1. Sales Promotion Management Session 9 9 nd September 2010

2. TRADE PROMOTIONS

3. Trade Promotion Marketing campaign aimed at building demand at the middleman (distribution channel) level. In a trade promotion, wholesalers and/or retailers are offered special price discounts (often in addition to a trade allowance), subsidized or free display racks or stands, gifts, or other incentives.

4. Objectives of Trade Deals Induce retailers to offer a price discount Induce retailers to display the brand Induce retailers to advertise the brand Gain or maintain distribution for a brand/model or item Load the trader with inventory to avoid stock outs Avoid price reductions Defend the brand against competitors Finance retailers’ inventories Shift inventory to channel of distribution and consumer Offer incentives for the retailers’/dealers sales force to push the brand ……..etc.

5. Types of Trade Deals for Consumer Durable goods Off invoice Cumulative volume rebates Floor planning or inventory financing Free goods Cooperative advertising Spiffs Contests Quota incentives

6. Types of Trade Deals for Consumer Durable goods Off invoice Cumulative volume rebates Floor planning or inventory financing Free goods Cooperative advertising Spiffs Contests Quota incentives For notes only

7. Types of Trade Deals for Consumer Nondurable goods Off invoice Bill back Free goods Cooperative advertising Display allowances Sales drives Terms or inventory financing Count – recount Slotting allowances Street money

8. Types of Trade Deals for Consumer Nondurable goods Off invoice Bill back Free goods Cooperative advertising Display allowances Sales drives Terms or inventory financing Count – recount Slotting allowances Street money For notes only

9. 1.Retailer merchandizing activities 2.Retailer sales force incentives 3.Loading the retailer 4.Gaining or maintaining distribution 5. Obtain price reduction 6. Competitive tool 7. Retailer “goodwill” *Objectives :

10. Effectiveness of a Trade Promotion f (Consumer Sales, Factory Shipments, Pipeline Inventories)

11. How a Trade Promotion Influence Sales The Blattberg Levin Model

12. How a Trade Promotion Influences Sales Trade Promotion Trade Promotion Other Factors Other Factors Other Factors Other Factors Manufacturer’s Shipments Manufacturer’s Shipments Consumer Sales Consumer Sales Pipeline Inventories Pipeline Inventories Retailer Promotions Retailer Promotions Blattberg and Levin, “Modelling the Effectiveness and Profitability of Trade Promotions” Marketing Science, Vol. 6 #2, Spring 1987 Shipments t = f 1 (inventory t-1. trade promotions t. other factors t ) Retail Promotions t = f 2 (trade promotions t. trade promotions t-1. inventories t-1 ) Consumer Sales t = f 3 (retailer promotion t. other factors t ) Inventories t = f 4 (inventories t-1. shipments t. consumer sales t-1 )

13. Blattberg and Levin’s Equations Shipments t = f 1 (inventory t-1. trade promotions t. other factors t ) Retail Promotions t = f 2 (trade promotions t. trade promotions t-1. inventories t-1 ) Consumer Sales t = f 3 (retailer promotion t. other factors t ) Inventories t = f 4 (inventories t-1. shipments t. consumer sales t-1 ) Where t = time period and f( ) is a function

14. Effects from a Trade Deal The retailer runs a promotion in which a percentage of the units bought on trade deal are sold to the consumer at a discounted price (pass percentage) Consumers increase their purchase of the brand when the retailer runs a promotion The retailer usually buys inventory at the end of the trade dealing period The retailer decreases buying after the trade deal ends and relies on inventory bought during the trade dealing period

16. Promotions influence Shipments Increase in orders occurs because : 1.‘forward buying’ 2.Increase in inventories in anticipation of increased consumer sales from the retail promotions

17. Assessing the Effectiveness of Trade Deals Before – After analysis

18. Before – After Analysis Used to assess the profitability and sales effect of the promotion by looking at 1.Sales before the promotion – ‘baseline’ sales which would have been if no promotion was run 2.Sales during the promotion 3.Sales after the promotion – the sales dip generally occurs because retailers load their inventories when a trade deal is offered.

