Various Sales Promotion Techniques Adopted by Companies - Research Paper Example

? Sales Promotion This report will try to throw some light on various sales promotion techniques adopted by companies. The study will try toanalyze sales promotion in terms of demographics and psychographics. The report will try to dissect sales promotion as a strategic tool used by companies to create brand equity. Objectives of sales promotion are discussed in the second half of the study. A hypothetical comparison between three different retail outlets has been drawn to analyze the application of sales promotion on creating brand equity. Finally the study will try to discuss various budgeting techniques applied for sales promotion in brief. A hypothetical budget and return on investment calculation is done in the final part of the study. Table of Contents Table of Contents 3 Sales Promotion 4 Theories of Sales Promotion 7 Sales Promotion Objectives 8 Creating Inquiries 8 Product Trial 8 Building Traffic 9 Rate of Purchase 9 Loyalty 9 Awareness 9 Tactical Reason 10 Comparative Analysis Product Profile and Sales Promotion Activity 11 Sales Promotion Budget 13 Return on Investment 14 References 16 Bibliography 17 Sales Promotion Sales promotional techniques like free gift item on each purchase, free movie ticket, holiday tour and free dining invitation are used to increase the brand awareness among customers. They use exchange offers (exchange the old TV set and get a new TV set at reduced price) to push the sales. Sales promotion can be done by using seasonal sales technique. The technique can be summarized in the following manner. Winter sale, autumn sale, summer sale and discount of 50% on particular product are few examples of seasonal sales technique. These are all incentive program offered by companies to boost up the sales. Incentive program may come in the form of gifts, free samples, demonstrations, discount coupons, trade shows, contests etc. Retailer uses all these techniques as a part of sales promotion to motivate customers to purchase more and in this way they can increase sales volume. This type of sales promotion is known as consumer promotion (Kenneth, 2007, p. 330). Many companies use personal selling and advertising as a promotional tool to increase the brand equity in the mind of consumer. Personal selling deals with face-to-face interaction with customer or target segment but advertising is use to communicate brand massage to large number customers. Advertising and Sales promotion are useful tools to increase sales of product. Advertising can be integrated with sales promotion to communicate incentive program on each purchase. Companies can use advertising to create awareness about sales promotional schemes and offers to target customers. Personal selling can also be used for the same purpose but sales promotion and personal selling is not the same thing. They differ in terms of objectivity and technique. Sales promotion uses short term and non cohesive model to increase the sales with various incentive schemes. Generally the incentive program is not valid throughout the whole season. Companies use sales promotion during end of seasons or during festive seasons. Sales promotion is more occasion dependent. The promotional technique differs from personal selling and advertising in terms of process and application techniques (Pauwels, Risso, Srinivasan and Hanssens, 2003). Sales promotion is a part of integrate marketing communication (IMC) strategy. Company uses sales promotion to increase the brand visibility among customers. Manufacturer companies use sales promotion for two reasons. 1- Increase product sales to retailers (trade promotion) and 2- increase product sales to customers (consumer promotion). Retailers also use sales promotion to increase the sales of a particular product. Sales promotions have an important role in the marketing programs adopted by retailers (Gedenk, Neslin and Ailawadi, n.d.). Sales promotion contributes a large percentage of advertising budgets for a company. Companies use at least seventy percent of total advertising budget on sales promotion. Below the line promotion can also be integrated with sales promotion to create product awareness among customers. Retailers use cross selling technique (selling other product with targeted product) to increase sales volume of particular product portfolio. They also use up selling (selling premium priced product to customers although the buyer intended to purchase low priced product) technique to increase sales revenue. Retailers use point of sale (POS) as advertising medium for below the line advertising. Many organizations prefer digital advertising (advertising using social media) with respect to traditional advertising technique (TV commercial and radio broadcasting). Digital