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CHAPTER 15
Sales Promotion and the Role
of Trade Promotions
© 2010 South-Western, a part of Cengage Learning
All rights reserved.
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Eighth Edition
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 promotion program.
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–2
Chapter Objectives (cont’d)
After reading this chapter you should be able to:
5. Comprehend 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
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–3
The Nature of Sales Promotion
• Sales Promotion
 Is any incentive that is additional to the basic
benefits provided by the brand and temporarily
changes its perceived price or value
 Is short-term oriented and capable of influencing
behavior because it offers buyers superior value
and can make them feel better
about the buying experience
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–4
The Nature of Sales Promotion (cont’d)
• Purposes of Sales Promotion
 To induce the trade (wholesalers and
retailers) or consumers to buy a brand
 To encourage the manufacturer’s sales
force to sell a brand aggressively
 To encourage immediate, desired
shopping and purchasing behaviors
from their consumers
 To encourage people to increase their
donations to nonprofits now rather than
later
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–5
Figure 15.1
Brand-Level Promotion Targets
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–6
Increased Budgetary Allocations
to Promotions
• Advertising Spending
 Advertising expenditures have declined in recent
years while promotion spending has increased
• Push Strategy
 Using promotional efforts to push product through the
selling chain
• Pull Strategy
 Using consumer advertising to pull product through
the channel of distribution
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–7
Table 15.1
Push and Pull Strategies
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–8
Table 15.2
Developments Underlying the Growth in Promotions
• Shift in manufacturer versus retailer balance of power
• Increased brand parity and price sensitivity
• Reduced brand loyalty
• Splintered mass market and reduced media
effectiveness
• Emphasis on short-term results in corporate reward
structures
• Increase in responsiveness of consumers to promotion
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–9
A Consequence of the Increase:
New Accounting Rules
• Financial Accounting Standards Board (FASB)
Emerging Issues Task Force
 Regulations EITF 00-14 and 00-25 require that price
discount sales promotion—including those directed to
retailers and consumers—must be treated as
reductions in sales revenue.
 Adherence to the new rules will cut reported net sales
for CPG companies by 8.5% on average.
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–10
Table 15.3
Illustration of “Old” and “New” Accounting Procedure
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–11
Table 15.4
Tasks That Promotions Can and Cannot Accomplish
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
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–12
Table 15.4
Tasks That Promotions Can and Cannot Accomplish (cont’d)
Sales Promotions Cannot
• Compensate for a poorly trained sales force or for 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
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–13
The Role of Trade Promotions
• Trade Promotions’ Scope and Objectives
1. Introducing new or revised products
2. Increasing distribution of new packages or sizes
3. Building retail inventories
4. Maintaining or increasing manufacturer’s share of shelf space
5. Obtaining displays outside normal shelf locations
6. Reducing excess inventories and increasing turnover
7. Achieving product features in retailers’ advertisements
8. Countering competitive activity
9. Selling as much as possible to final consumers
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–14
Ingredients for a Successful
Trade Promotion Program
Financial
Incentive
Minimize
Retailer’s Effort
and Cost
Correct
Timing
Quick
Results
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
Improved
Retailer
Performance
15–15
Table 15.5
Illustration of Forward Buying and Diverting
1. In preparation for a huge promotional event in 2009 surrounding the Cinco de Mayo
celebration of Mexican independence on May 5, Beauty Products Inc.—a hypothetical
manufacturer of personal-care products—extends an off-invoice offer to grocery
chains in the Los Angeles area. This promotion is a 15 percent off-invoice allowance
on all orders placed for SynActive shampoo (a hypothetical brand) during the week
beginning April 3, 2009, and extending through the week beginning April 24, 2009.
2. Assume that FB&D Supermarkets of Los Angeles (a hypothetical chain) orders 15,000
cases of SynActive—many more cases than it typically would sell in its own stores
during any four-week period. Beauty Products Inc. has offered the 15 percent offinvoice allowance to FB&D Supermarkets with the expectation that FB&D will reduce
SynActive’s retail price to consumers by as much as 15 percent during the week of
Cinco de Mayo festivities.
