MARKETINGMMGEMm
30 U2J0.2
IMRKETING mMMNl
byjakkij.
Mohr and George S. Low
Escaping the Catch-22 of
Trade Promotion Spending
It takes discipline and courage, but some packaged-goods
marketers are breaking a bad habit.
C
onsumer-goods manufacturers are
caught in a catch-22 situation: They
want lo break the costly cycle of
trade promotion spending, but find
themselves either unwilling or
unable lo wealher the resistance from retailers
and their own sales managers.
For at lea.st 10 years, executives have been
questioning whether the benefits gained from
trade promotions are worth the increasing costs.
The proportion of marketing communication.s
budgets allocated to trade promotion was 44.9%
in 1992, according to Donnelley Marketing's
15th Annual Survey of Promotional Practices.
Trade promotions can help a firm acquire not
only short-term sales increases, but also crucial
shelf-space and other advantages in merchandising and point-of-purchase activities. But lowmargin sales don't generate incremental profits,
and many marketers arc watching sales erode
because of trade promotion activity. Their trade
promotions expenditures usually shortchange
brand- and consumer-franchise building activities such as advertising.
The managers we interviewed said that many
problems result from heavy reliance on trade
promotion, including lower sales in the product
category and less favorable consumer percep-
tions of product quality, among others (see box
on page 33).
As two respondents said:
• "There comes a poinl of diminishing returns,
where you keep throwing dollars at a customer.
EXECUTIVE BRIEFING
C
onsume!--goods manufacturers want to cut their
bloated trade promotion budgets, but demanding
retailers, volume-hungry sales managers, and shortterm corporate financial targets stand in the way.
Some marketers say they are breaking free, however,
with tough-minded strategies focused on long-term
brand profitability. The authors' research among
packaged-goods manufacturers finds them using a
variety of techniques to build brand value, customer
loyalty, and ttade partnerships. They are proving
that even though the trade promotion addiction is
formidable, it is not insurmountable.
MARKETING MANAGEMENJ
and you get fewer and fewer cases in return proportionately."
• "You know, it would be one thing if [spending
on trade promotions | were working and we were
just worried about the long-term impaet on the
brand...but it's not even working."
Managers face a variety of pressures to
increase trade spending. In addition to demands
from retailers, eompetition from privale-label
and other manufacturers, and less brand-loyal
consumers, marketing managers must deal with
pressures from within their own firms to meet
short-term financial and unit volume targets (see
Exhibit I). For example, sales managers lobby
for increased trade promotion budgets because
they are rewarded for short-term sales, and the
reward systems for brand managers encourage
near-term volume and profit hits.
The managers we interviewed say pressure
from within the firm to drive market share with
promotions may be greater than the demands of
the market. They find it very difficult to withdraw from their addiction to trade promotions.
Firms that do attempt to curtail trade spending will experience some pain. According to
widespread press reports. Safeway recently
retaliated against Procter and Gamble's efforts
to cut back on trade discounts by dropping some
less-popular P&G sizes and brands. And marketers will have to accept the negative impact
such a move will have on revenue—namely
decreases or smaller increases in volume and
market share. But firms that don't make the
attempt will likely experience even more pain in
EXHIBIT
Pressures on brand managers to increase
trade promotion spending
Organizational
factors
greater competition
retailer's power
media fragmentation
more private iabels
decreasing bran(J loyalty
32 M2J0.2
Macro
environment!
L
slow population growth
economic recession
short-term focus
reward system
pressure from
sales force
the long run when they see their profitability
eroding further.
Managing Budgets
M
anui^ing trade promotion spending,
rather than allowing budgets lo mushroom out of control, will set marketers
on ihe road back to sanily. It's not so much a
question of which firms will bring their trade
budgets under control, but rather which ones
will do so in a proactive manner. The managers
in our study offered novel solutions to some of
the common problems.
PROBLEM:
Adversarial retail
relationships.
SOLUTIONS:
• Establish partnerships/alliances with the trade.
• Be creative in promotion planning.
• Work on communicating better.
• Initiate team selling.
• Try an every-day low purchase price strategy.
Retailers use their power to convince manufacturers to give them more and deeper discounts, better dating, better case rates, higher
slotting allowances, and other concessions for
distribution coverage and support. Their
demands for payment are more exacting when
manufacturers want shelf space for new products. If manufacturers don't pay. many retailers
simply refuse to continue carrying the product.
Threatening manufacturers with loss of distribution can be very effective—particularly when
retailers can pit one competitor against another
or emphasize private labels.
