions
 Competitive conditions
 Laws and regulations
 Infrastructure
 Company marketing objective
Promotion
 PROMOTION MIX

Is sometimes known as marketing communication.

Means activities that communicate the merits of the product &
persuade target customers to buy it.
Promotional objectives:
• Informing the product
• Increasing sales
• Stabilizing sales / profit
• Positioning the product
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Promotion mix is a blend of communication tools that help to achieve the promotion
objectives in one way or another.

It includes

Advertising

personal selling

 sales promotion and

 publicity.

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 Advertising

Mass selling is communicating with lager number of customers at the same time

In developing an advertising program, marketing managers must make five major
decisions known as “The five M’s”:

Mission: what are the advertising objectives?

Money: how much can be spent?

Message: what message should be sent?

Media: what media should be used?

Measurement: How should the results is measured?

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Sales Promotion

Sales promotion consists of a collection of short term incentives designed

to stimulate quicker or greater purchase of a particular product or service
by consumers

Advertising offers a reason to buy, sales promotion offers an incentive to

buy.

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The objectives of sales promotion

To stimulate trial purchase

To enable manufacturers to adjust to short term variations in supply and

demand

To encourage repurchase

To increase quality of purchase

To support advertising

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 Sales promotion includes

 consumer promotion,

 trade promotion and

 business and sales force promotion

 consumer promotion tools

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Trade promotion tools

Manufacturers award money to the trade:

(1) to persuade the retailer or the wholesalers to carry the brand;

(2) to persuade the retailer or the wholesaler to carry more units than the normal amount;

(3) induce retailers to promote the brand;

(4) to stimulate retailers and their sales clerks to push the product.

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Trade promotion tools

Price-off (off-invoice or off-list)

Allowance

Free goods

Business And Sales Force Promotion Tools

They are used to gather business leads, impress and reward customers and motivate the
sales force. It contains Tradeshows and conventions, Sales contests and Specialty
advertising:

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Public Relations (Publicity)
A public is any group (stockholders and stakeholders) that has an actual or potential
interest in or impact on a company’s ability to achieve its objectives.

It is any unpaid form of non-personal presentation of ideas, goods and services.

Basic tools

Publication

Events

Sponsorships

News

Speeches etc… 26
Personal Selling

Personal selling is a direct (personal) spoken communication between sellers and one
or more prospective or potential buyers for the purpose of making presentations,
answering questions, processing orders, making sales and developing relationship
between a salesperson and a potential buyer.

A personal selling usually happens face-to-face, but sometimes the communication

occurs over the telephone or even via video conference over the internet.

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 Drawing Up Promotional Plans
As a new business owner, you need two kinds of promotional plans:

1. a preopening plan to lay the groundwork for your opening

The image you establish in your preopening plan sets the tone for your
promotional plan

2. an ongoing plan to support marketing operations once it is under way

An ongoing promotional plan helps in preselling your goods or services.

Preselling: the act of influencing potential customers to buy before contact is actually
made
 Objectives of a Preopening Plan

Establish a positive image.

Let potential customers know you are opening for business.

Bring in customers or have them contact your business.

Interest customers in your new company and your

products or services.
 Objectives of an Ongoing Promotional Plan

Explain major features and benefits of your products.

Communicate information about sales.

Clear up customers’ questions and concerns.

Introduce new goods or services.

 Group Discussion

Discuss different
promotional strategies
should be employed at
PLC stages to ensure
the healthy success and
life of the product.
Introduction: When a product is new the organization's objective will be to inform the target
audience of its entry. Television, radio, magazine, coupons etc may be used to push the product
through the introduction stage of the life cycle. Push and Pull Strategies will be used at this crucial
stage.

Growth: As the product becomes accepted by the target market (at this stage of the life cycle) the
organization will employ strategy to increase brand awareness and customer loyalty.

Maturity: At this stage of the life cycle the product will be experiencing increased competition and
will need persuasive tactics to encourage consumers to choose their product over their rivals. Any
differential advantage/benefit will be need to be clearly communicated to the target audience.

Decline: As the product reaches the decline stage of its life cycle, all the organization can do is use
strategy to remind consumers about the product in a try to slow the expected.
 t- I I
Par n t o
u c ti o nt
t r o d e m e
In a n a g
c i al m
fi na n
 Financial Management?

