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Promotions: Are They Worth the Price?

You probably know how expensive promotions are for Fast Moving Consumer Good brands (a dollar value equal to 20% or more of gross revenue), and that only about 40% of them have a positive Return on Investment (ROI). So, we ask the question: “Why do we promote at all?” In this article we examine a few of the reasons why you may be promoting.

Trial Purchase

Trial is one of, if not the most important reasons to promote. Promotions introduce new products into a shopper’s consideration set and induce them to try the product. Promotions draw attention to your product. Without trial, there is no repeat purchase.

This applies to completely new products and to a product that is new to a geography… said another way, expanding distribution. Promotions should be part of the pitch to add new products and to add distribution in new divisions/banners/regions. Your negotiation should include introductory promotion(s) in the discussion with other customer “requirements” like slotting or free fill.

Repeat Purchase

We want shoppers to only buy our product and only our product. Most, however, have several products in their consideration set. If Brand A is not available or on-deal, they will buy Brand B, or C, or D. Some shoppers, especially during periods of restricted disposable income, will only buy products that are on promotion, actively hunting for deals across brands. Promoting to existing buyers gets you repeat, but practically speaking it isn’t a great investment if you’re just preventing them buying something else or giving them an opportunity to stock up.

Induce Switching

If a shopper has a consideration set that includes your product, promotions can get them to switch their purchase. As stated earlier, shoppers will consider multiple products. When you attract shoppers to your product instead of a competitor, the investment you make in the promotion is good. The flip side of this, however, is if the promotion cannibalizes the sale of different pack sizes in your own portfolio. In this case you are only subsidizing the sale of another product’s base volume.

Maintaining Equilibrium (and Distribution)

The risk of what happens if you don’t promote is also front and center in decision making. Retailers have a finite number of promotional opportunities. If you do not maintain frequency and type of promotion year over year, chances are you will lose sales, competitors will take the promotion slot, and shoppers will switch their sale to products in their decision set that are promoted. Also, if a product does not meet the retailer’s expectation for velocity, they may threaten discontinuation. Promotion may be the only opportunity to attempt to build velocity and keep distribution.

Building Brand Loyalty

Brand loyalty is an important objective, but you probably not achieving this to any great degree with any one single promotion. It is best to view this outcome as the result of the consumer’s total experience with your product and brand: How they buy it, and their love for the product and brand. Truly loyal customers are the those that buy the product when it’s not on sale.

Considerations for Promotion Planning

  1. Determine your fair share of promotions. If your sales represent 40% of the category, it is reasonable to ask for 40% of the promotions. If you get less than your fair share, use this as a negotiation lever. If you want more than your fair share, expect that you’ll have to invest. The customer will need incentive to give you more activity.
  2. Identify the existing mix (type; tpr, feature ad, display), frequency, and depth of discount of your promotions and track this over time. When possible, track your key competitors. Understanding this gives you a promotional framework that helps identify trends and gaps. Use what you learn here to make adjustments.
  3. Prioritize new products. Use promotions to get new products into the hands of consumers.
  4. Evaluate the consideration set. If you have a large group of external competitors and a small group of other products in your portfolio, chances are that when you promote, the benefit of stealing sales from competitors will outweigh the risk cannibalizing sale of your own products. Conversely, if you have a small group of external competitors, and a large group of other products in your portfolio, promotions may be just spending money on switching sales amongst your own products.
  5. Evaluate promotion outcome. Whether using simple lift KPIs or measuring ROI, learn how promotions perform. Evaluate promotions across products at one customer. Evaluate the promotion of one product across customers. Evaluate the performance of promotions around key initiatives -like a product launch- or holidays/special events This enables you make the best decisions possible. Do more of what works and get better at what doesn’t.

Good promotional planning mixes mechanics, maintains brand equity, and aligns to longer-term brand strategies. Doing this well, however, takes investment- whether in people to do it manually or in a business system that adds standardization, structure, and automation to the process. It is, without doubt, an element of the formula for delivering sustainable profit and growth in fast moving consumer goods.

About UpClear

UpClear makes software used by Consumer Goods brands to improve the management of sales & trade spending. Its BluePlanner platform is an integrated solution supporting Trade Promotion ManagementTrade Promotion OptimizationIntegrated Business Planning, and Revenue Growth Management.    

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