marketing is a cost effective way to promote product due to low risk index (capital investment on the digital medium is much smaller with respect to television commercial). Thus, marketers give importance on sales promotion as an alternative of less effective classic media advertising. Retailers believe sales promotion can work most effectively on point of purchase. Point of Purchase Advertising Institute (POPAI) conducted market research on consumer purchase behavior in side German retail stores during 1999 to find out effect of sales promotion on people. They suggested that fifty five percent of purchase decision is directly affected by extent of sales promotion. It is clear from the study that more than half of the purchase decisions are made by customers at point of purchase. Surprising fact is that, many customers don’t even know about the difference between point of sale and point of purchase. Retailers may use various types of price promotions. Coupons, temporary price discount, multi-item discount and using combination of non price promotional tools like displays (point of sales design) are few examples of classic sales promotion. Sales promotion can create a direct impact on sales volume in terms of increasing unit sales and profit margin in the following manner. Brand switching, store switching, category or class switching; stockpiling and increased consumptions can be termed as result of successful sales promotion. Profitability of sales promotion is measured by cost benefit analysis (comparing promotional cost versus annual sales volume or implementing other suitable technique). Efficient consumer response (ECR) is used a functional tool to measure the penetration level of sales promotion (Soret, Pablos and Montes, 2008). CPFR or collaborative planning, forecasting and replenishment is emerged as technical process to understand market demand and sales promotion techniques can be derived by using CPFR. The whole process tries to create collaboration between different promotional activities in terms creating forecasting model for each promotional activity. Many researchers use various techniques to understand the effect of sales promotion on consumer mind. Different methods have been developed, practiced and refined in last twenty years. Researcher mainly focuses on impact of sales promotion on purchase behavior of a potential customer. No research scholar has been able to develop a single sales promotional model which can be accepted unanimously. There is huge scope to convert traditional sales promotional model into a neo classic model. Retail sales promotion technique has been changed significantly in last few years. Companies take help of technology to increase the efficiency of sales promotion. Loyalty cards, application of electronic media in POS, online shopping offer, electronic shopping cards are few examples of neo classic sales promotions. Retailers use digital marketing medium as support for sales promotional technique (D’Souza, Lin, Hsu and Schwartz, 2008). Theories of Sales Promotion Behavioral science has analysed sales promotions from the view point of demographics (customer segment prefers deals on purchase and another segment that shows interest on coupon proneness) and value consciousness. Coherent relationship between psychographic and demographics of potential customers plays a cordial role to increase the efficiency of sales promotion (Kwon and Kwon, n.d.). Many deal prone customer prefers sales promotion due to various reasons like monetary savings, getting best deal with minimum effort, chosing right product and satisfying personal objectives. Many econometric and analytical model described monetary benefit is the single most important factor to motivate consumers to purchase product on point of sale. Yet few statistical studies show that monetary benefit is not the single most important factor to motivate customers. The alternate theory against monetary benefit can be established with the help of following examples. Many customers show more interest on free coupons rather than temporary price discount offered with same monetary incentives, many customers do not respond to price reductions but switchs brands due to free coupon offered by competitor brands, many of them show more responsiveness on particular point of purchase rather with respect to other retail store. Many researchers have explained relationsionship between consumer behavior and sales promotion in terms self perception, achievement of motives, perception about quality and price, knowledge about product and low level of involvement in decision making process. Every academic theory has limitations. Many of the theories failed to explain situational impact of sales romotion in the mind of consumers. There is no fix model to predict