Trade promotions - how low can you go?

17 May 2011

How low can you go? I ask this question not about your moral standards or indeed about your limbo dancing ability, but about the depth of retailer trade promotions!

When you last did your regular shop, did you see "better than half price" deals, or have you seen them advertised on TV?  "Buy one get 2 free" deals have started to appear and on the biggest of brands too - I calculate that as a 67% discount!  When I see this, two things immediately spring to mind:

  1. If they can make money at this price, they weren't half making a killing before!
  2. When and where is it going to end?  They'll be paying us to take the stuff away soon.

Can it continue?

When I turn to the marketing press for answers or insight, I'm told this level of discounting is damaging brands (I believe this), is totally unsustainable (I believe this too) and that we should brace ourselves for more of the same! (Bizarrely I believe this one too).

In my simple world, I see the major retailers with market share that has been relatively flat for a while, with an offering that is increasingly homogenous and whose only source of competitive advantage is now price. They no longer compete to be different, they compete to be cheaper.  Mix this with an environment of shrinking consumer disposable incomes and the British love for a bargain, and it's not really surprising that promotion intensity in terms of frequency and depth is increasing.

Who pays the price?

So what about the 'poor' consumer goods companies who are predominantly the ones footing the bill?  If it's bad for brands and unsustainable, why are they behaving this way?  Well, seems to me it's all about growth.  Are any brands planning to contract this year? I doubt it.  As consumers stop consuming, the pressure to promote to drive sales and grow market share rises inexorably. It must only be a matter of time before profits suffer, even with the most successful cost and efficiency drives.

Now that commodity prices are on the rise again, the issue of pricing and discounting must be the top challenge facing consumer goods companies. Does that make it the top challenge facing their CIO's and software vendors?

Things used to be simple

As I remember it, there was a time when the purpose of a promotion was to entice consumers to buy a product when it was cheap on deal, in the hope that once they tried it they'd be back every week to buy it at full price.

Success was a higher level of base sales after the promotional spike than the level before. The cost was a simple calculation based on base volumes and prices compared with the discounts and volume uplifts. Pretty straightforward stuff even for an ERP vendor!

What's the point?

These days, I'm not sure if promotions have any deeper purpose other than to drive short-term sales and volume market share. I recently read an evaluation of one promotion that read...

Conclusion: promotion did not meet its intended objectives. 
Future Recommendation: change the objectives.  

I got a sense of some frustration from this only half tongue in cheek statement.

I wouldn't have thought that many promotions deliver a subsequent base sales increase these days. Either because our cupboards are so crammed full with the stuff we don't come back for weeks to buy any more or if we do want some more we restrain ourselves, sure in the knowledge it will be back on deal soon enough. So the objectives seem to have shifted towards driving volume at (presumably) incremental profitability.

To work this out means that we need a calculator, ideally packaged up and sold as a trade promotion evaluation system. Of course, we know our prices and discounts, but what about our base volume, do we even have one anymore?  But the biggest shift seems to be that with increasing depth of deal and with the cash strapped, bargain loving, promiscuous promotional junkies out there the cannibalisation impact is huge. We steal our own future sales (when we're not on deal), we steal from our other brands, from our competitor brands (good for us but maybe not the retailer), from other retailers (good for retailer but maybe not for us), we even steal from other categories (after all, there's only so much food we can eat, or so many times a day we can clean ourselves, our houses and our clothes).  Who can assess the impact of all of these on the profitability of the promotion for the manufacturer and the retailer?

Who knows the answer?

Well, apparently, there are companies out there analysing thousands of historical trade promotions every month, who can give me the answers to these questions (displayed as whizzo charts and presented as insights). This always struck me as like saying "I've managed to correlate exactly our sales volume with the weather - now all I've got to do is forecast the weather!"

But then again, perhaps they do  have something.  If it's all too complex, rather than invest all our efforts into building expensive systems that try to calculate the impact of multiple variables (all of which we estimate) to pre-evaluate and optimise our promotions, let's shift the focus to the post-evaluation. If we have simpler rules for deciding whether a promotion actually worked for us or not, then when we know the actual impacts,  perhaps we should simply do more of what worked and less of what didn't! 

Just a thought…what do you think?

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Seb joined Unilever as a Maths graduate and after just a couple of years decided that IT must be more exciting than Accounting. He then held various IT roles from programming onwards, working on the usual array of ERP implementations, open systems, 4GL's etc, before joining Müller in 1996 after obtaining an MBA from the Open University.

Since then, he has led the IT teams in the UK and for the Müller Group based in Germany in getting to grips with the joys of SAP and rolling it out into the European sites.

For the last 2 years Seb has worked outside of IT in a strategy and change management role, but still has a view!

Disclaimer: The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Bluefin Solutions Ltd.

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