Sales Promotion Sales Promotion: Any short-term offer or incentive directed toward-

buyers, retailers, or wholesalers that is designed to achieve a specific, immediate response. Two basic classification of sales promotion are:- Consumer promotions include coupons, free samples,

premiums, rebates, and special exhibits

- Trade promotions: include cash, merchandise, equipment or other resources are awarded to retail or whole sale firms or their personnel

- The main value of both consumer and trade promotions lies in

their effectiveness in stimulating behavioral responses.

Sales Promotion ObjectivesObjectives directed at final buyers1.

Stimulating inquiries:Can include returning a form requesting for additional information Visiting a exhibit at trade association meeting Such programs must be closely associated with advertisement programs Why needed: It is important to attract only high interest prospects, especially when new buyers are few and hard to identify When new models or versions of products or service are offered, sales promotion may be designed to stimulate inquiries from past customers in order to maintain contacts with prospects.

2. Generating product trial Appropriate in marketing new products Free samples and coupons are usually useful in stimulating trial for

low perceived risk products. Why?

Generate a usage experience, if positive, may lead to favorable attitude towards advertising

Firms that market number of different products( such as product

line extensions or complimentary products) may use techniques such as cross- couponing to build a trial for these other products ( Gillette razor blades might contain a coupon for Gillette shaving cream)

3. Traffic Building

Sales promotion may be employed by Retailers as vehicle to stimulate store traffic from new buyers as well as for repurchase objective Special entertainment events (such as having authors autograph copies of their books) and special attractions placed in shopping malls may attract customers By establishing price specials on leader products, retailer may draw customers who purchase the leader plus complementary products (at non-sale prices).

4. Increasing rate of purchaseThere are two alternative strategies underlying this objective i. Consumer loading Reflects a retention oriented marketing strategy in which the goal is to get buyers stock up on the product

ii.

Multi-packs may be used before new competing products are introduced or in anticipation of increased competitor promotional activityIncreased consumption rate Stimulate primary demand if lower price encourage higher rate of consumption (often the case with products such as soft drinks, or some meat products) A well known method for increasing purchase rates is the use of in-store displays Information Resources Inc. reports that displays are especially effective for snack food , soft drinks, juices, soups and detergents.

Sales promotion objectives and alternative programs directed at final buyersObjective Inquiries Product trial New products Related products Repurchase Traffic building Alternative programs free gifts, mail-in coupons, Catalog offers, exhibits coupons, cents-off specials free samples , contests premiums, demonstrations on- pack coupons, mail-in coupons for rebate, continuity premiums

special sales, weekly specials, entertainment events, premiumsIncreased rate of purchase Inventory building increased usage rate multipacks, special price on twos information on new usage situations

Trade Sales Promotion Objectives1.

Encouraging Trade Inventory BuildingConsumer promotions will simultaneously pursue this objective simultaneously For building acceptance for new products manufacturers provide slotting allowances They are cash payments given to retailers in exchange for stocking a new product for a specified period of time

2.

Obtaining distributor promotional assistanceSales contests and special cash or merchandise allowances may be offered in return for distributor agreement to provide special display space or additional selling or advertising effort

Sales promotion objectives and alternative programs directed at the tradeObjective Programs

Inventory Building New Product acceptance increased space allotment Promotional Support Local ad feature Promotional allowances Return allowances Merchandise allowance Slotting allowances

Displays price specials

Cooperative promotionsReusable display cases Sales contests Merchandise allowances

Relationship between S.P and Marketing strategy Promotions directed towards final buyers Inquiries and product trials is used to attract non users

or to acquire new customers Repurchase oriented promotions support retention strategy Promotions to increase rate of purchase may support primary demand strategy (through increasing the rate of usage) or retention strategy Unique exhibits may attract new customers The basic purpose of trade promotions is to support

advertising or consumer sales promotion

Promotions to Resellers i. ii.

Promotions to reseller have the objectives: Inventory build up Promotional support Many trade promotions are not achieving these objectives.

