All of us occasionally delay a purchase until the wanted item “goes on sale. ” Sometimes we make an unplanned purchase because of a coupon. Perhaps our loyalty to some brands we use now began with a free sample. If any of these are true for you, then you took advantage of an extra incentive to buy broadly known as “sales promotion. ” 1. Sales promotion definition and classifications.More formally, we define sales promotion as any of a variety of techniques designed to offer purchasers an extra inducement to buy in the form of value or benefits beyond those offered by the product being purchased. The examples in the previous paragraph represent a branch of sales promotion directed at consumers. Not surprisingly, this part of sales promotion is referred to as “consumer-oriented sales promotion. ” However, extra inducements to buy may be offered at any point of exchange anywhere in a channel of distribution.Exhibit 1 describes these distinctions and shows the names we will use to classify the various sales promotion techniques. In these notes, we will discuss consumer-oriented sales promotion, which itself may be further categorized in terms of who actually makes the promotional offer to consumers. The names under which these promotions get classified can be confusing, so I encourage you to look carefully at Exhibit 1. In these notes I largely adopt the names most commonly used among promotion professionals, which are sometimes not particularly descriptive.For example, promotional offers made by retailers to consumers are called retail promotions, which seem clear enough. But promotional offers made by manufacturers to consumers are not called manufacturer promotions; they’re called consumer promotions – not to be confused with the broader category of promotion I refer to as “consumer-oriented sales promotion. ” Again, look carefully at Exhibit 1. Making these sometimes confusing distinctions is more than busywork, however; identification of the source of the promotion also typically identifies who pays for the promotion.While most consumers care little about who funds promotional offers, promotion managers care deeply about such matters. Promotion managers keep a keen eye on what offers competitors make and who pays for them. Moreover, to assure that they receive access to all promotional offers possible, promotion managers want to know what manufacturers and retailers in their channels are offering to other firms. We will Consumer-Oriented Sales Promotion – page 2 address these issues more fully later in these notes and in the Web Notes on businessoriented sales promotion.Retail Promotions inducements offered by retailers to consumers ConsumerOriented Sales Promotion includes price discounts, retail coupons, double coupons, features, special displays, etc. Consumer Promotions inducements offered by manufacturers to consumers includes manufacturer’s coupons, rebates, premiums, bonus packs, samples, etc. Trade Promotions inducements offered by manufacturers to wholesalers and retailers, or by includes off-invoice discounts, merchandise allowances, promotional allowances, etc.BusinessOriented Sales Promotion Industrial Promotions inducements offered by and to raw materials suppliers component parts manufacturers , and final producers or manufacturers includes off-invoice discounts, merchandise allowances, etc. Business Promotions inducements offered by business product suppliers to any other business or organization includes off-invoice discounts, merchandise allowances, etc. Exhibit 1. Trade and Consumer Promotion in a Distribution Channel 2. Growth of sales promotion.In the past twenty years, all categories of sales promotions have experienced tremendous growth as marketers offering more value to customers has become an increasingly necessary part of overall marketing programs. In fact, as a percentage of total marketing expenditures, sales promotions frequently receive larger combined budget allocations than standard media advertising, according to Promo Magazine’s annual survey of marketing managers. In 1997, business-oriented salesConsumer-Oriented Sales Promotion – page 3 promotion received almost half of the total marketing budget, while consumer-oriented sales promotions and advertising evenly split the remaining half. By 2002, the allocations shifted back to media advertising, which received 37% of promotional dollars, with business-oriented sales promotions and consumer-oriented promotions receiving 27% and 30%, respectively. The point to this discussion is to correct any misperceptions that promotional budgets tilt heavily in favor of media advertising. In truth, they do not.Sales promotions of all kind play a large and sometimes even dominant role in marketers’ efforts to get products into the hands of consumers. Several reasons account for the importance of sales promotion. First, as discussed in earlier notes, the growth of retailer power in distribution channels has led to an increase in consumer promotions. Sometimes, manufacturers make special offers to consumers because a powerful retailer insisted that they do so. Other times, manufacturers make special offers to consumers as a way of counteracting retailer power by strengthening the bonds of loyalty consumers may feel toward the brand.Either way, retailers frequently serve as the driving force behind consumer promotions. Second, the nature of competition has changed remarkably over recent years resulting in ever greater consumer price sensitivity. The proliferation of brands and brand extensions, highly segmented consumer markets, and lower brand loyalty have combined to make consumers much more aware of price given that many product categories are populated by several competitors. Third, price deals have become the rule rather than the exception for many products.Rebates on certain brands of automobiles, department store sales, and coupons on many grocery items are only a few areas where consumers have grown to expect price breaks. Indeed, the expectation has become so strong that, when possible, many consumers will wait for promotional offers rather than buy with no deal. Fourth, advertising clutter has forced marketers to find new ways of getting consumer attention. Product benefits alone frequently prove insufficient to prompt consumer action much less get their attention.Thus, marketers increasingly look to sales promotion to find ways of breaking through to customers who face a constant bombardment of promotional messages. Finally, consumer promotion’s growth can also be attributed to increased pressure on marketing management