The owners of a small local gift shop have continually changed the products sold in their store to reflect changes in the market. From the early days of selling small gift-type items such as figurines and collectibles, the store now offers a more eclectic mix of merchandise that includes Vera Bradley purses and inexpensive jewelry as well as items that could be classified as "gift-type" products and merchandise that is best described as "collectibles."

The shop owners are considering launching a new promotional campaign that is in line with the integrated marketing communications approach that they remember from a college class. Up until now, they have gone with an ad hoc approach of buying ads in the local newspaper from time to time and running commercials on different radio stations to promote upcoming sales and other special events. After a consulting with a marketing professor they knew, the shop owners realized that they have not done a good job in building a consistent brand image that would bring customers into their store without having to promote special deals and events.

As members of a trade association for small gift shops, the owners have learned that shops their size ($1 million in sales last year with COGS of $500,000) on average spend approximately $50,000 a year on promotion. This amount would be considerably higher than what they have been spending. Best estimates for the coming year is that this promotion budget would produce a 7 percent sales growth, versus flat or no growth the last couple of years. They labeled this Plan A.

The other approach they are considering is a little more involved. With the idea in mind that building a brand image would be a good long term objective, the shop owners worked with their professor friend to put together a detailed promotion plan. This plan includes newspaper and radio advertising, but also includes an amount for improving the shop's website and for launching a direct marketing campaign. The total amount for all of these activities adds up to $90,000. The professor estimates that the improved brand image will spur sales to increase by 20 percent over the next 12 months. This approach is Plan B.

Both proposals are tempting, with each plan offering the prospects of sales growth. However, the shop owners question which plan will do the best job of reaching its target audience and which will be more profitable in the long run. The shop owners recall a vivid illustration in a college marketing course that showed how to use break-even analysis to help in making decisions such as this. Fortunately they kept their textbooks and had a ready resource to refresh their memories on how to do this analysis.

Answer the following questions to assess whether or not the shop owners should accept the proposal for increasing spending on advertising.

1.

What is the anticipated increase in sales if the gift shop owners choose to adopt Plan A?

$70,000

$200,00

$700,000

2.

What is the anticipated increase in sales if the gift shop owners choose to adopt Plan B?

90,000

70,000

200,000

3.

Which of the proposed plans would best build a consistent brand image for the gift shop?

Neither of the plans will accomplish this objective.

plan A

Plan B

4.

Which of the following should the shop owners do before they decide on a promotional program?

Pretest the promotions.

Schedule the promotions.

Identify the target audience.

5.

If the gift shop implemented Plan B and achieved the anticipated sales increase, what would be its incremental increase in profits during the first 12 months?

$110, 000

$200, 000

$90, 000