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Trade and Consumer Promotion

Retailing MKTG 6211. Trade and Consumer Promotion. Professor Edward Fox Cox School of Business/SMU. Types of Manufacturer Sales Promotions. Consumer Promotions Objective is to influence consumer to purchase product/service Trade Promotions

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Trade and Consumer Promotion

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  1. Retailing MKTG 6211 Trade and Consumer Promotion Professor Edward Fox Cox School of Business/SMU

  2. Types of Manufacturer Sales Promotions • Consumer Promotions • Objective is to influence consumer to purchase product/service • Trade Promotions • Objective is to influence retailer/wholesaler to purchase product, and to promote it to the consumer in turn • Business Promotions • Manufacturer to business buyer

  3. Growth of Sales Promotions • Trade Promotion grows with roughly with manufacturers’ dollar sales Source: A.C. Nielsen

  4. How Important Are Promotions? Total Advertising and Promotion Budget % by Spending type -2000 Trade promotion is 12% of gross dollar sales for packaged goods manufacturers Source: A.C. Nielsen

  5. Why the Prominence of Sales Promotions? • Product managers face pressure to increase current sales • Companies face competition in mature markets • Advertising efficiency has declined • Consumers have become more deal-oriented

  6. Consumer Promotions • Short-term incentives by the manufacturer to encourage purchase of a product or service Consumer-Promotion Tools Consumer-Promotion Objectives Advertising Specialties Samples Entice Consumers to Try a New Product Coupons Lure Customers Away From Competitors’ Products Patronage Rewards Patronage Rewards Cash Refunds Get Consumers to “Load Up’ on a Mature Product Contests Price Packs Sweepstakes Hold & Reward Loyal Customers Premiums Games Consumer Relationship Building Point-of-Purchase Displays Source: Adapted from Prentice Hall

  7. Trade Promotions • Short-term incentives by the manufacturer that are directed to retailers and wholesalers Trade-Promotion Tools Trade-Promotion Objectives Premiums Price-Offs Persuade Retailers or Wholesalers to Carry a Brand Allowances Give a Brand Shelf Space Displays Allowances Patronage Rewards Buy-Back Guarantees Promote a Brand in Advertising Discounts Push a Brand to Consumers Push Money Free Goods Specialty Advertising Items Contests Source: Adapted from Prentice Hall

  8. Effects of Consumer and Trade Promotions on Consumer Behavior • Expand category volume • Cause brand switching • Cannibalization • Change purchase timing • Cause stockpiling

  9. Size of the incentive (depth of discount) Considerations in Executing a Trade Promotion What are the conditions for participation? Structure and distribution of the promotion program Length of the program (limited time) How to evaluate success of the program Source: Adapted from Prentice Hall

  10. Issues in Trade Promotion • Accountability • Profitability • Long-term effects of promotions These issues boil down to whether or not trade promotion represents a good investment

  11. Trade PromotionAccountability • Dollars for buying or selling? • Off-invoice allowances • Scan-backs or bill-backs • Forward buying • Diverting / grey markets

  12. Trade PromotionProfitability • What proportion of trade promotion dollars are passed through to consumers? • What proportion end up in the retailer’s pocket? • Do the additional sales from a trade promotion offset the reduced margins and the allowances paid out?

  13. Trade PromotionProfitability Example Consider the following trade promotion example … • Sales for Starkist light meat in-water tuna 6.5 ounces average one case (48 units) per store in a retailer having 100 stores • The regular shelf price is $.79; the retailer pays the manufacturer’s price of $.70 per unit (gross profit is $.09 per unit); Starkist’s production and transportation cost is $.42 per unit (unit contribution is $.28) • The retailer’s gross profit during a normal week is 48 x 100 x $.09 = $432 • The retailer can sell an average of five cases per store during a promoted week if the discounted retail price is $.59 and the product is advertised and displayed

  14. Trade PromotionProfitability Example Starkist offers the following trade deal: • Price-off - 20% off the manufacturer’s regular price for all product sold during the week (scan-back) yields a case price of $26.88 or a discount of $6.72 off the regular case price • Display allowance - $2.00 per case • Advertising allowance - $1,500

  15. Trade PromotionProfitability Example Retailer profitability… • Sales for the promoted week are 5 x 100 = 500 cases or 24,000 units • Revenues for the promoted week are $.59 x 24,000 = $14,160 • Costs for the promoted week • With the price-off, the cost of goods is 500 x $26.88 = $13,440 • Allowances are 500 x $2.00 = $1000 for display and $1,500 for advertising • The promoted item’s weekly contribution is therefore $14,160 - $13.440 + $1000 + $1,500 = $3,220, much more than the normal weekly contribution of $432

  16. Trade PromotionProfitability Example Starkist’s profitability… • For a normal week • Revenues are $.70 x 100 x 48 = $3,360 • Costs are $.42 x 100 x 48 = $2,016 • Contribution is $3,360 - $2,016 = $1,344 • For the promoted week • With the 20% price-off, revenues are 500 x $26.88 = $13,440 • Costs • Production and distribution is 500 x 48 x $.42 = $10,080 • Allowances are 500 x $2.00 = $1000 for display + $1,500 for advertising • Contribution of the promoted item is therefore $13,440 - $10,080 - $1,000 - $1,500 = $860; less than the normal weekly contribution of $1,200

  17. Trade PromotionProfitability Example • So assessing the profitability of a trade promotion requires determining what would have been sold had the promotion not occurred • But what about the effect on other brands (e.g., Chicken of the Sea) and types (e.g., white meat tuna)? • But what about stockpiling – borrowing from future tuna purchases?

  18. Trade PromotionLong-Term Effects • Detrimental to brand health? • Builds the habit of switching • Teaches shoppers to buy on price • Takes resources away from media advertising • Builds brands? • Encourages trial Though there is little evidence of promotion enhancing brand equity, results are inconclusive about harming brand equity

  19. Why Not Reduce Trade Promotions? If a manufacturer reduced trade promotions … • What would competitors do? • Reduce, maintain or increase promotional levels • What would retailers do? • Punish or not punish the manufacturer Example - Procter & Gamble adopted value pricing and lost roughly 5% market share

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