Brand managers, therefore, often build their
budgets on the premise that trade dealing is part
ofthe cost of doing business. As one brand
manager we interviewed said, "There's a certain
cost of doing business that the trade demands
just to keep your slots. To keep your distribution, you have to run a certain number of trade
promotions."
Companies have allocated larger and larger
amounts to trade promotions and, in doing so,
have seen retailers forward-buy, stockpile,
divert purchases from areas where discounts are
greater, and postpone purchases until deals are
available.
Escaping the Catch'22 of Trade Promotion Spending
Consumers also are affected by increases in
trade spending. They have learned to either
stockpile or postpone purchases on the basis of
dealing activity at the point of purchase.
Because of the increased swings in purchase
behaviors, stockouts have become more common. And the increasing costs of implementing
promotions are being passed along to consumers
in the form of higher shelf prices.
At the same time, retailers face their own
competitive pressures to have promotable prices
and low-price images in competitive markets.
Some manufacturers recognize this dilemma and
are forming closer relationships with trade members. Soliciting retailers' input can create winwin solutions in spending marketing dollars.
For example, one manager said his firm was
trying to form partnerships by engaging in category management and working more closely
with retailers to achieve long-term growth. This
manager had succeeded in showing retailers that
market segmentation and strong advertising
increased sales for the product category in the
long term. He complained that "slotting
allowances get in the way of thai. Just because a
retailer says. 'Hey. I have another principal that
is giving me a deal, and unless you do that too,
you're not going to get in,' doesn't mean the
firm should cave in. That's real short-term
thinking."
Manufacturers also can differentiate themselves and encourage retailer loyalty through
alliances or electronic data interchange (EDI)
links with the trade, such as Wal-Mart's celebrated state-of-the-art EDI system. Offering
unique advantages to a business partner is a
more solid position than simply offering large
discounts.
Engaging retailers in creative promotion
planning will meet both parties" needs. Manufacturers and retailers will get more value out of
trade promotion dollars by using techniques
such as direct product profitability, compensating retailers for long-term growth, cooperative
advertising, and joint promotions.
One manager we interviewed told of using
joint promotions in which the retailer places
high-value coupons in its ads and the manufacturer redeems them just as if they were manufacturer's coupons. He said that the ability to
target the promotion was the key advantage; the
price point was not that important. And he
found he didn't have to trade-deal when he participated in this kind of in-ad program.
Manufacturers also are finding that better
communication with trade members can make a
big difference. By engaging in effective dialogue, manufacturers and retailers can better
understand each other's needs and goals. One
manager in our study thought that much of the
problem in retail relationships was due to the
tact that retailers don't understand the constraints of the manufacturing environment, and
vice versa. She said firms could build teams to
identify problems and come up with solutions.
Forming teams to call on retail customers
also gives manufacturers an opportunity to
cement trade relationships. For example, one
manager said: "We started this year with the
concept we call team selling. The person
responsible for calling on the customer, together
with people from our distribution department,
our credit department, logistics, and marketing,
form a team to go in and work with our customers, addressing all areas of the business. We
see how we can do things better to satisfy the
customer and, obviously, to satisfy ourselves."
Finally, if retailers adopt an every-day-Iowprice policy, the haggling over trade promotion
deals will end. Replacing trade promotions—
which can cause wild swings in sales and
prices—with relatively stable, low prices would
ease time and cost pressures of implementing
price promotions and reduce the mistrust that
exists between manufacturers and retailers and
between business and consumers. And it potentially could result in higher profits.
The Study
T
he authors interviewed 21 managers
at eight consumer-products finns as
part of a larger research project, funded by the Marketing Science Institute, on
how these firms allocate monies to advertising and/or sales promotion. The respondents
included brand/product, sales, market
research, promotion, trade, and category
managers who were guaranteed anonymity.
In personal interviews of approximately 45
minutes in length, the authors asked these
managers about their companies' budget
allocation process, the factors that influence
the process, and their evaluation of how
effective the allocations are. All interviews
were taped, transcribed, and analyzed for
key themes that emerged across interviews.
This article incorporates the insights of these
managers in formulating workable solutions
to the problems manufacturers face when
trying to curtail trade promotion spending.
mRKETING mmOEMENJ
2ZZ
Trade promotion spending
competitive retaliation.
SOLUTIONS:
• Focus on advantages to the retailer.
• Help retailers sell more of the category.
• Convince consumers to buy more product
at full price.
