Discount Advertising Campaign and Consumer Behavior

So goes the ancient saying, “Money is the source of all evil.” Whether we agree with that notion or not, we must acknowledge that if money is evil, it is also a necessary evil. Money, whether you like it or not, plays an important part in the world and in our lives, both professionally and personally. We all have to earn a livelihood and pay expenses, and in order to achieve our financial objectives, whatever they may be, we must manage the funding of those goals.

What is meant by an advertising campaign?

It is a routine course of every business that they take up an advertising campaign to promote their product or service. An advertising campaign is a well-planned strategy that is used across many channels to attain particular goals such as greater brand awareness, increased sales, and improved communication within a given market. All of this is made possible through advertising. Discounts are extremely important in the life of a brand. They are one of the most effective strategies to generate sales and reward consumers. The most popular approach in an advertising campaign for sales promotions is a percentage discount or coupons.

What is consumer behavior?

Consumer behavior is the study of consumers and the processes they use to select, use (consume), and dispose of items and services, as well as the emotional, mental, and behavioral responses of consumers. Consumer behavior research is essential because it helps marketers understand what factors affect customers' purchasing decisions.

What is Markup?

The markup in business is the price difference between the cost of producing an item or service and its selling price. Producers must add a markup to their overall expenses in order to make a profit and recover the costs of creating a product or service. They will either express the markup as a set sum or as a percentage of the cost. Keep in mind that the markup is a percentage of the cost, not the selling price. Selling price = Cost + markup, or in arithmetic, selling price = Cost x (1+r) = Cost + cost x r, where r is the markup margin (in percentage terms) and cost x r = markup.

What is Markdown?

For retailers, a price markdown is a deliberate reduction in the selling price of a good. There are several reasons why a retailer may decide to mark down its goods. For seasonal merchandise, the retailer may be eager to clear the shelves of old merchandise to make room for the next season's goods. They may slash prices to do so, even if it means they take a loss on the sale. Some manufacturers may come out with new models of products each year or every few years, in which case they will offer markdowns on older products rather than risk being stuck with obsolete inventory. Markup is an addition to cost and markdown is a subtraction from selling price. For example, suppose Eddie’s Bike World has a “10% off” sale on a bike that normally sells for Rs 56,640. 10% of Rs 56,640 is (0.10) (56,640) Rs 5664, and so subtracting off this discount gives us a sale price of Rs 56,640 - Rs 5664, hence markdown in Rs 50,976.

Making things simpler by developing formulas, such as FORMULA for Markdown is,

MP = OP (1 - d)

where MP represents the MARKED-DOWN PRICE,

OP represents the ORIGINAL PRICE

and d represents the PERCENT MARKDOWN.

Illustration

The advantage of the formula is that we can manipulate it to get other desired results, for example, a necklace was purchased for Rs375,000 by Gold & Gemstone Jeweler for his store. Gold & Gemstone raised the price by 20% i.e., to determine the markup price. When the necklace had not sold after several months, they decided to reduce the price by 20%. What was the reduction in the price? The "obvious" answer is Rs375,000; they marked it up by 20% and then down by 20%, thus it seems apparent that the markup and markdown would balance each other out. However, when we think about it in reality, we realize that this is incorrect as firstly we have to evaluate the markup price (or original selling price) then apply a discount on it. As he is offering a discount on his selling price not on the purchased price.

Markup: P = C (1+ r), thus P = Rs375,000 (1.20), so P = Rs450,000.

Markdown: MP=OP (1 - d), therefore MP = Rs450,000(0.80), resulting in MP = Rs360,000

The reduced price was Rs360,000 rather than Rs375,000, thus he will lose Rs 15,000 (375,000 – 360,000). He could have made a profit if he had lowered the price by 15% rather than 20%, as the markdown price is now 450,000(.85) = 382,500. Profit = Rs 382,500 – 375,000 = Rs 7,500 as a result.

Advertising Campaign and Consumer Behavior
Finding the breakeven

Suppose we know a markup percent, and we want to mark things back down to cost. We can determine what the percent should be, as the next example will show. For example, if prices are calculated with a 25% markup based on cost, what is the percent that those prices should be marked down to get back to their original cost?

We don’t know what sort of things we are pricing here, much less what the dollar amount of those prices would be. Fortunately, though, since we are working with presents the actual rupees/dollar amounts don’t matter. We can work the problem out with whatever dollar amounts we like; the percent answer will be the same regardless of the price we assume. Following what we did to calculate effective interest rates back markup price in Illustration, we choose a convenient cost of Rs100.

P = C (1 + r).

P = 100(1.25).

P = Rs 125.00

 MP = OP (1 - d).

Rs 100.00 = Rs 125.00(1 - d)

0.8 = 1 - d

d = 20% (this is a break-even rate keeping other things unchanged)

Probable Scenarios to Earn Profit

Hence, a 20% discount “undoes” a 25% markup since the markdown price equals the cost (i.e., Rs 100), so there is no profit and no loss in this situation. Now the seller has two options: either increase the markup margin to generate a profit, say to 30% and retain the 20% discount. In this situation, the markup price is Rs 130 [100(1.30)] and the markdown price is Rs 104 [130 x (1-0.20)], therefore profit = 104 – 100 = Rs 4. In another situation, the markup price will remain Rs 125, but the discount rate in the markdown price will be reduced to 15%, resulting in a markdown price of Rs 106.25 [125 x (1-0.15)]. As a consequence, net profit = 106.25 – 100 = Rs 6.25.

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