Robbing Peter to Pay Paul

Business Processes
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An Introduction to Promotional Cannibalization

This is Part 2 of UpClear’s Series on Promotional ROI and Optimizing Trade Spend. In the first blog, we looked at the 5 key building blocks to calculating your ROI. In future posts, we will discuss areas such as why to promote at all and how to drive promotional effectiveness. Here, though, we investigate the mystery of cannibalization…

“I have delivered a 300% uplift on that last four-pack promotion!” says the account manager proudly, dreaming of hitting his year-end target and getting a meaty bonus. Marvellous news! … Until the annoyed Brand Manager points out total volume across the range is down massively over the same period. Post-event analysis clearly shows that while the ‘four pack’ delivered incremental volume*, shoppers did not buy as many six or eight packs as they would normally: they have been victims of what is known as “Cannibalization”.

Size Cannibalization

From the shopper’s perspective, this is a completely logical response to seeing a four-pack promotion. The promoted cost of two four-packs is often less than that of a non-promoted eight pack and unless they have a specific requirement for six-pack, e.g. a six-person householder, they will likely purchase the smaller promoted pack.

For manufacturers, though, the issue is slightly more complicated. There may be a perfectly legitimate reason for promoting just the one pack (we will come back to “Why promote?” another day), but frequently across a product range, due to economies of scale, more margin is made on larger packs than smaller ones. Driving volume into the four-pack rather than sixes or eights, can reduce the overall manufacturer’s revenue for the period if the uplift and cost of promoting the former does not balance the cannibalization of the latter.

Variant Cannibalization

The same issue can even arise when you have a range of the same product: think of, for example 500ml bottles of coconut, strawberry, or mint shower gels. Promoting coconut only will almost inevitably lead to reduction in volume for the other two, which may be fine except if the cost of producing the strawberry and mint variant is considerably less than the ‘tropical’ one.  Manufacturers need to understand not only the cost of such activities, but also the interaction between these different variants.

Horizontal Cannibalization

Ever been into a store and “stocked up” on coffee, dishwasher tablets, detergent, etc., by buying two or three packs instead of one because there’s a promotion? The result, particularly for longer-shelf life categories, is a large uplift of promoted volume, with associated costs, but often too a “post-promo-dip” in base volumes. Shoppers have ‘cupboard’ fill and so no need to buy again at a non-promoted price. Appreciating the length and depth of this “dip” are important factors in calculating the effectiveness of the original promotion. It is all very well selling 10,000 cases for two weeks, but if you then sell only half your base volume during the following month, it is possible you shouldn’t have promoted at all.

Accounting for Cannibalization

Account managers therefore need to take a wider view, rather than planning each event at the SKU level in isolation. Running an “Impact” report in their TPM solution will calculate not only the profitability of promoting the four-pack, but also the ‘cost’ of cannibalizing the sixes and eights too. Without conducting this pre-event analysis and understanding the effects of cannibalization across an entire range, the ROI of an individual promotion may be overstated. With this knowledge at hand, manufacturers can then decide whether it is a good idea to rob Peter to pay Paul.

If you would like to find out more, have any comments on this piece or would like to suggest future topics please do not hesitate to contact us at: info@upclear.com

* See Part 1 for an explanation of “Base” and “Incremental” volumes