the success ratio of sales factors with respect to responsiveness of customers (Chandon, Wansink and Laurent, 2000). Sales Promotion Objectives Creating Inquiries This is the first step of sales promotion. Companies use trade shows, asking customers to send enqueries about new product, distributing product brochures to create interetest about the product among customers. In the initial stage advertising and digital marketing should be used as supporting catylst for creating mass awarness about the product. Product Trial Companies distribute free samples of product to inculcate usage experience among customers. The technique is generally used for products associated with low risk factors (in terms of investment in the promotional process). Gillete distributes free blades with each shaving cream to increase the usage ratio among customers. Building Traffic Retailers use the traffic building techniques to increase customer foot falls inside the stores. Many book stores use traffic building technique called happy hour for customers to collect book signed by the author personally. Rate of Purchase This is retention oriented marketing strategy to increase product consumtion ratio among customers. Companies use multi pack products to counter balance the demand created by competitor’s product. In store displays and product information resources are used to increase the consumtion ratio of soft drinks, foods and detergent among customers. Loyalty Building customer loyalty for a particular product is one of the most important aims of any marketers. A loyal customer not only repurchases the product but also helps to spread positive word of mouth about the product. Customer loyalty can be measured by using frequency of purchase (FoP) and average weight of purchase (AwoP). AwoP is described as average amount of value spent by brand buyers on particular brand during the specific time frame. It can be formulised as AWP (Volume) = volume of market /buyers of market/brand. FoP is described as number of repurchases made by customer. FoP can be used as part of Recency, Frequency and Monetary (RFM) analysis (Robinson, 2011). Awareness Above the line promotion or ATL [using television, radio, billboards and newspaper as advertising medium] is used by companies to create awarness of the product among large set of customer group. They use ATL integrated with sales promotion to increase the efficiency of promotion. Reinforcement of the brand equity in the consumer mind is an important reason to adopt above the line strategy (Frank, 1992, p. 145). Tactical Reason Companies use sales promotion increase the confidence level among retailers. A well promoted brand makes the work easy (customers already have the product knowledge) for retailer to sell the product. Margin offered in secondary sales should be high enough to motivate retailers to push the brand. This study will try to analyze various sales promotional techniques adopted by retail fashion stores to increase brand awareness among customers. Retail Fashion Stores Success of any apparel retail store is decided by product portfolio maintained by them. A retail player must follow the latest fashion trend and needs to employ them into existing product line. In this way they can achieve a competitive edge over competitors. Stocking pattern of the retail store needs to change in accordance with the demand of season (jackets for winter season, cotton cloths for summer season, colourful dress for spring season). This study will try to compare sales promotion techniques adopted by three hypothetical retail stores in order to understand market dynamics (Vyas, 2007). Comparative Analysis Product Profile and Sales Promotion Activity Retail Store X Y Z Type of Format Multi brand Exclusive store for Y brand Multi brand Positioning It’s a family store This is store for customers prefer high priced and branded cloths Customers prefer trendy cloths with latest fashion Size of the Floor 50000 square feet 40000 square feet 35000 square feet Location At the heart of the city In a posh and overcrowded area Outside the city and beside highway Product Categories Apparel and accessories for children, men and woman Apparel for men and woman. Branded clothing items. Foot wear and relaxed wear, summer apparels, Seasonal apparels Number of suppliers 40 1 20 Stock keeping Units 75000 1 35000 Billing per customer $ 100 $ 150 $ 120 Footfalls/ day 750 on weekdays but more than 1000 on weekends 400 on weekdays but more than 500 on weekends 500 on weekdays but more than 700 on weekends Sales Promotion techniques End of Season-yes, they use it to clear out existing stocks End of Season- They do not use end of season technique to clear out existing stocks End of Season-yes, they use it to clear out existing stocks Festive promotion They use