for short-term results. Publicly traded companies find themselves especially prone to this orientation. Many investors look to immediate bottom-line results rather than the long-term health or stability of the companies in which they invest.Responding to this pressure, marketing managers seek quick fixes for sagging bottom lines. Sales promotions are often seen as ways to boost near term sales. However, as their use becomes more common, their costs become regular and recurring and therefore potentially self-defeating. Consumer-Oriented Sales Promotion – page 4 TransactionBuilding Sales Promotion Immediate Purchase Incentive brand equity deterioration Product Sales BrandBuilding Sales Promotion Brand Equity Enhancement Exhibit 2. Relationship Between Transaction and Brand Building Promotions B.Time goals of consumer-oriented sales promotion: brand building versus transaction building As just noted, in retail channels consumer-oriented sales promotions often become tools for short-term fixes to sales. Circumstances frequently legitimately call for boosts to sales, and consumer-oriented sales promotions can be ideal for that purpose. When overused, however, they can actually hinder a brand’s ability to build equity among target markets. Excessive use of some consumer-oriented sales promotion techniques can, for example, erode consumer confidence in brand quality.If the brand must constantly be promoted, consumers may reason that brand quality may be poor. Or consumers may delay purchasing a brand if they believe that a reduced price or other purchase incentive will soon be forthcoming – a reasonable assumption of a brand is overpromoted. However, many marketers are now examining how consumer oriented sales promotion can be effectively used for long term goals. Although not traditionally used for building brand equity, marketers for many successful brands believe that consumer-oriented sales promotions can do just that. As such, the nature of ales promotion is changing to include careful long-term use with the goal of communicating value to brand loyal customers. Thus, we may view sales promotion as having two sets of time goals. One revolves seeks short-term increases in the number of transactions while the other builds long term brand loyal relationships with customers, often at the expense of short term sales. This distinction is illustrated in Exhibit 2. As noted in earlier Web Notes, the “ultimate goal” of all promotional activities is to build sales in some way, which cannot happen without transactions.As Exhibit 2 shows, the paths toward sales differ depending on whether the sales promotion is intended to be transaction building or brand building. Consumer-Oriented Sales Promotion – page 5 1. Transaction building sales promotion. No set of individual sales promotion tools are designed exclusively to short term build transactions, though as we’ll see later, some clearly work better than others toward this goal. I apply the term “transaction-building sales promotion” to promotions designed to create short term temporary increases in product sales. . reasons for transaction building sales promotions. As noted above, although I caution against the overuse of transaction building sales promotions, circumstances frequently call for them. For example, short term sales increases may be desired in response to a competitive situation requiring immediate action. Competitors may launch promotion activities aimed at one’s own customers, in which case they must be defended. I’ve even seen sales promotion used to disrupt a competitor’s field marketing research activities.Transaction building sales promotion can also be used to adjust inventories. The need for inventory adjustments can arise for many reasons. Retailers may adjust product mixes in which case some products may be sold off to make way for others. On occasion, manufacturers overproduce and require sales promotion to encourage consumers to buy more than necessary for immediate needs and store the excess for later use (i. e. , “stock up”). Seasonal merchandise must regularly be adjusted several times per year. b. how transaction building sales promotions works.Transaction building sales promotion works to spur short-term sales through two basic mechanisms. First, they attempt to accelerate consumer decision processes. This can occur by speeding consumers’ decisions of whether to buy, when to buy and what to buy. Consumers not actively in the market for a product may notice a sales promotion offer and decide to make the purchase on the basis of the offer. Consumers on the fringe of a market, considering a purchase at some later date may decide to make the purchase now given the extra inducement.Consumers actively in the market for a product may stop their evaluation of purchase alternatives when presented with the extra inducement to buy and settle immediately on the product making the offer. Second, transaction building consumer promotions attempt to increase the relative position of price as an evaluative criterion. As consumers search and evaluate alternatives for purchase, they create criteria against which to judge the suitability of each alternative. By increasing the value of the offer to consumers, promotions help move price up their list of their evaluative criteria. . characteristics of transaction building sales promotions. As noted earlier, no single set of consumer promotion tools exists as purely transaction building, however, when used to build short term sales, consumer-oriented sales promotion tools share certain characteristics. For one thing, they tend to be price oriented. As we shall see in later sections, many consumer promotions offer consumers nonprice inducements. However for faster short term results, nothing works quite as well as price. Also, transaction building promotions require minimal consumer effort to participate.Many promotions require fairly extensive consumer involvement to obtain the inducement. Not so with Consumer-Oriented Sales Promotion – page 6 transaction building promotions. Finally, transaction building promotions run for relatively limited periods of time. Doing otherwise would defeat their purpose. 