©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 1 Sales Promotion Overview and the Role of Trade Promotion

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter Objectives After reading this chapter you should be able to: 1.Understand the nature and purpose of sales promotions. 2.Know the factors that account for the increased investment in promotions, especially those that are trade oriented. 3.Recognize the tasks that promotions can and cannot accomplish. 4.Appreciate the objectives of trade-oriented promotions and the factors critical to building a successful trade promotions program. 2

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter Objectives (cont’d) 5.Explain the various forms of trade allowances and the reasons for their use. 6.Be aware of forward buying and diverting and how these practices emerge from manufacturers’ use of off-invoice allowances. 7.Appreciate the role of everyday low pricing (EDLP) and pay-for-performance programs as means of reducing forward buying and diverting. 8.Understand nine empirical generalizations about promotions. 3

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. It’s a Matter of Power: Nike versus Foot Locker 4

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Nature of Sales Promotion What Exactly is Sales Promotion? All promotional activities (excluding advertising, public relations, personal selling, direct marketing, and online marketing/social media) that stimulate short term behavioral responses from consumers, the trade (i.e., distributors, wholesalers, or retailers), and/or the company’s own sales force. Incentives in addition to the product’s basic benefits. 5

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Examples of Sales Promotion Techniques Consumer Samples Coupons Price-offs In/on pack premiums Self-liquidating premiums Bonus packs POP materials Contests Sweepstakes Games Trade Buying allowances Push money Merchandise allowances Advertising allowances Display allowances Specialty advertising Trade shows Sales Force Sales contests Bonuses Meetings Sales aides Training materials POP displays 6

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Baseball Promotions: The Good, the Bad, and the Ugly 7 Taco Bell, Steal a Base – Free Taco, World Series Promotion True Value – MLB Opening Day Free Baseball Promotion Ten Cent Beer Night, Municipal Stadium, Cleveland, OH Disco Demolition Night, Comiskey Park, Chicago, IL

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 18.1: Brand-Level Promotion Targets 8

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Developments Underlying the Growth in Promotions 9

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Push and Pull Strategies 10

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A Shift in Accounting Rules Promotions expenditures are now treated as reductions in sales revenue instead of as current expenses Under the “new” rules, price-discounting promotions are appropriately treated as direct reductions from revenue rather than as indirect expense reductions This can motivate brand managers to allocate relatively more money into advertising or into other forms of sales promotions other than price discounts 11

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Illustration of “Old” and “New” Accounting Procedure 12

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sales Promotions Can … Stimulate sales force enthusiasm for a new, improved, or mature product Invigorate sales of a mature brand Facilitate the introduction of new products to the trade Increase on- and off-shelf merchandising space Neutralize competitive advertising and sales promotions Obtain trial purchases from consumers Hold current users by encouraging repeat purchases Increase product usage by loading consumers Preempt competition by loading consumers Reinforce advertising 13

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sales Promotions Cannot ….. Compensate for a poorly trained sales force or a lack of advertising Give the trade or consumers any compelling long- term reason to continue purchasing a brand Permanently stop an established brand’s declining sales trend or change the basic nonacceptance of an undesired product 14

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Invigorating Sales of a Mature Brand 15

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problems with an Excessive Emphasis on Sales Promotion It can: 1.Damage image of product 2.Diminish brand loyalty 3.Reduce consumption 16

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Specific Decisions to Be Made in All Sales Promotion Programs 1.Size of the incentive (e.g., 15-20% savings) 2.Conditions for participation 3.Distribution vehicle 4.Duration of promotion (e.g., repurchase cycle) 5.Timing of promotion 6.Total sales promotion budget 17

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trade Promotions Scope and objectives: Introducing new or revised products Increasing distribution of new packages or sizes Building retail inventories Maintaining or increasing the manufacturer’s share of shelf space Obtaining displays outside normal shelf locations Reducing excess inventories and increasing turnover Achieving product features in retailers’ advertisements Countering competitive activity Selling as much as possible to final consumers 18

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ingredients for a Successful Trade Promotion Program Key Ingredients to Success Financial incentive Correct timing Minimize retailer’s effort/cost Quick results Improve retailer performance 19

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Examples of Trade Promotion Types 1.Trade Allowances a)Off-invoice allowances b)Bill-back allowances c)Slotting allowances and exit fees 2.Cooperative advertising and vendor support programs 3.Trade contests and trade incentives 4.POP materials 5.Training programs 6.Specialty advertising 7.Trade shows 20

