Spar InfoTech, Inc.
What Basic Measurements Do You Need From a Trade Promotion?
What is desired from a Trade Promotion Analysis can be very complex. It can quantify numerous types of market conditions and promotion variations and be used to forecast or plan future promotions. But most companies don’t have the basics and should start with the minimum results needed to have an impact. That is quantifying the incremental sales and profits from promotions. This allows further analysis across numerous promotions.
Incremental Volume. This is measured in the units the Supplier uses to describe their business. It can be Cases, Units, Dozens, Ounces or an equivalent measure to allow comparisons across SKU’s and promotions.
Geographical area of measurement. The level at which Promotions are executed. For Health and Beauty suppliers it is National since they promote to National Drug Chains as well as other National accounts. For soft drink companies, it is chain specific for a bottler’s geographical area. For most CPG food companies, it is by specific geographical market. The geographical area to be measured needs to be how the supplier offers the trade promotion.
Channel of Trade. Many suppliers promote differently by Channel of Trade. Candy companies promote to vending machines customers differently than to a grocery chains. The analysis needs to be for those customers or groups of customers that are being offered the promotion.
Chain vs. Market Analysis. Most Suppliers Promote by Geographical Area and not by retail chain. Retail chains will perform differently within the same market so eventually the retail chain level analysis is a useful tool but initially the analysis should be for the geographical market. Market level analysis removes one problem in quantifying the impact of Trade Promotion which is consumers switching retail stores during a promotion resulting in extra sales for a retail chain but not the supplier. A market level analysis eliminates this problem since lost sales in one retailer result in lower sales in that market for the supplier.
Period Covered. Suppliers run promotions for specific dates. Usually they are long enough so a retail chain can order at the beginning of the promotion, run a promotion, and then order again to replenishment their inventory. In practice the second buy is for Trade Loading. There is a dip in sales the week before the promotional discount is being offered to the retailer because the buyers will allow the retail chains inventory to run low and then replenish it at the start of the promotion at a lower price. The amount of loading is primarily driven by a formula influenced by the percent discount, the cost of holding inventory and the frequency of the promotions. To quantify the impact of trade promotions on incremental volume review the week before the promotion, the promotion period, and the post promoted period (for as long as the retailer uses the excess product purchased during the promotion instead of purchasing the normal sell through volume). For some retailers, this post promoted period can be months when the product offered is physically small, not perishable, high value, has a high off-invoice discount and when promotions are infrequent.
Costs of Promotions. The total cost of the Promotion needs to quantified. Often the only cost considered is the off-invoice discount. When there is BOGO, extra product included with the product, coupons, one free with 11 and other costs they needs to be quantified. The cost in the post promoted period needs be considered as those lost sales are part of the Promotion Expense as is the direct off invoice expense. Getting these costs with scanner data is more difficult since only the incremental volume during the promotion can be measured along with the retail discount to the consumer. See Data Types for a more in depth explanation of what types of data to use in evaluating Trade Promotions.
In summary, a basic trade promotion analysis system needs to calculate incremental unit volume, incremental gross profit in dollars and net profits from the trade promotion taking into consideration lost sales in week before the promotion and the weeks that follow the promotion.