2. Brand building sales promotion. a. nature of brand building sales promotions. Over the past few decades, promotion management witnessed a gradual shift in the focus of some consumer-oriented sales promotion activities to include long term brand building.Since marketers grew to better understand that the true value of brands stems from the emotional connections many consumers make with their favorite brands, they directed more energy designing promotional activities directed toward that end. Building brand equity became and remains the key to lasting relationships between brand and consumer. Let me make clear that in the world of trade promotion, brand building still takes a back seat to transaction building, which still receives the lion’s share of funding.Nonetheless, as promotional budgets and long term strategic plans allow, promotion managers more frequently call for sales promotion activities that help strengthen the bonds between brand and consumer because they better understand how this stabilizes and enhances long term sales growth. As such, promotion managers began devising promotional inducements intended not only to gain new customers but more importantly to reward and retain existing ones. These promotional activities work to build brand loyalty, and therefore brand value. Hence, I refer to them as “brand building sales promotions. b. characteristics of brand building sales promotions. As with transaction building sales promotion, no set of uniquely brand building sales promotion techniques exist. However, brand building sales promotions possess several characteristics that help distinguish them from transaction building sales promotions. First, brand building sales promotions frequently offer accumulating promotional rewards to customers. In other words, the value of the promotional offer depends on the amount of product purchased during a given period of time.A common example of these types of rewards is airline frequent flyer miles; travelers’ bonus miles accumulate as they purchase more tickets. Similarly, many of us may have in our wallets or purses “frequent shopper cards” of one kind or another. A typical card may be hole-punched or marked each time we purchase from that particular store. When the card has been punched or marked a certain number of times, we receive free or discounted merchandise. For promotions of these kinds to work, of course, they must be valid for an extended period of time, a second characteristic of brand-building promotions.Like Rome, brand loyalty cannot be built in a day – or even a week or month. Programs such as frequent flyer offers remain valid for years. Doing less would defeat the purpose of brand building. Third, brand building promotions are less frequently price oriented than transaction building promotions. Because the purpose of such promotions is to develop the attachment between consumers and brands, rewarding loyalty with additional amounts of the brands consumers love only makes sense. Such promotions clearly indicate the longConsumer-Oriented Sales Promotion – page 7 term orientation of brand building. If encouraging short term sales were the promotional goal, then giving away free product, which could delay future consumer purchases, makes little sense. Other nonprice brand building promotions involve free merchandise or services of the type that reinforces the image of the promoted brand. For example, a jewelry store may offer customers a free day at a luxury spa. The idea is to reinforce the jewelry brand’s image of self-indulgence and leisure.It’s unlikely that such an offer would spur short term jewelry sales; however, it might strengthen the jewelry stores image among their target market sufficiently to draw customers back for later purchases. II. A. Tools of Consumer-Oriented Sales Promotion Consumer Promotion As noted in Exhibit 1, consumer promotion refers to promotional activities originating with manufacturers and directed toward consumers. Manufacturers have developed a wide variety of consumer promotion tools for both transaction building and brand building objectives.The range of options available for offering consumers extra inducements to purchase extends as far as the imagination. The increasing availability of computer technology, the emergence of new media, and the growth of Internet usage particularly among affluent consumers suggests that new forms of consumer promotion will emerge and over time become marketing mainstays. Indeed, only a few years ago, Chrysler pioneered the use of cash rebates; now rebates stand as a regularly employed tool in many product categories.We can expect that determined manufacturers will develop new and innovative ideas to add to the current kit of sales promotion tools, some of which are discussed below. 1. Couponing. a. trends in couponing. Coupons produced by manufacturers for use by consumers are called manufacturers’ coupons and they remain very much a part of the consumer promotion landscape. In fact, so much so that in 2002 coupon distribution rose 4. 5% to an all time high of 336 billion. To put this figure in perspective, that’s almost 1,200 coupons for every person living in the United States! Likewise, marketer expenditures on coupons rose to around 6. billion dollars in 2002. Of that total, actual discounts to consumers amounted to about 3. 5 billion dollars, with the remaining 3. 3 billion being spent to print, distribute and process the coupons. As you might expect, about 75% of all coupons were for grocery products. Part of couponing’s recent growth is fueled by large consumer products firms such as Procter and Gamble, which eight separate times in 2003 created its own newspaper inserts to distribute coupons in major metropolitan areas. This represents a major turnaround from P&G’s decision in 1996 to eliminate coupons altogether and switch to an EDLP (everyday low pricing) strategy.Other large consumer products firms such as Consumer-Oriented Sales Promotion – page 8 Heinz, Nestle, and ConAgra also used newspaper inserts multiple times during the year to distribute millions of coupons on their popular brands. b. strategy issues for couponing. By their very nature, coupons tend to be used most for transaction building rather than brand building. This is in part due to the fact that price sensitive consumers use coupons most. Using most types of coupons generally requires some planning by consumers. Coupons must be located, often clipped, stored, carried and redeemed on a specific product of a specific size.For the most part, the only people willing to go to such measures are those for whom price ranks high as an evaluative criteria. These consumers would likely put off making a purchase unless a price break was available. These people make ideal targets of transaction building promotions; they provide the extra boost in sales that is the goal of these promotions. One potential problem with this strategy arises when significant numbers of regular brand loyal users