Promotions to ResellersIssues with Promotions to Reseller

Many trade buyers respond to promotions by purchasing normal inventory. In some cases, buyers buy in large volume during deals to avoid buying at normal prices Trade buyers often accept the incentive but fail to perform the promotional requirement Some retailers make purchase beyond their own requirements during price deals and then resell the discounted merchandise to other retailers at profit

Factors to be considered in developing sales promotion BudgetSales Promotion Objectives Product Profitability structure

Estimation of Market Response

Sales Promotion costs

Sales Promotion Budget

Sales Promotion Budgets Determining Costs: Most promotions will incur direct fixed costs and variable costs:

- Among direct fixed costs are the costs of physically distributing

samples, mailing coupons, and placing advertisements carrying coupons, inquiry slips, and premium offers - Contribution margins may be reduced, because the value of coupons, or cents-off specials is a price reduction - When coupons are used, retailers must be remunerated for each coupon redeemed, this represent an increase in the variable contribution margin Estimates of sales response is necessary to determine the actual

reduction in contribution margins. Why? - Contribution margins are reduced for those items actually purchased at promotional price

Sales Promotion Budgets 1. 2. 1. 2. 3. 4. 5. 6.

Estimating Market Response: Estimating market response for sales promotion are important for two reasons: Some costs cannot be estimated without estimates of sales response Sales promotion objectives have a direct link to sales volume Product trial, repurchase, increasing the rate of purchase, and traffic building objectives are specifically sales oriented Promotional support and inquiries can be expected to result in increased sales with a small time lag The ability to predict response will enable not only assess profitability but also the degree to which the program objective will be achieved There are six type of market response: Redemption Rates Displacement rates Acquisition rates Stock-up rates Conversion rates Product line effects

Relationship among types of market responses to sales promotions Number of coupons distributed or number of potential buyers made aware of promotion Redemption RateNumber of redeeming coupons /or responding to promotion

Product-Line Effects

Acquisition Rate

Purchases by regular buyers ( normal volume for period) Displacement Rate

Purchases by regular buyers borrowed from future sales Stock-up Rate

Purchase by nonregular buyersConversion Rate Post promotion purchase by new customers

Add drag-along sales (complements) Subtract cannibalized sales (substitutes)

1. Redemption Rates Total number or percentage of buyers responding to the

incentive The percentage of coupons that will be redeemed is a function of how they are distributed Redemption will be higher when: The product or brand is well established so that the value of the incentive is well understood The product is widely distributed or easy to obtain so that coupon redemption is easy or there is less effort required to acquire the incentive The product form is used by large number of households The frequency of purchase of product form is high The value of incentive is high

2. Displacement Rates Sales that would have been made to regular customers

at normal price Studies show that 75% of coupons are redeemed who already use the couponed brand Must determine the amount of lost contribution margins that result fro selling to regular buyers at discounted rates Regular buyers of the brand will more likely to take advantage of coupons or cents-off- specials than will non-regular buyers The redemption rate will be a percentage that is somewhat higher than the products market share The displacement rate will depend on the method of coupon distribution or the method by which potential buyers are made aware of a promotion

3. Acquisition Rates Non regular buyers who purchase the specific brand or product because of the incentive The percentage of redeemers who are not regular buyers will normally be greater when: Average purchase quantity is high Perceived risk and prices are generally low for product form The incentive is directed toward demographic groups or geographic areas in which the

product or firms market share is relatively low Direct mail is used to distribute coupons or other information about a promotion

4. Stock-up Rates If an incentive is sufficiently large, some of the sales

made during a promotion period will reflect a borrowed sales from future sales periods This effect may be desirable when sales promotion objective is to build buyers inventories, but it will result in some reduction in sales in post-promotion period Borrowed sales may be made at a lower contributionmargin

5-Conversion Rates When marketing strategy is to build market share,

the primary objective of sales promotion is to build product trial in order to convert non-regular buyers into regular buyers

Assessing Profitability of a sales promotion Estimated Displaced and Stock up sales Equals Reduction in Contribution Plus

Times

Amount of Price Reduction

Estimated sales to new buyers

Times

Normal unit contribution less price reduction

Equals

Short run increase in contribution

less Direct cost of promotion Equals Net Profit effect of promotion

Linkster: Example Linkster produces a line of golf apparel and accessories In order to expand sales of its specially designed

golf sweaters ( currently selling 40,000 per year) The company is taking out a full page advertisement in golf digest( circulation 1.4 million) The total cost including art work of the ad is $ 96,000 Part of the advertisement contains a $ 20 coupon on any Linkster sweater The normal unit contribution on sweater is $ 37