3. FB&D sells at the discounted price only 3,000 of the 15,000 cases purchased. (The
remaining cases include some that are forward bought and some that will be diverted.)
4. FB&D resells 5,000 cases of SynActive to Opportunistic Food Brokers—a company
that services grocery retailers throughout the West. (This is the practice of diverting.)
5. FB&D later sells the remaining 7,000 cases of SynActive to shoppers in its own stores
but at the regular, full price. (These 7,000 cases represent forward buys.)
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–16
Trade Allowances
• Trade Allowances
 Are used because manufacturers hope to increase
purchases of the manufacturer’s brand by
wholesalers and/or retailers
 Augment consumers’ purchases of the
manufacturers’ brand from retailers
 Foster the expectation that retailers will pass along
their savings to consumers
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–17
Trade Allowances (cont’d)
Major Forms of
Trade Allowances
Off-Invoice
Allowances
Bill-Back
Allowances
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
Slotting and
Deslotting
Allowances
15–18
Major Forms of Trade Allowances
Off-Invoice
Allowances
• Most frequently used form
• Deals offered to trade that permit wholesalers and
retailers to deduct a fixed amount from the invoice
• Retailers may not pass along discounts to consumers
Bill-Back
Allowances
• Retailers receive allowances for featuring the
manufacturer’s brand in advertisements or for providing
special displays
Slotting
Allowances
• Fees that manufacturers pay retailers for access to the
slot, or location
• Fees paid by a manufacturer to get its new brand
accepted by retailers—a form of bribery? or legitimate
cost of doing business?
Exit Fees
(Deslotting
Allowances)
• If brand does not meet an average weekly sales volume,
the retailer can assess a deslotting charge for removing
the item from its distribution center,
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–19
Undesirable Consequences of Off-Invoice
Allowances: Forward Buying and Diverting
Forward
Buying
• 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
• Actions leads to increased distribution costs
• Manufacturers experience reduced margins due to price
discounts
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
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–20
Efforts to Rectify
Trade Promotion Problems
Reducing the
Negative Effects of
Trade Allowances
Everyday Low
Pricing (EDLP)
Pay-forPerformance
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
Account-Specific
Marketing
15–21
Trade Promotion Activities
Everyday Low Pricing
(EDLP) or Value Pricing
• When a retailer charges the same price for
a particular brand day in and day out
EDLP(M)
• A form of pricing whereby a manufacturer
charges retailers the same price for a
particular brand day in and day out.
Pay-for-Performance
Programs
• Reward retailers for selling the brands
supported with trade allowances rather
than merely buying these brands.
• Produce win-win-win situations
• Provide incentives to the retailer only for
the items that are sold to consumers
during the agreed-upon time period
• Benefit all parties: consumers, retailers,
and manufacturers
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–22
Scanning Agents
• Activities that scanning agents profit from:
 Collecting scanner data from retailers
 Verifying the amount of product movement that meets
the manufacturer’s promotional requirements and
warrants compensation
 Paying the retailer
 Collecting funds from the manufacturer along with a
commission for services rendered
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–23
Trade Promotion Activities (cont’d)
Account-Specific
Marketing
(Co-Marketing)
• Creates promotional and advertising
activities that a manufacturer customizes to
specific retail accounts—local radio tie-in
advertising, loyalty programs
• Relatively recent innovation
• Requires much effort and can be costly
• The future of this practice is uncertain
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–24
Table 15.6
Nine Empirical 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 percent of trade deals.
5. Higher-market-share brands are less deal elastic.
6. Advertised promotions can result in increased store traffic.
7. Feature advertising and displays operate synergistically to influence sales
of discounted brands.
8. Promotions in one product category affect sales of brands in
complementary and competitive categories.
9. The effects of promoting higher- and lower-quality brands are asymmetric.
© 2010 South-Western, a part of Cengage Learning. All rights reserved.
15–25