redeem the coupons. In fact, brand loyalty tends to be the single best predictor of coupon use by American consumers.As such, their use as a transaction building tool is something of a double-edged sword. In cases where coupons are largely redeemed by brand loyal consumers, coupons will not provide the intended short term boost in sales, but can actually reduce dollar sales. In response, marketers frequently make coupons a bit more difficult to use by distributing them through media where the coupon must be clipped and by shortening the period in which the coupon is valid. Marketers must take care to control the cost of coupon use, even if they are confident in low redemption rates.The costs of coupon use extend well beyond their face value. Tellis (1998) develops a simple mathematic relationship that can assist promotion managers in calculating or estimating the overall cost of a coupon distribution. According to Tellis, a coupon promotion will be profitable for a firm if: bm ? r (p+d) + f where: b = the incremental change in unit sales after the coupons gave been distributed r = the total number of coupons redeemed m = the firm’s margin per unit sold d = the face value of the coupon p = the processing costs for each coupon f = the distribution costs for the couponsAccording to this calculation, the profit from the coupon offer (the product of the incremental increase in unit sales from the coupon and the firm’s profit margun oer unit sold) must equal or exceed the costs associated with the coupon promotion, which includes the face value of each coupon redeemed, the processing charge of each coupon redeemed, and the total costs of distributing all coupons. Marketers frequently use coupons as much as part of an advertising strategy as a promotion strategy. As we will see shortly, coupon redemption rates are quite low in the Consumer-Oriented Sales Promotion – page 9 United States.As such, marketers use coupon offers as a means of drawing attention to an advertisement carrying a coupon knowing full well that very few will be redeemed. This approach also gives marketers the ability to emphasize the great deal they’re offering while not being forced to provide that deal to everyone in the market for the product. The main point to the mathematical relationship is to emphasize that the costs of the coupon promotion are not limited to the redemption value of the coupon itself. Processing and distribution can add per coupon costs that can easily exceed the coupon’s face value.Promotion managers must weight these costs when evaluating the merits of a coupon promotion. Because consumers receive the vast majority of coupons through regular print media advertising, a coupon’s appearance in an advertisement acts almost like advertising copy. The coupon may enhance a message of value being delivered by the advertisement, for example. Thus, even of the consumer has no real intention of redeeming the coupon, he or she may still mentally process the coupon’s appearance in the advertisement and form an impression of the product based on that information. c. coupon distribution and redemption.As noted above, coupon redemption by American consumers remains quite low. In fact, of the 336 billion coupons distributed in 2002, consumers redeemed only about 3. 7 billion – an overall redemption rate of just over one percent. Analysis of coupon redemption by method of distribution shows a predictable pattern. The coupons that garner the highest redemption rates tend to be distributed through media that make them easy to use. Daily newspaper Sunday newspaper supplement or insert magazine (both on-page and pop-out) direct mail electronically dispensed in-pack on-pack instant 0. % 1. 0% 0. 9% 3. 5% 8. 5% 5. 0% 35. 0% Media in which coupons must be located by thumbing through pages of advertising, then clipping the coupon offer the lowest redemption rates. Other media such as direct mail, in-package coupons or electronically dispensed coupons feature somewhat higher redemption rates, though still quite low overall. Even the most convenient of coupons boast redemption rates of only 35%. On-pack instant coupons appear attached to labels. Consumers need only remove them at the check stand and redeem them on the spot.Even this ease of use leaves 65% of these coupons unredeemed! Indeed, if store personnel do not initiate redemption by removing the coupon for the consumer, chances become quite good the consumer will not notice or will simply ignore the on-pack instant coupon. Consumer-Oriented Sales Promotion – page 10 2. Sampling a. sampling in promotion strategy. As the old saying goes, experience is the best teacher. Certainly this is true in marketing. Simply describing product benefits through media advertising cannot provide the depth of understanding that actually trying a product brings to consumers.Thus, sampling plays an important role in promotion, particularly when trying to bring new customers to a brand. Promotion managers use sampling both for brand building and for transaction building. In either case, however, the presumption of sampling is that the consumers being targeted have never tried the product before, or considerable time has elapsed since they last used it. To build quick transactions, in-store food sampling can prove quite effective. Food manufacturers frequently set up small sampling stations in grocery stores to offer shoppers small bites of a featured product.Such tactics often convince shoppers, particularly impulse shoppers, to purchase a package. The temporal and spatial proximity of the sample to the product itself is the main reason why in-store food sampling proves so effective for transaction building. Shoppers are in the store inches away from the product itself. Other types of sampling are better suited to brand building. For example, placing samples on or in packages of complementary products often builds loyalty among brand loyal users of the product on which the sample was attached.Placing a sample of frosting inside a box of cake mix may eventually lead to repeat sales of the frosting among brand loyal users of the cake mix. No matter the purpose, sampling remains by far the best promotional method to induce trial. Studies estimate that 75% of households who receive a sample eventually use the sample. b. effective sampling procedure. Effective sampling isn’t possible for all products. How does a consumer sample furniture, for example? So one important key to effective sampling is using it with a product well-suited for it.Marketers use sampling most heavily in product categories such as