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.
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.