Linkster: Example Linkster will reimburse its dealers for $ 20 coupon plus 25 cents

for the expense of handling redemption Linksters contribution margin on coupon sales will be $ 37.00 - $ 20.00 - $ 0.25 = $ 16.75 Linkster marketing manager anticipates 0.5 to 1.0 percent of the coupon will be redeemed and 15 -20 percent of the redemptions will be displaced sales The estimated sales resulting from coupon promotion will be between 1.4 million x 0.05 = 7000 1.4 million x .01 = 14,000 while sale to new buyer generates $ 16.75 in incremental contribution Each displaced sales reduces Linkster contribution by $ 37.0 16.75 or $ 20.25 Subtracting the direct cost of $ 96,000 and lost sales on displaced sales from incremental revenues from new buyers yield expected net impact in total contribution

Estimating the likely profit consequences of Linksters Promotion

0.5 % redemption15% 20% redemption redemption Total redeemed 7,000 7,000

1% Redemption15% redemption 14,000 20% redemption 14,000

New BuyersDisplaced Sales

5,9501,050

5,6001400 $ 93,800

11,9002100 $199,325

11,2002800 $ 187,600

Increased $ 16.75 x Contribution on 5,950 = sales to new buyers $ 99,663 Minus lost contribution on displaced sales (at $20.25) Minus increase in direct cost Net impact on total contribution $ 21,263

$ 28,350

$ 42,525

$ 56,700

$ 96,000 ($ 17,600)

$ 96,000 ($30,000)

$ 96,000 $ 60,000

$ 96,000 $ 34,000

Direct Marketing An interactive system of marketing that uses a

variety of communication media to achieve specific, measurable responses Prominent direct marketing methods are: Direct mail, including catalogs Telephone marketing; direct response television. Direct response ads in newspapers and internet.

Direct Marketing Objectives and Alternative Programs

ObjectiveGenerate Leads or Trial

Alternative ProgramsDirect Response Solicitation Point-of- purchase coupons Referral Programs Inquiry Generation through direct Response Cross selling programs Upgrade programs Targeted Discounts Frequency programs Targeted Discounts

Expand Customer Relationship Retain Customers Reactivate Former Customers

Direct Marketing Programs

1. 2.

3.

This approach to marketing has become widely adopted and very diverse in application Reasons for growth: Expanded ownership of credit cards, which facilitates the completion of transaction Increased computing power available for storing and analyzing large customer databases Realization that there are great benefits from treating each customer as an individual

Consideration in Program Design 1.

2.

i. ii.

The effectiveness of direct marketing depend on: How effective it is in generating the desired response (that is in achieving the direct marketing objectives) How efficient it is as measured by cost and profit consequences The effectiveness of direct marketing program depends on two key issues: The Design of data Base The process of using the database to select target customers

Developing the Marketing Data Base

To be effective marketing database should enable managers to identify the best prospects for a given offer This means that managers should be able to: Identify past purchasing behavior Predict how individuals will respond to specific offers

Developing the Marketing Data Base

1.2.

3.

4.

There are number of guidelines that managers should follow in designing or modifying databases Should use separate databases for existing customers and for prospects because different databases will be needed for the two groups Both customer databases and prospect databases should contain all marketing initiatives that have been targeted to each household or business in the past The customer database should track purchase histories to show recency, frequency and monetary value of all purchases Firm should add profile information such as demographic, psychographic, lifestyle and financial information about the customers either by surveying the customers directly or by purchasing external databases

Profitability Issues 1. 2.

The profitability concepts are directly applicable in development of direct marketing budgets In applying this concept, it is important to understand The distinctive economies of direct marketing The opportunity for more efficient application of the marketing budget

The Distinctive Economies of Direct Marketing

1.

-

2.

