How Much Trade Promotion is Enough?

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Most brands know trade promotion is necessary in the grocery industry, but the real question is how much is enough? Some brands can get away with trade spends of 10-15% of shipped sales, while others need 20-25%. Trade promotion is essential for almost all categories, as Chevalier and Curhan (1976) were one of the first to have shown that product family or class has little influence on the effectiveness of this trade promotion investment.

In addition, Haines (2007) explains that the power dynamic between retailer and manufacturer have waxed and waned as consolidation hit both industries, and trade promotion has become a tug-of-war as each side positions for the best deal. Despite its complexity, manufacturers still dedicate half of their marketing budgets towards trade promotion, and over $500 billion globally (Anderson & Fox, 2019).

And surprisingly, the fundamentals behind trade promotion have not changed much over the last 40 years. The familiar mediums such as, in-store displays, temporary price reductions, loyalty coupons, and BOGOs continue to be the primary tools for manufacturers. My father was in the supermarket industry his whole life, most of the time as a deli/dairy merchandiser for a distributor. As a kid, sometimes I would go with him on a Saturday to a store, and I remember playing with all these red plastic "BOGO" placards all over the store. :-)

Yet many big manufacturers continue to manage the insatiable trade promo monster with only high-level indicators of success, such as volume or sales at the register. These programs' profitability tends to get mixed in with the category in the resulting rollups of the business. However, brands cannot afford to miss on these big investments. They need to find the right level for their brand using the right promotion vehicle in the right chain at the right time of the year. Promotional heuristics such as 15% trade for this entire category is too coarse, and you are most likely leaving profit on the table.

Here at AnalyzeBrand.com we can help find what is working at a detail level and put the automated KPIs in place to monitor and course correct.

JimSwallow@AnalyzeBrand.com

References:

Anderson, E. T., & Fox, E. J. (2019). How price promotions work: A review of practice and theory. Handbook of the Economics of Marketing, 1, 497-552.

Chevalier, M., & Curhan, R. C. (1976). Retail promotions as a function of trade promotions: A descriptive analysis. Sloan Management Review (pre-1986), 18(1), 19.

Haines, D. C. (2007). Manufacturer and retailer power in retailer response to trade discounts. Academy of Marketing Studies Journal, 11(2), 1.