food, personal care items, over the counter medicines, and cosmetics. These products share several characteristics that make them well-suited for sampling. First, products making good candidates for sampling have a relatively low per unit value. Overall, sampling is expensive. Providing free samples of a product that even in small quantities costs a lot adds considerably to the expense and may render the product a poor candidate for a sampling promotion. Of course, this caveat rests in part on the marketer’s confidence in the samples to produce paying customers.Second, sampled products must be of a nature that permits the benefits to be realized even when used in very small quantities. This means that the product can be divided into Consumer-Oriented Sales Promotion – page 11 small portions for distribution to consumers and that each portion is capable of producing benefits salient enough to the consumer to prompt later purchase. Finally, products with relatively short purchase cycles make better candidates for sampling promotions. Ideally, consumers will not delay for long purchasing a product selected on the basis of sampling.No matter how well a sampled product performs, if the consumer rarely purchases it or purchases it at long intervals, chances are good tthat he or she will forget about the promotion and sampled brand by the time the next purchase occasion arises. c. sampling methods. Sampling methods differ by means of sample delivery. Commonly used methods include are door-to-door sampling, mail sampling, and in-store sampling. Additionally marketers often attach samples to the packages of other products, or arrange to distribute samples at events where large crowds are present.Many college students receive bags full of sample sized packages of personal care items as they prepare to move into university housing. Some companies offer samples via the Internet; customers may request samples online and have them delivered to their homes or offices. As with promotion in general, the imagination presents the only limitation to sampling delivery methods. 3. Premiums a. types of premiums. Many firms reward consumer purchases with (usually small) gifts. The age old classic example, of course, is the free toy found inside each box of Cracker Jack.Marketers now make extensive use of premiums in a variety of widely differing arrangements designed both for brand building and transaction building. Virtually all premium promotions fall into one of three categories. The first are “inpack” (or “with purchase”) premiums. As the name implies, consumers receive these premiums either attached to the purchased product or available in the store. These premiums provide “instant gratification” to consumers in the form if an immediate reward for buying the brand.Second, consumers claim “mail in” premiums by submitting proofs of purchase, often from several purchases of the brand. With mail in premiums, consumers need not mail additional payment; the premium is free. Manufacturers then mail the premium to consumers. Finally, premiums may be classified as “self-liquidating. “ Consumers actually purchase self-liquidating premiums from the manufacturer by mail. The name self-liquidating implies that the premium is sold at or below the manufacturer’s cost. In essence, the stocks of premiums are turned to cash, or liquidated, by the consumers who buy them. . premiums and promotion strategy. Premiums can work well either as brand builders or transaction builders. When used as transaction builders, the premium may simply serve as an incentive to buy the brand a sufficient number of times to obtain the premium. Consumer-Oriented Sales Promotion – page 12 For example, suppose a manufacturer offered a free t-shirt to consumers who mailed in a proof of purchase of the manufacturer’s brand. Such premiums might entice some consumers to buy the product once in order to get the shirt, after which time they would return to their preferred brand.Likewise, children may influence their parents to purchase a particular brand of cereal based on the free toy offered inside. Indeed, children frequently select products based more on the premiums than the product itself. Larger more expensive premiums tend to promote brand building. One way to accomplish this is to require multiple purchases to obtain the premium. For consumers new to the brand but interested in the premium, requiring multiple purchases provides the product with several opportunities to prove itself and win the consumer’s loyalty.For regular purchasers of the product, the premium serves as a “thank you” to loyal customers who would have bought the brand anyway. Another way that premiums build brands is to remind consumers of the promoted brand. Marketers frequently emblazon premiums with the brand logo in order to remind consumers where the premium originated. Even without the logo printed on the premium, carefully selected premiums may remind consumers of the brand awarding the premium. For example, Cascade dishwashing soap recently offered fine china as a selfliquidating premium to consumers who provided a certain number of proofs of purchase.The fine china and dishwashing liquid relate closely together, while the china itself is a significant enough premium that consumers not only appreciate the opportunity to purchase it at a substantial discount but remember how they obtained it. 4. Other common consumer promotions a. bonus packs. Bonus packs are simply packages containing an extra amount of the product but sold at the price of a regular sized package. Bonus packs are most typically associated with transaction building, but may serve brand building purposes as well. For both strategies, bonus packs have their pros and cons.For transaction building, consumers new to the brand may appreciate the extra value a bonus pack provides. However, for some product categories, consumers unfamiliar with a brand may hesitate from purchasing a bonus pack because the extra quantity represents a slightly larger purchase commitment to an untried brand. For brand building, consumers loyal to a particular brand may view the bonus pack like a small premium – a thank you for being good customers. However, the effects of bonus packs on the value of a brand among brand loyal consumers is not known.Promotion managers could logically assume that bonus packs may slow sales among brand loyal consumers. b. price off packs. Some manufacturers offer price reductions by printing the discount right on the package. Because it is a price based promotion, it may have a larger impact on transaction