Financial Management is broadly concerned with the acquisition and

use of funds by a business firm. Its scope may be defined in terms of
the following questions.
How large should the firm be & how fast should it grow?
Composition of firm’s assets?
Mix of the firm’s financing ?
Analyzing, planning & controlling its financial affairs?
Goals of Financial Management
• Profit Maximization (profit after tax)

• Maximizing Earnings per share(EPS)

• Shareholder’s Wealth Maximization

 THE FUNDAMENTAL PRINCIPLE OF FINANCE

A business proposal-regardless of whether it is a new investment or acquisition of another

company or a restructuring initiative –raises
DECISIONS, RETURN, RISK, AND MARKET VALUE

Capital Budgeting
Decisions

Return
Capital Structure
Decisions
Market Value of
the Firm
Dividend
Decisions
Risk

Working Capital
Decisions
 FORMS OF ORGANISATION
Public Limited Company
• Many owners
• Somewhat complex
• Limited liability
• Distinct legal person
• Free transferability of shares

Public Limited Company’s Attraction

• The potential for growth is immense because of access to
substantial funds
• Investors enjoy liquidity because of free transferability of
securities
• The scope for employing talented managers is greater
 Decisions under
Financial Management

• Investing Decision

• Financing Decision

• Dividend Decision
Investing Decision
• Investment in Short Term & Long Term Projects

• Short Term Projects

- Decisions relating to Working Capital Mgt.

-Inventory Management,

- Receivables Management, etc.

Long Term Decision
 Relates to Capital Budgeting Decisions

 Techniques:

(i) Traditional- Payback Period, Accounting, Rate of Return

(ii) Modern- Net Present value Method, Internal Rate of Return,

Profitability Index, etc.
Financing Decision
• Decision relation to Funding of the Projects
• Sources
-Short Term (trade credit, bank overdraft,etc.)
-Long Term
(i) Owners Funds ( Equity/Preference Share Capital,
Retained Earnings)
(ii) External Funds( Debentures, Long Term Loans, etc.)
 Dividend Decision
This decision relates to How much of the Earnings to be
DISTRIBUTED AS DIVIDENDS?
AND
HOW MUCH TO BE KEPT
AS RETAINED EARNINGS?
 ALL MANAGERS ARE FINANCIAL MANAGERS

• The engineer, who proposes a new plant, shapes the

investment policy of the firm
• The marketing analyst provides inputs in the process of
forecasting and planning
• The purchase manager influences the level of investment in
inventories
•The sales manager has a say in the determination
of the receivables policy
• Departmental managers, in general, are
important links in the finance control system of the
firm
 RELATIONSHIP OF FINANCE TO ACCOUNTING

• Accounting is concerned with score keeping, whereas

finance is aimed at value maximizing.

• The accountant prepares the accounting reports based

on the accrual method. The focus of the financial
manager is on cash flows.

• Accounting deals primarily with the past. Finance is

concerned mainly with the future.
 ACCOUNTING FOR SMALL BUSINESS

• Proper financial and accounting records make it possible for the owner to
exercise effective control of funds and overall performance of his/her
business.

• Such records also make it possible to know whether the firm is earning
profits or loss.

• Accounts also help to know the financial position of the business at any
time and at the end of the fiscal year.

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 BUSINESS TRANSACTION AND ACCOUNTING EQUATION

• A business transaction is the occurrence of an event or of a condition that

must be recorded.
• The payment of a monthly telephone bill,
• The purchase of merchandise on credit and
• The acquisition of land and a building are examples of business transactions

• A particular business transaction may lead to an event or a condition that result in another
transaction.
• For example, the purchase of merchandise on credit will be followed by
payment to the creditor, which is another transaction

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 The accounting equation

• Assets are the properties owned by a business enterprise or any thing of value
owned by a business enterprise.

• The rights or claims to the properties are referred to as equities.

• The sum of assets is equal to that of the sum of equities.

• Equities may be subdivided into two principal types:

• the rights of creditors and
• the rights of owners.

• Rights of creditors represent debts of the business and are called creditor’s
equities or liabilities.

• The rights of owner or owners are called owner’s equity or owner’s capital
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• Expansion of the equation to give recognition to the two basic types of
equities yields the following, which is known as the accounting equation:

• Assets = equities
• Assets = creditor’s equities + owner’s equity
• Assets = liabilities +capital

• It is customary to place “liabilities“ before “owner’s equity” in the

accounting equation because creditors have preferential rights to the assets.

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 Assets
• Assets: any physical thing (tangible) or right (intangible) that has a
monetary value is an asset. Assets are customarily divided into two:

• Current assets: are cash and other assets that may reasonably be expected
to be realized incase or sold or used up usually within one year or less,
through the normal operations of the business.
• Example: cash, accounts receivable, notes receivable, supplies, prepaid expenses,
stock (inventory), etc

• Plant assets: are tangible assets used in the businesses that are of a
permanent or relatively fixed nature. It is also known as fixed assets.
• Example: equipment, machinery, building, vehicles and land

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 Liabilities:
• Liabilities: are debts owned to outsiders (creditors) . Liabilities are frequently described
on the balance sheet by titles that include the word “Payable”.

1.Current liabilities: are liabilities that will be due within a short time (usually one year or
less) and that are to be paid out of current assets.
• Example: notes payable, accounts payable, salaries payable, interest payable,
taxes payable.

2.Long-term liabilities: are liabilities that will be due for a comparatively long time
(usually more than one year) it is also known as fixed liabilities.
As they come within the one-year range and are to be paid, such liabilities become
current.
Example: Mortgage payable

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 Owner equity
• Owner equity: is the residual claim against the assets of the business after
the total liabilities are deducted. For a corporation, owner’s equity is
frequently called stockholders equity, shareholder’s equity or stockholder’s
investment.

