Trade promotion spending is an important part of most companies’ annual budget. Although not always thought of as a component of pricing, a trade promotion is like a discount. It is another mechanism for transferring money from the seller’s pocket to the buyer’s pocket. On the other hand, a trade promotion can be superior to a discount if it results in increased sales without damaging your long-term price levels or pricing structure. Unfortunately, according to Nielsen 67% of trade promotions do not break even. It is therefore critical to measure the ROI of trade spending, and ensure there is a process for managing trade promotion decisions.
Promotions come in a wide variety of shapes and sizes, including:
- Slotting allowances, which are cash paid up front to the retailer to secure shelf space
- Coupons, typically paid for by the manufacturer, which provide temporary price reductions to the shopper
- Trial periods and trial package sizes
- Rebates. Some are paid directly to the consumer, and others are paid to a distributor or retailer. They can include payments for:
- Overall purchase growth
- Purchases of specific products or categories
- Purchases of all products for a certain period
- Sales spiffs, which are typically enhanced commissions paid by a manufacturer to sales reps of distributors or retailers for selling specific products or brands
- $20 off when you spend $100 or more
There are many other types of trade promotions, but you get the idea. They are meant to entice the buyer to purchase more product, or in some cases to simply try the product. While retailers and distributors always want lower prices from their vendors, they often prefer trade promotions, because they may not have to pass it on to their own customers. When they receive start-up allowances, slotting allowances, rebates and sales spiffs, retailers and distributors retain the discretion to market the featured products in their own way; and they often spend less promoting the products than they receive in promotional money.
The fact that not all your trade spending is passed on to consumers does not mean that your money is poorly spent, however it does mean you should measure the results. More specifically, you should:
- Require specific measurable objectives to be defined before each promotion. It’s not enough to simply say we are trying to grow sales. Be specific about which segments, products, etc. and how the promotion is expected to stimulate the additional sales.
- Establish an approval matrix and exception management process
- At certain spending levels and estimated ROIs, trade promotions can be approved automatically
- Proposed promotions outside the matrix require more centralized approval
- Offer more latitude to managers and teams with histories of over delivering the ROI on promotions. Do the opposite with managers and teams with a history of under delivering
- Follow up on how your customers used the money. Did they actually promote your product, or just pocket the money?
- If the promotion was to fund specific favorable product positioning, did you receive that?
- What are the historical returns from promotion spending with the specific customer?
- Is the requested trade spending simply a continuation of the past, because “We always do it?” Or does spending with this customer typically provide the appropriate ROI?
None of this is easy. Measuring the ROI of trade promotions or any marketing effort is difficult and imprecise, and managing the processes takes organizational effort. But none of that should stop you from trying. Wouldn’t you rather be in the 33% of trade promotions that deliver a positive return?