Weaning the Sales Force and Retailer off Price Promotions

In a recent blog post entitled “Partners in Profit” I suggested we as Marketers needed to revisit our dependence on trade marketing and price promotions in particular.  If we were going to focus on brand building I argued we needed to be able to divert current resources from trade marketing into consumer marketing and I deplored the almost total reliance today in CPG on trade spending.  I stated we need to rebalance our trade and consumer spending if we are going to build long term consumer brand loyalty.  I quite rightly was criticized in a subsequent response to this post for failing to offer a solution to the situation.  In fact the poster commented, perhaps somewhat unfairly, that I was taking “a trip through fantasyland with yearnings of what has been lost.”


In response let me start by saying I am a realist and in that respect I recognize there are some components of trade marketing/spending with retailers that we as marketers are not going to be able to change.  First and foremost is the fact they are going to expect and require that we continue to grow payments to them for advertising and display activity.  Whether they are called co-op advertising funds, volume rebate programs, key account marketing programs or whatever those funds are necessary to continue to promote brands in the key retail chains and frankly to ensure their continued listing.  They are a cost of doing business and why in most cases they don’t even show up in a marketing budget but are put into the sales budget or in some cases are simply shown as part of the cost of goods.  Equally in most cases they are managed by the sales team and not the marketing team. 


What I know can be changed is the discretionary part of trade promotions, particularly price promotions but first we need to understand if there is a problem and the magnitude of the problem.  To do that we need to do something most marketers don’t do and that is evaluate the success or failure of all of our promotions, not just price.  In short did they pay back or would we have been better served not to have run them at all.


I’m sure most marketers have been faced with the proposition from sales of “Let’s cut the marketing programs in the last 3 months and give me the money to run a large discount and load up the trade.  That way we can all make our numbers for the year.”  Inevitably the CEO and CFO agree to this and off sales goes and loads up the trade and the company makes the number but at what cost? 


No one stops to calculate what the impact of the proposed price promotion has on future sales and profitability.  Yes you get a huge bump in sales during the period of the discount but what happens afterwards?  Often what happens is there is a huge drop-off in sales in the first quarter of the following year, sales that don’t happen because the retailer is still working off the stock he bought in at the end of the year.  If you were to do an analysis showing the average rate of sale and corresponding profit before during and most importantly after the promotion would you in fact show that you generated incremental profit versus a lower discount and/or no discount at all?


As marketers we need to start doing this type of analysis on all our promotional programs regardless of the time of year and determine if they are adding to our brand’s bottom line or in fact subtracting from it.


In addition we should be testing the depth, the length and the frequency/timing of our price promotions.  All too often we simply repeat what we have done in the past without looking at whether or not changes are required to our trade promotional strategy and execution in these three areas.  I will address what can be done in each of these variables in turn starting with depth.


How many times have the sales team run a price discount to the trade for the same amount X dollars off per case with the trade.  The argument usually when questioned about the amount is “this is what we did in the past so this is what the minimum is going forward”.  But is that really the case?  Do we know that $3.00 per case off invoice would not work as well as $5.00 per case?  We also have moved away from proof of performance deals for the most part in CPG.  The argument used to be it was too difficult to work out how many cases a chain sold when the brand was on feature but this was before UPC codes, scanners and daily sales reporting were generally available.  There is no reason now why you can’t negotiate an arrangement with the chain to pay them one discount for the duration of the promotion and a second higher rate for sales to consumers during the time period in which they have a feature price in store.


This highlights the second area we as Marketers need to examine, the duration of the price promotion programs.  In most cases we run price promotions for a minimum 4 week period and I have seen them as long as 8 weeks but are they really effective? 


In an analysis I did a number of years ago I found that our accounts were buying in heavily during the first week and they ran their price feature in the first two weeks.  The next few weeks’ sales were relatively slow but there was a sudden burst of orders in the final week as the accounts stocked up on discounted stock prior to the end of the deal.  In fact in one market we found that over 90% of the most popular size of the total years sales were being done at the same discounted price.  This analysis highlighted two things we needed to change; first we needed to go to a two stage discount program (off invoice and proof of performance) and second that our promotions ran too long and we should cut them back to two week programs.  This we did and we improved both profitability and were able to fund more consumer directed programs, both advertising and promotion and still deliver the bottom line.


Finally we all have a tendency to be creatures of habit.  This point was driven home to me a number of years ago when I went on a call to a head office with one of our Key Account Managers.  Because I was there the Key Account Manager tried to get the buyer to order some more of my brands.  The buyer looked at his calendar and said no, not at this time.  When I asked him why he pointed to his calendar and said your next promotion starts in 6 weeks time and I have enough stock to last me until then.  I then asked him how he knew that (he was correct by the way) and he showed me his calendar with all our promotions set out for the year on it saying you guys have run the same program at the same time every year for the last 3 years so I just wait and buy on deal because I know when the next one is coming. 


When was the last time you changed the timing of one of your promotional programs?  I recognize there are times when we have to be on promotion but there are also times when I question why we chose to promote based on price.  For example I have spent a number of years in the beverage alcohol business and the key selling period for spirits is between December 1 and December 31.  Over 30% of a premium/ultra premium brand’s sales can occur during this one month period that includes both Christmas and New Years.  People are predisposed to trade up in terms of their purchases so why do brands such as Patron or Johnny Walker Black whisky that are iconic brands, chose to price promote during this period?  Yet they do, just as Coke and Pepsi run huge price discounts during this period that offset one another at a time when consumers would probably spend a little extra on soft drinks.   Yes they need to be front and center in the retail chains but at the lowest price of the year?   Consumer directed promotions such as gift packs or added value could have just as big an impact here as price but often what happens is that we give the consumer both, added value and price.


None of these proposed modifications are silver bullets that can overnight move a brand from predominantly trade promotion activity to consumer driven activity nor should they be implemented without testing and evaluation.  However they are options that marketers need to consider in their search for funds to undertake long term brand building.

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