19. Example to Better Understand Before-After Analysis Suppose a firm offers a $2.00 off-invoice trade deal with a 50¢ advertising allowance. The regular price of a case of 24 units is $20.00. The incremental gross margin for the product is 50% or $10.00 per case. Sales in the two months prior to the trade deal averaged 10,000 cases per month. “Average sales” is used as the baseline. During the two of the trade deal, sales averaged 30,000 cases per month. For two months after the trade deal sales dropped to 2,000 cases per month Incremental Sales? ? Incremental Profits??

20. Example to Better Understand Before-After Analysis Suppose a firm offers a $2.00 off-invoice trade deal with a 50¢ advertising allowance. The regular price of a case of 24 units is $20.00. The incremental gross margin for the product is 50% or $10.00 per case. Sales in the two months prior to the trade deal averaged 10,000 cases per month. “Average sales” is used as the baseline. During the two months of the trade deal, sales averaged 30,000 cases per month. For two months after the trade deal sales dropped to 2,000 cases per month Incremental Sales? ? Incremental Profits??

21. Example to Better Understand Before-After Analysis Incremental Sales

22. Example to Better Understand Before-After Analysis Incremental Profits

23. Issues in Trade Promotions The areas of concern to any marketer when launching a trade promotion are : 1.Forward buying 2.Passthrough

24. Monthly Effect of Promotion Trade deal begins Promotion ends Carryover effect Inventory effect Consumer sales Ratio 1.0 1.2 1.4 1.6 1.8 2.0 0.6 0.8 Month

25. Forward Buying The retailer stockpiles after assessing three main costs : 1.Product cost 2.Inventory carrying costs 3.Set up costs For most retailers 1 & 2 dominate. If there is a temporary price reduction, the retailer purchases up to the point where savings from the promotion are less than the additional holding costs associated with keeping the product in inventory Other considerations are risk of obsolescence and perishability

26. Conditions for a Profitable Promotion Most of the incremental units sold by manufacturers during the promotional period must also be the incremental units sold by the retailer. If the retailer does not pass the promotion through to the consumer, then the channel members are only buying at reduced costs which results in a lower implicit selling revenue to the manufacturer without long run increased units sold to compensate for the reduced price.

27. Trade Deals and Passthrough The prime reason why a manufacturer engages in a trade deal is to increase consumer sales. Does the manufacturer receive enough passthrough to justify the cost of trade dealing? The retailer, being a rational economic agent, has learned that when a trade promotion is offered, it is possible not only to buy the quantity needed during the promotional period, but also to buy an increased quantity to reduce the future cost of goods……. This is called forward buying

28. Factors that can enhance Passthrough 1.Economic structure of the trade deal a.deal discount, allowance, terms b.performance requirements and restrictions c. Length of the deal 2.Item importance a. volume b.category c.competitive retailer promotional activity 3.Manufacturer’s reputation 4.Promotional elasticity a. own promotional elasticity b.cannibalization

29. Profitability of Trade Deals Trade deals have been found to be ineffective because : 1.Not all trade deals are “passed through” to the consumer 2.Even if there is consumer passthrough, forward buying persists

30. When Manufacturers Should Trade Deal

31. When a Brand Should Trade Promote Promote Paper Products ? Tuna fish Do not Promote Specialty wines Do not Promote Corn caps, Laxatives Holding Costs Promotional elasticity High Low

32. Tactics for improving Trade Promotion Results 1.Count recount – pay only for units sold to consumers and thereby minimize forward buying 2.Bill backs 3.Allocations – the retailer is allowed to buy on deal only a predetermined quantity based on the average volume of business in a given time frame 4.Invest in ‘pull’ strategies

33. Tactics for improving Trade Promotion Results 1.Count recount – pay only for units sold to consumers and thereby minimize forward buying 2.Bill backs 3.Allocations – the retailer is allowed to buy on deal only a predetermined quantity based on the average volume of business in a given time frame 4.Invest in ‘pull’ strategies

34. THAT’S ALL FOR TODAY!!!