Profit-less Trade Promotion is Like a Love-less Romance

Well maybe that was a harsh or uncomfortable analogy, especially when it's a week away from Valentine's Day. 

But as harsh or uncomfortable as it is, it's true.

Retailers tend to look at promotions differently than brands do. If you’re a brand, you look at promotion in terms of ROI – because, common sense right? Unless you and your investors want to be a non-profit brand, a negative ROI on a promotion is not a nice-to-have. You MUST make a profit.

Retailers, however, may not be as into your promotions (and how they perform) as you are. To them, you are just one of their many brand options. They DON’T CARE which one sells, as long as someone sells. They look at both everyday sales and promotions as dollars in their pocket, both from the brand and from the shopper. The one who brings the most dollars per inch of shelf wins. This isn’t a negative judgment on retailers; they just want what everyone wants in business - to make money. You’d look at it the same way if you were in their shoes. 

"So how can I possibly compete?" 

Contrary to popular belief, you DON’T have to promote just to stay on the shelf.

If the retailer thinks you’re a brand that drives consistently high everyday sales, that’s enough to stay on their shelf forever. If they look at you as a brand who promotes intelligently to measurably drive even more long term sales, even better. If they ask you for promotion dollars and you just give it to them without any profit requirements... what do you think will happen?

This may sound harsh – but if you believe you do have to discount, it’s because you are in a weak position. Fact is, if you focus on product value and driving repeat sales with fanatic shoppers, the retailer will be happy anyway, and you will stay on their shelf purely on the strength of sales velocity. On the other hand, if you hand them promotional dollars today but don’t tomorrow, they will give you no particular loyalty in return.

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Price discounts (the most popular promotional tactic, and coincidentally the laziest) may drive short term sales, but long term they encourage undesirable purchasing behaviors in consumers, retailers, and even your sales team. Used indiscriminately, for brands it's a lose-lose-lose scenario.

Over time, regular discounting undermines your brand’s long-term profit potential.

 

If you want to get out of the retail rat race, you need to outsmart the other rats.

Your sales focus should be strategic. You need to instill a culture that understands that promotion should be a profitable activity, or it shouldn’t be done. This runs contrary to the average brand exec or manager or salesperson who believes that “you have to pay to play.” That’s just the racket that the industry is hoping you’ll fall for. Build loyal consumers who will buy regardless of promotion, and retailers will carry you regardless of promotion. This frees you up to promote on your terms.

This of course is not easy to do. If it was, everyone would be doing it. But you’re not after average results, are you? You’re after extraordinary results. And that means some combination of harder and smarter. You’ll still need to bring the hard work part to the party, but you’re in luck – we're about to give you tips on how to do it smarter on a silver platter.

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How to promote smarter, and with purpose  

  1. You need to first ensure that your unpromoted business is baseline profitable in the everyday competitive environment. This means a beloved product, loyal consumers, and smooth operations and logistics.
  2. You should design your promotions in terms of 3 clear (and clearly, separately measured and evaluated) focuses:
    1. Promotions designed to create more purchases than would have happened otherwise. There’s zero point in unnecessarily cannibalizing business that you were going to have anyway if you just wait.
    2. Promotions designed to create new and/or more loyal consumers. You should make an effort to understand and quantify if you are creating new loyal business.
    3. Promotions to fend off competition. This is a worst-case scenario. If your competition is able to steal business away just by lowering their price, then your loyalty is low. You should only do this if you have the margin strength to counterpunch your competitors.
  3. You need to make nearly every promotion profitable. To do that,
    1. You need to be able to easily analyze each promotion, both in advance, and after the fact.
    2. You probably need to deeply reconsider your definition of profitable. (This will be the subject of another post.)

The key to achieving the above (at any scale larger than a million bucks or so) is to have the systems in place to measure revenues, volumes, and costs (admittedly not an easy thing to do in CPG) as well as your promotional activities, and then applying a model to those data that will tease out the correlation between them.

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If you take this holistic approach to operating from a position of strength, it will put you much more in the driver’s seat when it comes to dealing with retailers, distributors, brokers, and even your investors!

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SHARING IS CARING

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