Every year, manufacturers spend large amounts on trade promotions. Unfortunately, only a small portion of this investment results in sales. To maximise their RoI on trade promotions, manufacturers should adopt value-related promotions over experience-related promotions. They should also take channel structures and retail format strategies into account by preferring generalist formats and direct selling. However, ultimately, the best combination of promotion type, retail format, and channel structure depends on the nature of the product.
Trade promotions are an important tool in manufacturers’ marketing kit. Every year, they spend large amounts on trade promotions. For instance, consumer-packaged goods (CPG) companies spend around $1 trillion per year. However, less than half of this amount results in sales at the front end (consumers). Therefore, it is critical for manufacturers to consider this question: Which type of trade promotion yields better results? A study attempts to answer this question and also to examine how channel structure (direct to retailer vs through distributors) and retail format strategies (generalist vs specialist) moderate the effect of the different types of trade promotions.
Trade promotions refer to incentives offered by manufacturers to trade (distributors, wholesalers and retailers) to encourage sales. Trade promotions are of two types—value-related and experience-related. Value-related trade promotions are investments by the manufacturer in monetary promotions at the retailer’s (e.g., discounts on bulk purchase). Experience-related promotions are investments in non-monetary promotions and shopping experience (e.g., test drives of vehicles before purchasing).
The study found that, in general, value-related promotions such as promotion packs (bundled goods going at a discounted price, e.g., Pay for 2 and get 1 free), temporary price reductions, and promotional flyers (flyers created by the retailer to encourage sales of certain products, which manufacturers pay to get their products listed on) had a stronger impact on sales compared to experience-related promotions like product shelf displays, in-store salesperson incentives, and store events.
The study also found that retail format strategies have a prominent influence on the impact of the two types of promotions. For instance, in generalist stores (stores with larger market share and wider product assortment, e.g., supermarkets), temporary price discounts pushed up sales the most. In specialist stores (stores with small market share and narrow but deep product assortment, e.g., cosmetics stores), on the other hand, shelf displays had a significant effect on sales.
Similarly, channel structures also play a role in the impact that trade promotions moderated by retail format strategies have on sales. Direct selling to the retailer leads to higher sales in generalist stores in response to value-based trade promotions. For example, an FMCG manufacturer with its own sales force will achieve high sales when it invests in a Buy One Get One promotional pack in a supermarket. On the other hand, experience-related promotions such as store events work best for specialist formats and distributor-based channel structures. For example, a pharmaceutical manufacturer can earn high sales through distributor-based selling to chemists and offering incentives to store salespersons at the same time.
This study can help manufacturers create an optimal trade promotions strategy. For example, manufacturers of utilitarian products can go the direct selling + value-related promotions + generalist format route to maximise sales, whereas manufacturers of hedonic products can go the distributors + experience-related selling + specialist route. And when in doubt, adopting value-related trade promotions would be the safe bet for any manufacturer. By using the best combinations of trade promotion type, retail format strategy, and channel structure based on the study’s findings, they can maximise sales and reduce wastage of resources, which will ultimately lead to higher profits.