following seasonal sales promotion techniques to increase sales volumes- Valentine’s Day (February), Red Nose Day (March) and the build up to Easter (April) They do not use festive promotion techniques They use only Christmas events to increase sales volume Loyalty Card System Yes Yes Yes Special Promotion Exchange offer at the end of the season No No Promotion Type Discount on item, Every day low price, free gifts and exchange offer Promotional contests, free gifts and combo offers Free coupons, discount scheme Media Used Point of purchase display, electronic hoarding, digital marketing Print media, electronic media and hoardings Telemarketing and electronic hoarding inside the store The retail outlet can use social media to promote sales in the following way. Sales Promotion Budget Companies use five types of sales promotional budget to calculate the monetary fund required for implementing different sales promotion techniques. Five types of budgets can be explained in the following manner. 1- Percentage of sales- generally companies uses certain percentage of annual sales to plan promotional budget. 2- Unit of sales- This method is applicable for big products (for example, automobile companies use the technique). Units of product sold are multiplied with certain amount of money to calculate promotional budget. 3-Competitive parity- In this method, Marketers follow competitor’s budget to fix promotional expenditure. They use it to create optimal budget with respect to industry standard. 4- All you can afford- Small companies use the technique to allocate budget for sales promotion. Sales promotional budget is decided after all other significant admeasures have been made. 5- Objective End Task- Companies use the technique to allocate fund on various marketing objectives (category extension, product line extension or one to one marketing). The retail company should use unit of sales method to calculate sales promotional budget. Sales promotional budget will be decided according to annual sales volume of the company. Companies should use at least ten percent of total sales volume to fix total promotional budget. Suppose total sales volume for the retailer was $500,000 in the year 2011. The company will use $50000 for total promotional activity. Out of $50000 they will use $40000 for sales promotion (eighty percent of the budget is used to counterbalance huge investment made by the company on sales promotion). Return on Investment Companies use discounts on purchased item as a part of sales promotion to motivate customers to purchase products. They calculate return on investment for each type of promotional event. The retail store can calculate return on investment in the following manner. Promotion Cost of Promotion Month 1 Profit Month 2 Profit Month 3 Profit Return on Investment per quarter Sales promotion (discount, free gifts, exchange offer, POS display) $30000 $70000 $6000 $4000 56% References Chandon, P., Wansink, B., and Laurent, G., 2000. A Benefit Congruency Framework of Sales Promotion Effectiveness [pdf] Available at: < http://faculty.insead.edu/chandon/personal_page/Documents/JP_chandon%20wansink%20laurent%20benefit%20congruency%20JM%2000.pdf>. [Accessed 1 September 2012]. D’Souza, B., Lin, Y.S., Hsu, W.S., and Schwartz, J., 2008. Collaborative Planning, Forecasting & Replenishment (CPFR) [pdf] Available at: [Accessed 3 September 2012]. Pauwels, K., Risso, J.S., Srinivasan, S., and Hanssens, D.M., 2003. New Products, Sales Promotions and Firm Value, With Application to the Automobile Industry [pdf] Available at: < http://www.anderson.ucla.edu/faculty/dominique.hanssens/content/npi030922.pdf> [Accessed 3 September 2012]. Robinson, D., 2011. Customer Loyalty Programs: Best Practices [pdf] Available at: < http://faculty.haas.berkeley.edu/robinson/Papers%20DOR/Customer%20Loyalty%20Programs.pdf> [Accessed 3 September 2012]. Soret, I., Pablos, C.D., and Montes, J. L., 2008. Efficient Consumer Response (ECR) Practices as Responsible for the Creation of Knowledge and Sustainable Competitive Advantages in the Grocery Industry [pdf] Available at: < http://proceedings.informingscience.org/InSITE2008/IISITv5p601-621Soret474.pdf> [Accessed 1 September 2012]. Vyas, P.H., 2007. Sales Promotion Practices in Apparel Retail Sector and Challenges Ahead [pdf] Available at: < http://www.iimahd.ernet.in/publications/data/2007-11-02Vyas.pdf> [Accessed 3 September 2012]. Bibliography Gelb, B.D., Andrews, D., and Lam, S.K., 2007. A Strategic Perspective on Sales Promotions, [online] Available at < http://sloanreview.mit.edu/the-magazine/2007-summer/48401/a-strategic-perspective-on-sales-promotions/> [Accessed 3 September 2012]. Kotler, P., Keller, K., Brady, M., Goodman, M., and Hansen, T., 2009. Marketing Management. London: Pearson Education. Read More