 2007 Thomson South-Western Sales Promotion Overview and the Role of Trade Promotions Chapter Seventeen

Chapter Seventeen Objectives Understand the nature and purpose of sales promotions. Know the factors that account for the increased investment in promotions, especially those that are trade-oriented. Recognize the tasks that promotions can and cannot accomplish.

Chapter Seventeen Objectives Appreciate the objectives of trade- oriented promotions and the factors critical to building a successful trade promotion program. Comprehend the various forms of trade allowances and the reasons for their usage.

Chapter Seventeen Objectives Be aware of forward buying and diverting and how they are created by manufacturers’ use of off-invoice allowances. Appreciate the role of everyday low pricing (EDLP) and pay-for-performance programs as means of reducing forward buying and diverting.

Chapter Seventeen Objectives Recognize the concept and practice known as efficient consumer response (ECR). Appreciate the practice of category management. Understand nine empirical generalizations about promotions.

Introduction to Sales Promotion What Exactly is Sales Promotion? Any incentive used by manufacturers to induce the trade and/or consumers to buy a brand and encourage sales force to aggressively sell it.

Introduction to Sales Promotion What Exactly is Sales Promotion? The incentive is additional to the basic benefits provided by the brand and temporarily changes its perceived price or value

Introduction to Sales Promotion Promotion Targets All three groups – the sales force, retailers and consumers – are targets of sales promotional efforts

Increased Budgetary Allocations to Promotions Advertising spending as a percentage of total marketing communications expenditures has declined in recent years. Promotional spending, however, has steadily increased.

Factors Accounting for the Shift Pull Strategy Using Consumer advertising to pull product through the channel of distribution Push Strategy Using Consumer advertising to push product through the channel of distribution

Illustration of “Old” and “New” Accounting Procedures

Sales Promotions – Can: Stimulate sales force Invigorate mature brand sales Facilitate introduction of new products Increase merchandising space Neutralize competitive ads Obtain trail purchases Hold current users Increase product usage Preempt competition Reinforce advertising

Sales Promotions - Can’t: Compensate for lack of training and advertising Give a long-term reason for repeat purchases of the brand Permanently stop an established brand’s declining sales or basic non-acceptance

The Role of Trade Promotion Introduce new or revised products Increase distribution of new packages or sizes Build retail inventories Maintain/Increase manufacturer’s shelf space Obtain displays outside shelf locations Reduce excess inventory Achieve product features in retailer’s ads Counter competitive activity Sell as much as possible to final consumers

Trade Promotion Key Ingredients to Success Financial incentive Correct timing Minimize retailer’s effort/cost Quick results Improve retailer performance

Trade Allowances Used by manufacturers to reward wholesalers and retailers for performing activities in support of the manufacturer’s brand

Trade Allowances By using trade allowances, manufacturers hope to: Increase purchases of the manufacturer’s brand by wholesalers and/or retailers. Augment consumers’ purchases of the manufacturers’ brand from retailers. Expectation that retailers will pass along their savings to consumers.

Major Forms of Trade Allowances Most frequently used form Deals offered periodically to trade that permit wholesalers and retailers to deduct a fixed amount from the invoice Retailers do not necessarily pass along to consumers the discounts Off-invoice allowances Bill-back allowances Slotting allowances

Major Forms of Trade Allowances Retailers receive allowances for featuring the manufacturer’s brand in advertisements or for providing special displays Slotting allowances Bill-back allowances Off-invoice allowances

Major Forms of Trade Allowances The fees manufacturers pay retailers for access to the slot, or location Typically paid by a manufacturer to get its new brand accepted by retailers Off-Invoice allowances Bill-back allowances Slotting allowances

Exit fees If a brand does not meet a stipulated sales amount, the chain will issue a deslotting charge, or exit fee to cover handling costs for removing the item from the distribution center.

Forward Buying and Diverting Retailers purchase enough products on deal to carry them over until the manufacturer’s next regularly scheduled deal Retailers’ savings from forward buying often are not passed on to consumers Leads to increased distribution costs Manufacturers experience reduced margins due to price discounts Forward BuyingDiverting

Forward Buying and Diverting Occurs when a manufacturer restricts a deal to a limited geographical area Retailers buy large quantities at the deal price and then resell the excess quantities in other geographical areas Product quality potentially suffers due to delays and serious problem could result from product tampering Forward BuyingDiverting

Efforts to Rectify Trade Promotion Problems Efficient Consumer Response (ECR) Category Management Everyday Low Pricing (EDLP) Pay-for-Performance Programs Account-Specific Marketing

Generalizations About Promotions 1. Temporary retail price reductions substantially increase sales 2. The greater the frequency of deals, the lower the height of the deal spike 3. The frequency of deals changes the consumer’s reference price 4. Retailers pass-through less than 100% of trade deals 5. Higher market share brands are less deal elastic

Generalizations About Promotions 7. Feature advertising and displays operate synergistically to influence sales of discounted brands 6. Advertised promotions can result in increased store traffic 8. Promotions in one product category affect sales of complementary and competitive products 9. The effects of promoting higher-and lower-quality brands are asymmetric