• Capital: is the owner’s equity in a sole proprietorship (and partnership)

•  Capital stock: represents the investment of the stockholders.

• Retained earnings: represents the net income retained in the business.

• Drawings: represents the amount of withdrawals made by the owner of a sole

proprietorship (and partnership)

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• Dividends: represents the distribution of earnings to stockholders.

• Revenue: is the amount charged to customers for goods or services sold to

them. It is an increase in capital that resulted from the normal operation of
the business. Example: Professional fees, commissions revenue, fares
earned, interest income, etc

• Expense: costs that have been consumed in the process of producing

revenue are expired costs or expenses. It resulted in a decrease in capital.
Example: Wages expense, rent expense, supplies expense, utilities expense,
etc

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 Preparation of financial statements

• Financial statements: After the effect of the individual transactions has been determined,
the essential information is communicated to users. The account statements that
communicate this information are called financial statements.

• The principal financial statements are the income statements the statement of
owner’s equity, the balance sheet and the statement of cash flow.
• The financial statements prepared for sole proprietorship, partnership and corporation are
almost the same.

• The major difference is in the capital section of the balance sheet.

• The capital section of these enterprises indicates the name of the owner, the name of the
partners and the capital stock (common stock) and/or the preferred stock in their respective
order.

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• Income statement: a summary of the revenue and the expenses of a business entity
for a specific period of time, such as a month or a year.
ABC trading
Income statement
For month ended December 31, 2004
 Sales 10,000
Operating expenses:
 Wages expense 3,000
 Rent expense 2,000
 Suppliers expense 2,000
 Utilities expense 750
 Miscellaneous expense 250
Total operating expense (8,000)
Net income 2,000

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• Statement of owner’s equity is a summary of the changes in the owner’s equity of a
business entity that have occurred during a specific period of time such as a month or a
year.

ABC trading
Statement of owner’s equity
For month ended December 31, 2004
Investment during the month 15,000
Net income for the month 2,000
Less withdrawals 500
Increase in owner equity 1,500
Mr. X, Capital, December 31,2004 16,500

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• Balance sheet: is a list of the assets, liabilities and owner’s equity of a business entity as of a
specific date, usually at the close of the last day of a month or year.
ABC trading
Balance sheet
December 31, 2004
Assets
Cash 10,000
Supplies 1,000
Land 8,000
Total asset 19,000
Liabilities
Accounts payable 2,500
Owner’s equity
Mr. X, capital 16,500
Total liabilities and capital 19,000 58
 Statement of cash flows

• It is a summary of the cash receipts and cash payments of a business entity

for a specific period of time, such as a month or a year.

• It is customary to report cash flows (cash receipts and cash payments) in

three sections:

1. Operating activities
2. Investing activities, and
3. Financing activities
 ABC trading
Statement of cash flows
For month ended December 31,2004

Cash flows from operating activities:

Cash received from customers 10,000
Less cash payments for expense and payments to creditors (7,300)
Net cash flow from operating activities 2,700

Cash flows from investing activities:

Cash payments for acquisition of land (8,000)

Cash flows from financing activities:

Cash received as owner’s investment 15,000
Less cash withdrawal by owner (500)
Net cash flow from financing activities 14,500

Net cash flow and December 31,2004 cash balance 9,200

 Common Accounting Transactions
Let’s suppose that Lykun and Gelila have opened a local feed and pet supply store. During their
first month of business several accounting transactions take place. Owner Investments – Lykun
and Gelila file articles of incorporation and receive their charter and business license and begin
their business as LGM, Inc. They have $75,000 of cash to invest in their new business. The first
balance sheet of LGM, Inc. would show the asset Cash and the Equity of the owners

• As of right now, LGM has no liabilities and assets equal equity. The labels Cash and Net Worth
are called accounts. Accounts are used to classify similar transactions.

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• Purchase of Assets with Cash – LGM decides to purchase a small land for
$10,000 and building for $40,000. This transaction doesn’t change LGM’s total
assets, liabilities, or equity, but it does change the composition of the assets. A
key point to remember is that the purchase of an asset doesn’t affect owner’s
equity. The transaction decreases Cash and increases two new accounts called
Land and Buildings:

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• Purchase of Assets by Incurring a Liability – Assets may be purchased with credit
instead of with cash. However, by using credit the business agrees to pay the liability at
a later date. Let’s suppose that LGM buys pet supplies for $1,000 on credit. The
transaction increases the assets (Pet Supplies) and increases the liabilities of LGM, Inc.
Assets purchased on credit are still recorded for the full amount at the time of purchase.
It should be pointed out that this type of transaction increases both sides of the
accounting equation to $76,000. The liability creates a new account called Accounts
Payable:
 Reading Assignment
 About Business organization management and
financial managements.
 Effects product life cycle stages in marketing mix.