Are PDA customers likely to be price-sensitive?
11. Pricing (See chapter 14)
a. Are PDA customers likely to be price-sensitive? Is demand elastic or inelastic? Explain. What are the implications for pricing the Sonic 1000 PDA?
Consumers usually look at a product that has a high price and think that it will be a better product. Although a lower price will usually sell more of a product. Since the Sonic 1000 PDA is a brand new product customers must be in some way convinced to purchase it. The Sonic 1000 PDA is priced lower than other PDAs even though the Sonic 1000 PDA has more features. With the low price and high feature more customers should be willing to purchase. Sonic does have some large goals of having 3 percent market share and 240,000 unit sales by the first year. In the first year Sonic is expected to have a loss of $10 million dollars that is because of the aggressive pricing strategy. The Sonic 1000 PDA should have an elastic demand since it is a new product. Customers unaware of the Sonic brand will be more price conscious which is why Sonic choose to price the PDA lower than other PDA's. Any increase in the Sonic's price would greatly decrease sales, 240,000 units in the first year would be impossible. Many times during a price increase customers will not purchase the product but later on will switch back to the product. But this usually happens to products that have been around for a while and would not work with a brand new product like the Sonic 1000 PDA. There are several pricing implications that have to be considered. One is that the current economy is in a recession and consumers are not purchasing as much and are much more price conscious. Because of the recession the unemployment rate is also high, the unemployed will most likely not purchase the Sonic PDA. Competition is also high with several brands that have been on the market for years.
b. What price adaptations should Sonic include in its marketing plan?
Companies usually do not set a single price, but rather develop a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors (Kotler, 397). Since this is a new product and it will be sold only in the US to start it will have the same price in every state. The Sonic PDA is small and not very heavy which means the shipping costs should not be very large which is also why the price will be the same in each state. At the moment Sonic is not planning any price discounts in the first few months. The Sonic PDA is already priced at a low competitive price and Sonic does not want more profits slashed. The price of the PDA can be change very quickly if needed. Price is a logical weapon of choice because it is easy to change fast (Van Heerde, 502). The only negative about pricing a product low is that it could cause price wars if sales skyrocket. In general, price wars are believed to hurt revenues and long-term prospects for the market player, other studies suggest that the impact depends on each player's price position and role in the price war (Van Heerde, 501). A price war would further cut profits but at the moment this is not a concern for Sonic. Towards the end of the year if Sonic sees low sales it will give price discounts for volume purchases and early payment. Even with low sales Sonic will not supply retailers with store brand versions of the Sonic 1000 PDA at a deep discount. This may take away sales from the Sonic branded PDA. Sonic PDA is planning on using promotions to drive sales. Special event pricing will be used to boost sales during back to school and Christmas. No other promotions will be used. Sonic will be using customer segment pricing. Employees will receive a 10 percent discount. Students will be able to get a 5 percent discount. The young welcome change more then older customers. Young customers will be more likely to buy a new product like the Sonic PDA. Once the students try it and like the PDA they are more likely to continue purchasing newer Sonic PDA after they finish school.
12 . Promotion (See chapter 17)
a. What communications objectives are appropriate for Sonic's initial campaign? Explain.
A new category is not needed for the Sonic 1000 PDA. There are already many PDA's that are similar to Sonic's. One of the most important communication objectives will be building brand awareness. Sonic is a brand new brand, no one knows about it. Without any brand awareness there will be no way that Sonic can sell 240,000 PDA's. As a result, brand awareness must always be considered first, before any other communication effect (Percy, 123). Sonic will also build brand attitude. Its important for Sonic to know consumers opinions about the PDA. This is so Sonic can adjust its advertising campaign when needed. Sonic must make sure that consumers will pick the Sonic brand over other brands. We look at brand attitude as the understanding a person has in terms of how they evaluate a particular brand and its ability to satisfy what the consumer is looking for in the product (Percy, 123). And finally Sonic must create a brand purchase intention. Brand purchase intention is the communication response that relates to the target audience's decision to purchase a brand or use a service (Percy, 123). Sonic must persuade people to purchase the Sonic 1000 PDA. There are several ways customers are persuaded to purchase a brand. One way is when someone sees an advertisement and convinces someone else who never saw the ad to purchase the brand. As an example, a teenager sees an ad and convinces a parent to buy the brand for themselves. A second way is for the customer to see an ad several times which than makes the customer feel good about the brand. When the customer is in the store that same good feeling about the brand comes back and the customer purchases that brand. Without persuasion there will be no sales especially since this is the first PDA made by Sonic. Sonic must create an emotional connection with the PDA in order to sell many PDA's.
b. Which promotional tools would be most effective in Sonic's promotional mix? Explain.
There are three benefits to sales promotion tools. These benefits are communication, incentive, and invitation. The two promotion tools that Sonic will use are coupons and rebates. There is a big difference between coupons and rebates. Coupons offer a lower price up front while rebates offer a discount only after purchasing the product. Rebates are more efficient in surplus extraction but coupons offer more finetuned control over whom to serve (Qiang, 67). There is some negativity about rebates. Risk aversity on the part of consumers reduces the attractiveness of rebates, as does the delay between rebate redemption and rebate payment, but the latter if and only if consumers are more impatient than the seller (Qiang, 67). Rebates and coupons are a must for price-sensitive customers. Studies show that only about 20 to 30 percent of all consumers regularly bother to clip, save, and use coupons when they go shopping (Qiang, 67). Gaining 20 to 30 percent advantage is a big deal especially when introducing a new product. With coupons and rebates sales should be higher by about 60,000 units. That should help in reaching 240,000 sales in the first year. Coupons offer the most benefits when giving small discounts. While rebates are more beneficial in large discounts. Sonic plans to provide coupons discounts during store sales. While rebate discounts will be given during back to school and holidays. Even though rebates are seen as a bigger risk to customers it should give a big boost to Sonic. Both coupons should give communication, incentive, and invitation to purchase the Sonic 1000 PDA. Sonic will need to contact retailers to plan coupons and rebates with them. When implementing a sales promotion programme, manufacturers generally require the cooperation of the retailer in placing point-of-sale materials, allocating signage that high-lights price discounts, dealing with coupons and maintaining product displays (Simpson, 229). It will be difficult to implement all promotional tools with retailers but Sonic is hoping to implement most to raise sales and stay competitive.
Qiang, L., & Moorthy, S. (2007, February). Coupons Versus Rebates. Marketing Science, 26(1), 67-82.
Kotler, P., & Keller, K. (2009). Marketing Management (13th ed.). Pearson Education.
Percy, L., Rossiter, J., & Elliott, R. (2001). Communication Strategy. Strategic Advertising Management, p123.
Simpson, L. (2006). Enhancing Food Promotion in the Supermarket Industry: A Framework for Sales Promotion Success. International Journal of Advertising, 25(2), 223-245.
Van Heerde, H., Gijsbrechts, E., & Pauwels, K. (2008, October). Winners and Losers in a Major Price War. Journal of Marketing Research, 45(5), 499-518.