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Major Forms of Trade Allowances Most frequently used form Free goods or price reductions (e.g., “on deal”) for purchases of specific quantity of goods (e.g., 5 free cases or 5% off if purchase 50 cases) Retailers do not necessarily pass along the discounts to consumers Off-invoice allowances 21

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Major Forms of Trade Allowances Retailers receive allowances for featuring the manufacturer’s brand in advertisements or for providing special displays. The retailer bills back the manufacturer for services rendered. Bill-back allowances 22

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Large Chains Don’t Always Pass Along Deals to Consumers (Why?) 23

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forward Buying and Problems Forward buying problems: 1.Deal savings not passed on to consumers 2.Retailer and distributor costs increase 3.Manufacturers have higher production costs 4.Diverting One possible solution: billing for the deal and holding inventory/producing when needed Forward Buying Buying larger quantities than needed due to deals. 24

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Diverting and Problems Diverting Occurs when a manufacturer restricts a deal to a limited geographical area rather than making it available nationally. Retailers then buy abnormally large quantities at the deal price and then sell off, at a small profit margin, the excess quantities in other higher-priced geographical areas. Diverting Problems: 1.Undermines regional marketing efforts 2.Products intended for foreign markets are diverted back into domestic markets 3.Product quality can suffer due to delays 4.Product tampering can be more difficult to trace due to diverting 25

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Major Forms of Trade Allowances Slotting allowances The fees manufacturers pay retailers for access to a slot, or location in retailer’s (e.g., grocer’s) warehouse Typically paid (in cash) by a manufacturer to get its new brand accepted by retailers Any problems with slotting fees? 26

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exit Fees 27 In order for the brand to remain in the chain’s distribution center, an average weekly volume amount must be met. If the brand does not meet the stipulated sales amount, the chain will issue a deslotting charge. The charge, or exit fee, is intended to cover handling costs for removing the item from the distribution center.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Category Management 28 Category Management: a system established by Procter & Gamble whereby each product category within a company is managed by a category manager who has direct profit responsibility (also at retail level) Why the shift from brand mgt.  category mgt.? Different consumer preferences across regions of country Scanner data (including competitive data) Shift of power from manufacturers  retailers Need for a longer-term focus

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Five Stages of Category Management (SKUs, Planograms) 29

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Efforts to Try to Rectify Trade Allowance Problems Everyday Low Pricing (EDLP) Pay-for-Performance Programs Account-Specific Marketing 30

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Everyday Low Pricing (EDLP) Everyday Low Pricing: Is a form of pricing whereby a manufacturer charges the trade the same price for a particular brand day in and day out. 31 Introduced by P&G in the 1990’s due to its desire to compete on the basis of providing product value and not mere price savings. Because off-invoice allowances are not offered under this pricing strategy, wholesalers and retailers have no reason to forward buy or divert. Yet, it is rare for an item to sell at the same (low) price throughout the entire country.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pay-for-Performance Pay-for-Performance: Rewards retailers for actually selling the manufacturer’s brand supported with a trade allowance rather than for merely buying the brand at an off-invoice price. This also is known as a “scandown.” 1.Agreed upon period for mfg. offer of deal price ($1.79) to retailer (vs. regular price of $1.99) 2.Retailer's scanning verifies 5,680 units sold at $ Mfg. reimburses retailer for: a)Reduced 5680 units = $1,136 b)Trade 5680 units = 284 $1,420 32

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Account Specific Marketing Account Specific Marketing: Also called co-marketing, this characterizes promotional and advertising activity that a manufacturer customizes to specific retail accounts. Promotion dollars are directed to specific retail customers Manufacturer advertising and promotion programs are developed in concert with retail advertising and promotion programs Requires a lot of effort in both development and implementation and is costly, so interest among packaged goods companies may have peaked That said, powerful retailers benefit from well-designed account-specific programs, so account specific marketing is here to stay 33

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cooperative Advertising 34 Cooperative (co-op) advertising: An arrangement between a manufacturer and retailer whereby the manufacturer pays for all or some of the advertising costs undertaken by the retailer. It is initiated by the manufacturer. Compare this to vendor support system (same as a co-op, but initiated by large retailers)

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cooperative Advertising 35 Five Common Elements Specified time period Accrual Payment share Performance guidelines Billing for reimbursement

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cooperative Advertising 36

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trade Contests, Incentives and Push Money 37

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Specialty Advertising 38 Specialty Advertising An advertising and promotions medium that utilizes useful or decorative articles to transmit to a target audience an organization's identification and promotional message

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Nine Empirical Generalizations about Promotions 39