Relying on trade promotion leads brands to a
viciou.s cycle in which competitors match each others' trade allowances, pushing them beyond reasonable levels. Powerful retailers demand that the promotional discounts und slotting allowances continue, threatening manufacturers that do not comply
with potential loss of distribution.
The managers in our study said that getting out
of this bind is difficult, but not impossible. To get
retailers to accept smaller trade allowances, even as
competitors continue to deal, managers have to
focus on advantages to the retailer.
One vyay to do this is to help retailers sell more
ol' the category. All other things being equal, retailers don't care which manufacturer's brand they sell;
what they want to do is increase total sales in the
product category. Manufacturers can help retailers
accomplish this by balancing consumer advertising
and price Incentives.
One firm recently decided to take a leadership
position in its category by returning to network TV.
"We'll grow stronger because we'll bring more
people in and increase purchase frequency and use.
So it's a win-win situation," said a company brand
manager. The trade reaction to the plan was mixed,
however. Half of the retailers bought it, accepting
lower trade budgets in exchange for stronger advertising: but the other half said. "Well, that's great,
but Where's my money?"
The firm held its position, refusing to restore
allowances to retailers who balked. The manufacturer felt a longer-term outlook ultimately would be
better for all the parties involved. In fact, this manufacturer felt more advertising by competitors would
help the situation: "Our competitors still haven't
figured it out—they keep hammering away at the
trade side, hoping that will drive the business...,"
said the brand manager. "However, when ali three
brands advertise, the category does respond."
Another way to keep retailers happy is to sell
more product at full price, rather than at discounts.
becau.se retail margins will be higher. The question
then becomes, how do manufacturers (and retailers)
get consumers to buy more product at the regular
price? Managers in our study indicated that a strong
34
2. No. 2
product position is crucial to convincing consumers
to buy products at full price.
PROBLEM:
Trade dollars steal funds
from advertising.
SOLUTION:
' Create a powerful position to justify ad spending.
Exhibit 2 shows the relative proportion of funds
spent on advertising, consumer promotions, and
trade promotions over the last 10 years. In 1981, the
Donnelley survey found media advertising accounted for 43% of marketing communication budgets,
while trade promotions accounted for 34%; by
1992, those figures were reversed, with media
advertising accounting for 26.9% and trade promotions 44.9% of marketing communications budgets.
A contributing factor to the decline in ad spending is managers' need to make annual profit and
volume goals: when such goals arc not being
reached, advertising is an easy target at which to
aim cuts. Part of the decline is due to the ease with
which managers can slice ad budgets to meet profit
goals. They are less likely to cut trade promotioEi.
which has a more immediate and visible effect on
volume. One firm's solution is to focus on the
power of the brand with a clear, consistent, and
salient positioning strategy—some point of meaningful differentiation that advertising can comrnunicate. justifying a larger advertising budget.
As one brand manager noted. "Let's say you had
news on a brand. A new type of packaging or something of breakthrough value, like a new fiavor or fat
free. That news is always a great reason to advertise. So if you're finally able to bring some news to
the category to maximize the value of being first
with a product innovation or improvement, you
would definitely tend to advertise that."
If the message is powerful, consumers will be
willing to pay more to acquire a brand, and
demand, rather than trade allowances, will ensure
the brand's distribution. Also, as we will point out.
advertising has a stronger positive effect on brand
profit than trade promotion. Heinz is one manufacturer that has been following this strategy. According to press reports, the company's CEO has granted increases in advertising budgets to build brands.
PROBLEM:
Devalued brand image/los.s of
consumer brand franchise.
SOLUTIONS:
Rc-turgct consumer groups.
Use integrated marketing communications.
Escaping the Catch-22 of Trade Promotion Spending
Ad budget erosion has negative implications for
brand image and consumer franchise. As one manager said. "'You can put a lot more money into trade
promotion than your competitors, but if they heavily outspend you in advertising, you still get killed
on the shelf. It comes back to equily—you have to
have better brand equity." In addition, a high product-quality positioning is incompatible with a lowprice strategy.
Managers can build brand equity by focusing on
the power of the brand, but they also need to segment consumer markets according to buying behavior. One company carefully evaluated its customer
segments on the basis of customer loyalty and frequency-of-purchase/consistency-of-usageover
time.
In segmenting the market based on these variables, the firm found four discrete groups of customers, two of which the manager detailed for us.
