CATEGORY MANAGEMENT: The Merchandising Tool of the Future

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

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Growth of Sales Promotions

• Trade Promotion grows with roughly with
  manufacturers dollar sales

Source A.C. Nielsen
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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
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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

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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
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Trade Promotions

• Short-term incentives by the manufacturer that
  are directed to retailers and wholesalers

Trade-Promotion Objectives
Trade-Promotion Tools
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 Money
Push a Brand to Consumers
Free Goods
Specialty Advertising Items
Contests
Source Adapted from Prentice Hall
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Effects of Consumer and Trade Promotions on
Consumer Behavior

• Expand category volume
• Cause brand switching
• Cannibalization
• Change purchase timing
• Cause stockpiling

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Considerations in Executing a Trade Promotion
Source Adapted from Prentice Hall
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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
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Trade PromotionAccountability

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

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Trade PromotionProfitability

• What proportion of trade promotion dollars are
  passed through to consumers?
• What proportion end up in the retailers pocket?
• Do the additional sales from a trade promotion
  offset the reduced margins and the allowances
  paid out?

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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 manufacturers price of .70 per unit
  (gross profit is .09 per unit) Starkists
  production and transportation cost is .42 per
  unit (unit contribution is .28)
• The retailers 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

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Trade PromotionProfitability Example

• Starkist offers the following trade deal
• Price-off - 20 off the manufacturers 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

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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 items weekly contribution is
  therefore 14,160 - 13.440 1000 1,500
  3,220, much more than the normal weekly
  contribution of 432

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Trade PromotionProfitability Example

• Starkists 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

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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?

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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
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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