building than on brand building, though brand loyal customers will certainly appreciate the savings. Consumer-Oriented Sales Promotion – page 13 Price off packs hold strong appeal for marketers because of their simplicity.They require no coupon distribution, no rebate offers, and even no advertising because the offer itself is obvious and printed prominently on the package itself. The only major administrative tasks for price off packs are arrangements with retailers to honor the lower price and to reimburse retailers the difference between the discounted price and the retailer’s regular price. c. sweepstakes and contests. Sweepstakes and contests are not synonymous. Sweepstakes winners are determined strictly by random drawing while contests require participants to perform some task or display some talent in order to win.Legal restrictions governing sweepstakes have left them somewhat out of favor with promotion managers. Because sweepstakes winners are determined by chance, they cannot be limited to those who purchase the product. Otherwise the sweepstakes would actually be a lottery in which the product purchase amounted to buying a ticket. Lotteries not sanctioned by a government agency are illegal in most states. Marketers promoting by means of sweepstakes must provide an easy mechanism for nonpurchasers to enter and must note that no purchase is necessary to enter in all material promoting the sweepstakes.Contests determine winners by their display of some talent or participation in some competition. As such, participation can be limited to those who purchase the product. However, unlike sweepstakes which are simple to administer, contests frequently require judging as well as the development of rules and criteria for winning. Often unforeseen circumstances arise that cast controversy on the contest and by extension, its sponsor. Promotion by either contest or sweepstakes generally attempts to build transactions by generating excitement about the brand.These activities serve to draw in new purchasers but have little effect on brand loyal purchasers. They may even participate in the contest or sweepstake, but their purchase patterns change little as a result. B. Retail Promotions 1. Price cuts. A retail store putting products “on sale” is an age old staple of retail promotions. Shopkeepers of old used the basic laws of price and demand to move stubborn inventory through their stores and into the hands of consumers by simply lowering the price. Modern retailers use the same technique, though their approach to the practice is much more scientific and calculated.Not only do retailers attempt to forecast demand of an item that’s put on sale, they attempt to predict how that price change will affect sales of complimentary and competing goods. Their goal is to vary the prices of sets of products so as to produce maximum profits for their entire inventory of goods. The mathematical models used for these types of calculations can be quite sophisticated and impressive. Consumer-Oriented Sales Promotion – page 14 We will glimpse briefly at how these mathematical models work later when we examine how to evaluate the success of sales promotions.For now, we focus on the mechanics of retail price cutting. a. presenting the reduced price. According to Tellis (1998), retailers rely on four basic approaches to presenting price cuts to consumers, which vary on the basis of the information retailers provide when giving the offer. First, they may provide the regular and discounted prices together and let the consumer calculate the actual discount. For example, the retailer may present the discount on a television by stating that the set “was $699, now $499! The advantage to this approach is that the regular price is provided, though the disadvantage is that consumers must calculate the discount themselves. Second, retailers may present the reduced price as the dollar difference between the regular and discounted prices. Similarly, third, retailers may present the discount as the percentage difference between the regular and discounted prices. When choosing between these two methods, research suggests that consumer response favors the method that suggests a larger numerical savings. This in turn may depend on how expensive the item is to begin with.For example, suppose a retailer reduces the price of an item from two dollars to one dollar. For this relatively inexpensive item, presenting the discount as “save fifty percent” or “save half” would be more effective than “save a dollar. ” On the other hand, suppose the price of an item regularly marked for one-thousand dollars was reduced to nine hundred dollars. It would probably be more effective to present the price reduction as “save one hundred dollars” rather than save “ten percent. ” Of course, these guidelines are just that: guidelines.Different people form different perceptions of the same price reductions. Fourth, retailers can frame price reductions in terms of how much more consumers can buy at the reduced amount relative to the regular amount. For example, price reductions can be presented as “buy three get one free,” “buy three for five dollars,” or “get three for the price of two. ” Research shows that, of the four basic presentation methods for price reductions, the fourth tends to elicit the strongest sales response acres a variety of consumer product categories. Two reasons may account for the effectiveness of this approach.One, t may be simply that consumers perceive this method as being suggestive of larger discounts. Two, and more importantly, consumers frequently believe that the discount does not apply unless they buy the total number stated in the offer. For example, if a price reduction is presented as “buy four for ten dollars, consumers may believe that they must purchase all four items to receive the discount when it may be the case that they could buy one for $2. 50. b. price discounts and the law. The Federal Trade Commission views all four of these methods as suitable ways of presenting price discounts as long as none deceive consumers.In other words, as long as the information is accurate and is honored by retailers, the F. T. C. does not consider any as inherently deceptive. Where retailers frequently run afoul of the law regards what constitutes the “regular” price from which the discount is calculated. For the most part, retailers cannot calculate a Consumer-Oriented Sales Promotion – page 15 discount from a regular price when the product in question is rarely or never sold at that regular price. Discounts calculated from such unrealistic regular prices may be seen as deceptive.In response, retailers frequently base their discount calculations on “MSRPs” or “manufacturer’s suggested retail price. ” These prices, arbitrarily published by manufacturers, tend to be higher than average retail prices, which allows retailers to claim discounts well below MSRP. Another tactic retailers use to give the appearance of price reductions is to present the discount relative to some arbitrary “reference price,” which may bear no relationship to the item’s regular price. As long as retailers disclose how they calculate the reduced price, they tend not to come under the scrutiny of the F. T.C. or state regulatory agonies. 