Spar InfoTech, Inc.
Impact of Price Increases
Price increases will often occur during or just before a Trade Promotion. When that happens before or during a promotion it has a material impact on the perceived incremental value delivered from a promotion. The reason Trade Promotions are offered to the Trade just after a Price Increase or concurrently with a price increase is a perception that offering a Trade Promotion (with a price discount) mitigates the impact of the price increase. There is little evidence to believe this happens in the real world but many marketing and sales department believe this.
When a price increase is going to occur the Retailer using standard financial analysis will buy extra product just prior to the increase in price and then will reduce purchases immediately after the price increase by an equal amount. The amounts are almost equal because the retailer just buys extra product prior to the price increase, puts it into inventory and then works it off as quickly as possible to minimize holding costs. Since the retailer does nothing to sell any extra product to the consumer the net impact of the trade loading on overall consumer and therefore supplier sales is zero. Before a price increase the retailer buys an extra 1,000 cases to take advantage of the lower price. The 1,000 cases go into inventory and then to bring the inventory back into line the retailer buys 1,000 less cases right after the price increase. Usually the price increase is a few percent so that the economics of forward buying and holding the inventory mean only a one or two week quantity of sales is trade loaded. What happens is the spike in shipments the week before a price increase is matched by an almost equal drop in shipments the first week the price increase is in effect (or sometimes two weeks). This is in contrast to trade loading from promotions which typically extends for 2 to 8 weeks since the discount during the promotion is more likely to be in the range of 10% justifying a much greater level of Trade Loading.
It is important to quantify the impact of a price increase on shipments as this can have an impact on seasonality and an estimate of the incremental sales from the Trade Promotion. If the price increase occurs in a period when there is no Trade Promotion then it needs to be quantified to insure an estimate of true seasonality is calculated. If it occurs during a Trade Promotion then the impact of the forward buying component of the Trade Loading due to the Price Increase needs to be removed from the Incremental Volume calculated from the Trade Promotion.
If scanner data is being used to analyze the impact of a promotion the price increase will not have an impact since trade loading has no impact on consumer sales and can be ignored.
To calculate the impact of Trade Promotions on Incremental Sales it is important to have a good estimate of seasonality. To have a good estimate of seasonality for Factory Shipments it is necessary to factor in the short term impact of many market factors of which Price Increase is an important one.