The uniqueness of direct marketing lies in the philosophy of targeting communications and product delivery directly to individual customer The uniqueness of this are : The elimination of distributors No need to pay for their services The opportunity for more efficient application of the marketing budget

Example: Linkster

Linkster has been selling its line through retail golf shops Uses a sales force to call on these firms and contacting the customers through magazine advertisement Alternatively Linkster could use direct marketing by soliciting sweater orders by mail from purchased list of subscribers to golf magazines and shipping orders directly to customers The economies of this approach differ in two respects

Example: Linkster1. 2.

Elimination of retailers allows Linkster to receive full retail price as opposed to the price paid by the retailer to Linkster Partially offsetting this gain is additional cost of fulfillment (processing each customers order and preparing it for shipment) While some direct marketing ( such as direct response ads on television or magazines) remains geared toward mass audiences, targeted telephone and direct mail marketing typically lead to reduced sales force and mass advertising costs Linkster can contrast the profitability of direct and indirect marketing by estimating the number of direct mail solicitation required to generate 40,000 units of sales volume currently generated through indirect channels If Linkster expects a 2 percent response rate the firm needs to solicit 2 million Prospects ( 2,000,000 x .02 = 40,000)

Profitability structure of Direct marketing versus indirect channels for Linkster Sweaters Indirect ChannelManufacturers Selling Price Less Variable cost / unit Cost of goods sold Sales commission Fulfillment Unit contribution margin Times unit sales $ variable contribution margin Less Fixed Cost Sales force Mass Advertising Design and Production Mail (@ $400 per 1,000) Total Contribution $ 60.0 - 20.0 - 3.0 - 0.0 $ 37.0 40,000 $ 1,480,000 - 360,000 - 200,000 - 640,000 0 $ 280,000

Direct Marketing$ 90.0 - 20.0 - 0.0 - 4.0 $ 66.0 40,000 $ 2,640,000 - 0. - 0. - 640,000 - 800,000 $ 1,200,000

Linkster Example Even with large direct mail cost, Linkster profitability

will increase dramatically through the elimination of advertising and selling costs and higher variable contribution per unit due to elimination of retailers As Linkster develops a customer database that allows management to identify frequent or high value customers, its efficiency will increase even more If Linkster can increase the response rate to 5% the number of solicitation required to generate sales to 40,000 customers would then be 40,000/ 0.05 = 800,000 Total cost of solicitation will be: 800,000/ 1000 x 400 = 320,000 This represent a fixed cost reduction of $ 480,000 when compared to a mailing cost that solicit 2000,000 customers

Life time Value Of Customer When primary objective of a direct marketing is acquisition of new customers or customer

reactivation Managers should attempt to estimate the lifetime value of each customer. Lifetime value of the customer is what the acquisition is worth taking into account future purchase as well as initial purchase Understanding lifetime value of the customer allows firms to determine how much can be spent to acquire new customers or reactivate old ones

Life time Value Of Customer The process of estimating lifetime value of customer is very similar to estimate the benefits of repeat purchase that result from programs designed to improve customer satisfaction The major difference is that here ( lifetime value) estimates are for potential value of future rather than existing customers To determine lifetime value, a firm normally analyzes the customer data base to examine average repeat purchase rate and the average dollar purchase Also the firm need to know average variable contribution on all products

Example: Linkster Linkster is considering a $20 coupon offer to prospective customers Based on companys historical data, 38 percent of new customers

never repurchase a product from Linkster, but small percentage repeat several times Weighting the number of repeat purchase by percent of buyers displaying each purchasing pattern allow Linkster to calculate 1.55 repeats can be from the average new customer Combining this with the information on the average dollar amount of sale and the average variable contribution margin allows the firm to forecast lifetime value Linkster can then estimate how much it can afford to spend to acquire new customer Linkster plans spending $800,000 to attract 40,000 customer - $ 20 per customer Adding the proposed $20 incentive a total acquisition cost per customer of $ 40. This is well below the life time value of $ 117.00

Life time Value Of New Linkster CustomerNumber of Repeat Purchase 0 1 2 3 4 5 X Percent of Linkster = Customers .38 .21 .15 .08 . 06 .02 1.00 Weighted Average 0 .21 .30 . 32 . 30 . 12 1.55

Average number of repeats 1.55 Time average dollar value x $ 120 Time average Variable contribution margin x .60 Total Variable Contribution Margin $111. 60 Plus variable contribution margin on initial sale 66.00 Life Time Value $ 177.60