2. Retail coupons. Retailers frequently issue their own coupons to consumers, though they issue considerably less than consumer products manufacturers. Indeed, little is known about the general couponing habits of all but the largest national retailers. This is because retailers are more numerous and diverse than manufacturers. For example, retailers differ widely in terms of their size, ranging from small single outlet sole proprietorships to some of the world’s largest corporations. Likewise, retailers are dispersed throughout all of our country’s towns and cities.Such variation makes systematic study of their overall promotional strategies extremely difficult. That said, we do know anecdotally about some ways retail coupon promotion differs from couponing by manufacturers. First, retailers are more likely than manufacturers to cross promote merchandise. That is, retailers may offer a coupon discount for one item if consumers purchase another usually more popular item. Unlike manufacturers, who obviously can only offer coupons on their own brands, retailers are free to offer coupons on the multitude of brands that they carry.This typically permits retailers greater flexibility in creating coupon promotions. Second, retailers more frequently offer blanket discounts by coupons. In other words, a retailer may distribute a coupon offering “10% off any merchandise in the store. ” Clearly, manufacturers cannot make such blanket offers. Third, retailers are more likely than manufacturers to offer nonprice promotions by coupon. That is, relative to manufacturers, retailers more frequently use coupons to offer free merchandise or free services to their customers. Finally, retailers routinely modify the dollar amounts offered by manufacturers’ coupons.Indeed, retailers may do so with other retailer coupons. That is, a retailer may decide to double or even triple coupon face values. Indeed, the retailer can target the offer to coupons for certain goods or from certain manufacturers. These advantages may lead you to wonder why retailers do not coupon more often and manufacturers less often. The answer may relate to the retailer’s size. Small retailers, who really cannot afford to compete on price against larger retailers, do not wish to sensitize their customers to price, which regular couponing can do.Therefore, refrain from price promoting for all but the most important of occasions. Large retailers, on the other hand regularly compete on price, which affords them little incentive to offer coupons. These retailers operate on razor thin margins everyday. Managing coupon deals on a large scale becomes more costly and effortful than simply putting the item on Consumer-Oriented Sales Promotion – page 16 sale for some period of time. Therefore, as with smaller retailers, coupon promotions at the retail level are generally reserved for special occasions or unusual circumstances. . Retail displays. Promotion managers understand full well that drawing attention to a promotion is the first essential ingredient in its success. In retailing, where promotions rely so heavily on the store’s physical environment, retail displays provide a highly effective means of drawing consumer attention to a promotional offer. Although attracting attention remains the top and overriding purpose of retail displays, attention itself is needed for a variety of more specific purposes.Displays frequently give prominence to price cuts, highlight many consumer promotional offers such as premiums or bonus packs, introduce new products or services, and permit sampling or inspection of new products. Retailers can create their own retail displays or rely on manufacturers to provide them with retail display materials. Manufacturers are often eager to provide especially large retailers with display materials in their efforts to help retailers merchandise the manufacturers’ products. These professionally prepared retail displays frequently boast highly complex and elaborate designs with moving parts or interactive features.Retailers select the location for in-store retail displays depending on the importance of the retail promotion, the nature of the product being promoted, or the trade deals being received from the manufacturer. Clearly, some retail space is more desirable than others. As a general rule, the more people that walk past a space, the more desirable that space is for a retail display. a. front-of-store displays. Many retailers design into their stores large open areas near the store entrances to hold large retail displays.Because all customers entering the store pass by these displays, the front of the store is the most valued location for retail displays. Retailers offer this location to manufacturers willing to provide valuable trade deals or other merchandising assistance. b. endcap displays. Endcaps are simply end of aisle shelving. After the front of the store, endcaps are valued most as retail display space. Depending on store layout, most shelving aisles end into high traffic aisles or walkways that funnel consumers to particular store departments or to cash registers.Naturally, endcaps exist at both ends of a shelving aisle. As a general rule, endcap displays nearest the cash registers are more valued display space. c. in-aisle displays. Retail displays may also be placed in shelving aisles. Relative to the front of the store and endcaps, in-aisle displays are less desirable locations. This is because a given aisle will receive less traffic than other store locations. Moreover, because of in-aisle space limitations, these displays tend to be smaller and may draw less consumer attention.To boost the attention given to in-aisle displays, many use “shelf talkers,” which use a motion sensor to trigger a brief recorded message. Thus, as shoppers walk near the display, the shelf talker speaks to them, drawing their attention. Such devices should be used