Changing the Channel: A Better Way To Do Trade Promotions
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In the cold war between manufacturers and retailers, trade promotions are viewed with great suspicion. Regardless of the terms of a given deal, each party believes the other is trying to get the upper hand. The watchword is trust, but verify.
In theory, trade promotions should benefit everyone involved. The manufacturer offers the retailer a product temporarily at a lower price; in return for selling its goods at a lower unit cost, the manufacturer intends to earn new customers and build the loyalty of current ones. Likewise, the retailer, by selling the product at a discount, should enjoy increased sales during the promotion, while bearing little in the way of extra costs. And consumers, of course, should save money on their purchases. In practice, however, manufacturers and retailers often manipulate the system in a zero-sum game, and consumers are sometimes left out altogether.
It need not be that way. Over the past three years, we’ve examined the theoretical and practical problems associated with trade promotions, and we are convinced that it is possible to create the right kind of deal — a transparent system that generates mutual trust and, yes, produces the proverbial win-win outcome for both manufacturers and retailers. The key is proper implementation of what is thus far a little understood tool.
As most marketing managers know, the most common form of trade promotion is the “off invoice,” so called because retailers see the savings immediately reflected in their invoices. Retailers frequently abuse these promotions, however. They often purchase much more than they can sell during the official promotion period and then either continue to sell discounted products for far longer than the manufacturer had desired — thus eroding the brand’s equity —or re-establish the product’s regular price and simply pocket the savings themselves. They frequently also sell some of their discounted excess inventory to other retailers at a smaller discount, a practice known as diverting.
Increasingly, manufacturers, having wised up to these tactics, are testing another approach: the pay-for-performance trade promotion. Pay for performance means that retailers get rewarded according to how much they sell, not how much they buy. Because the promotion results are usually determined by examining scanner data, these promotions are called “scan backs.” And yet scan backs so far are unpopular, too.
References (21)
1. K. Partch, “The Trade Promotion Quagmire,” Supermarket Business 53 (June 1998): 130 (an Andersen Consulting — now Accenture —report summary). For a comprehensive review of issues affecting manufacturer-retailer relationships, see K. Ailawadi, “The Retail Power-Performance Conundrum: What Have We Learned?” Journal of Retailing, in press.
2. R. Blattberg and S. Neslin, “Sales Promotions Concepts, Methods and Strategies” (New Jersey: Prentice Hall, 1990).