sparingly as they run the risk of annoying shoppers. Consumer-Oriented Sales Promotion – page 17 III. Evaluating the Success of Consumer Oriented Sales Promotion Tellis (1998) offers an insightful discussion of retail promotion profitability. My discussion here draws significantly from his. A.Decomposition of the Promotion “Sales Bump” Retail sales promotions produce a short term spike in sales during the promotional period. Although difficult to break down, or decompose, into its component parts, logic and some research points to various sources of the spike in sales. First is simply increased consumption of the promoted product. That is, some consumers will feel free to use a little more of a brand when they know that brand can be more inexpensively replaced. Of course, increased consumption would apply only to consumable products wit relatively short purchase cycles.More durable goods such as furniture would not experience this kind of incremental increase in sales due to simple increased consumption. Second, the sales bump includes brand switching. Brand switching, however, does not occur uniformly across all classes of brands. Brands in consumer product categories can be conveniently grouped into three classes. One class is national brands, which are produced by well-known manufacturers, distributed nationwide and often globally, and may be carried by several competing retailers.Another class consists of so-called store brands or private label brands. These brands are owned by a given retailer and distributed solely through that retailer. Retailers generally sell their brands at lower prices than national brands and consumers generally perceive them to be of a lower quality than national brands. Finally, brands may be generic, which are frequently unnamed, packaged very simply, sold at very low prices, and perceived by consumers to be of low quality relative to private label and especially national brands.When consumers brand switch because of a retail promotion, they tend to switch up in quality. That is, when national brands are promoted, consumers will switch from other national brands or from either private label or generic brands. When private labels are promoted, switchers come from users of generic brands or store switching users of other private label brands. Generics are rarely if ever promoted. Third, the sales bump also consists of sales to stockpiling consumers. Stockpiling simply refers to consumers who buy more of a promoted brand than they would have otherwise.Stockpiling occurs almost exclusively in price-related retail promotions. Consumer promotions such as couponing or premiums induce almost nothing in the way of stockpiling. Indeed, except under exceptional circumstances, consumers do little in the way of stockpiling even with price promoted products. For one thing, many consumers lack the space to stockpile promoted goods. For another, most retailers promote so frequently that consumers may feel they won’t miss a promotion on an acceptable brand if they forego extra quantities of a promoted brand.Consumer-Oriented Sales Promotion – page 18 Fourth, as mentioned above, the sales bump may reflect extra sales from consumers who switch stores. Store switching generally occurs only when the extra costs to the consumer associated with shopping at a new store do not exceed the benefit offered by the promotion. This suggests that for most low priced consumer products such as grocery products, consumers will do little store switching unless the alternative store is as convenient and easily accessible as the regular store. Thus, most store switching occurs for more expensive durable consumer goods.B Promotion Profitability Exhibit 3 shows a retail sales curve for a consumer-oriented sales promotion. For the promotion to be “profitable,” the increase in profits due to the promotion must exceed the profits that would have occurred had the promotional offer not been made. Bear in mind that we are not considering whether the promotion will make money at all. We are considering whether the promotion will make more money than not having the promotion. Brand Sales increased sales from promotion (“sales bump”) b regular anticipated sales t1 t2 t3 t4 t5 Time (t) Exhibit 3.The “Sales Bump” from Promoted Brands (adapted from Tellis 1998) Exhibit 3 shows the effect on brand sales of a promotion that lasts one time period, during all of period t2. The profitability of the promotion depends on whether the sales bump produces sufficient revenues to overcome the costs that produced the sales bump in the first place. The sales under time periods t1 and t3 through t5 represent the normal anticipated sales of the brand with no promotion. The sales at t2 represents the bump Consumer-Oriented Sales Promotion – page 19 caused by the promotion.The area above the regular sales line (b) represents the additional sales from the promotion. To figure whether the promotion would be a profitable investment, we must consider a few variables. First, we should account for the margin produced by the product at its regular unpromoted price. We will label this variable m. Next, we must include the reduction of product margin caused by the promotion. In the case of a simple price reduction, we reduce m by the amount of the price reduction. In the case of premiums or other nonprice promotions, we reduce m by the per-unit cost of offering the promotion.Both cases result in a reduction that we will label as d. The promotion will be profitable if: b (m-d) > t2 d The left hand side of the inequality represents the additional profits gained by the promotional offer. The increase in sales over normal levels during the promotional period (b) occur at a lower level of margin than regular sales; that is the regular margin less the discount or cost of the promotion (m-d). The product of these variables represents the additional profit earned by holding the promotion. The right hand side of the inequality represents the opportunity cost of holding the promotion.Had the promotional offer not been made, the firm would have achieved its normal level of sales (t2). During the promotional period, these customers who would have purchased at the regular price can take advantage of the promotion. Multiplying this figure by the discount (d) provides the lost profit of offering the promotion to people who would have bought without the offer. As the inequality demonstrates, unless the increase in profits from having the promotion exceed the lost opportunity of not incurring the costs of the promotion the promotional offer should not be made.