The top group—the "'enthusiasts"—consisted ofa
small percentage of households that accounted for a
reasonable piece of the volume and had the highest
profitability. At the bottom of the pyramid was the
"price-sensitive" group, a large percentage of
households accounting for the largest percentage of
volume, but with a commodity orientation. These
consumers were one-tenth as profitable as the
enthusiasts because they bought more than 50% of
the product on deal.
Interestingly, the difference in the average price
paid between the enthusiast and the price-sensitive
consumer was only 13%. But the finn was using
20%, 25%, or 30% deals, when it needed only 13%
deals to get these switchers to buy their product.
The implication of this firm's segmentation
strategy was that the most loyal, most consistent,
and most frequent consumers didn't need a price
reduction to buy: they needed reminder triggers in
the advertising to stimulate purchase. This helped
the fuTTi wean itself from price deals.
"The marketing plan we presented yesterday,
one that we're very proud of, [includedl price pro-
EXHIBIT 2
Share of promotional expenditures by packaged goods firms
50-
3
40-
30-
Consumer
Promotion
20 -
1
I
I
I
I
I
81 82 83 84 85 86 87 88 89 90 91 92
YEAR
Source: Donnelley Marketing's Armual Surveys ot Promotional Practices.
UARKHING mNAGEmi
2Z5
motions at only 7% and lower deal frequeticy," said
one of the company's managers. "The competition
is out there at 20%-25% and higher frequency.
We've taken tremendous hunks of the [trade] budget out, some of which we dropped to the bottom
line, others which we've invested back into advertising."
By refocusing some of the savings to advertising, the company enhanced its brand image, built its
consumer franchise, reinforced consumer loyalty,
and maintained overall profit.
A segmentation strategy has inevitable implications for promotional practices. A firm cannot be
everything to everyone. To succeed in segments it
can dominate, a company must make a tradeoff
among disparate segments, choosing, for instance,
either price-sensitive buyers or price-insensitive
brand loyalists, but not both.
Many firms are finding that promotions are less
likely to devalue brand image if they are part of an
integrated marketing communications campaign.
For example, trade dollars can be used to stimulate
cooperative advertising, or consumer promotions
can be tied to advertising themes. Ties between promotions and advertising dollars add synergy to the
campaign. One firm reallocated trade dollars from
price reductions to merchandising activities such as
end-aisle displays, features, and in-store programs
that contributed to building brand image and moving more retail volume.
" Improve evaluation by computing elasticities.
structure of business today doesn't allow for someone to plead the case for powerful advertising ideas.
And product managers are not good at it, and agencies are sometimes their own worst enemy. They
need to adapt—they need to downplay the brilliance and creativity and make it seem safe, logical,
rational...."
Brand managers also are not well-trained in
advertising issues. According to the same manager:
"Brand managers don't understand advertising
because they lack the aptitude—advertising is an art
form. They can't think conceptually. It's hard to
learn, and universities aren't terrific in teaching
advertising."
Marketers can justify increases in advertising
spending in two ways. First, they should measure
advertising and promotion elasticities: How much a
change in advertising or promotion spending affects
sales (i.e., the percentage of change in sales divided
by the percentage of change in advertising expenditures). John Philip Jones of Syracuse University
suggested this technique in a 1990 Harvard Business Review article, for example.
In addition, firms should work on improving
managers' understanding of advertising. Agencies
can help in this endeavor by changing the way they
present advertising to the client. By focusing on
advertising testing and research, the case for
increased advertising budgets will be more convincing.
Changes in MBA programs also would be helpful because future managers need to understand
what makes an ad campaign effective. Marketing
students today know budgeting techniques, media
planning, and other business management aspects
of advertising, but are less informed about creativity, emotion, and behavioral science.
• Educate managers about advertising.
PROBLEM:
PROBLEM:
Lack of solid measures of
advertising effectiveness.
SOLUTIONS:
Managers said increases in trade promotion dollars are due, in part, to the fact that it is so difficult
to measure returns from advertising expenditures.
The response from trade promotion is more predictable than the elusive long-range results of a new
ad campaign. Because managers are facing pressure
to deliver more certain results, advertising is getting
squeezed out of the budget.
In addition, brand managers and agencies sometimes hurt their own cause by using intuitive rather
than quantitative (recall testing, ad tracking studies,
and so forth) arguments to justify advertising to
tnanagement.
As one manager said: "Trade spending brings
this high degree of certainty: M paid for this drug. It
gets my volume up 20%'...compared to rationalizing, understanding, and selling to senior management the power of advertising ideas. The whole
36 U2JO.2
Difficulty assessing the
profitability of trade spending.
SOLUTIONS:
• Use single-source data and market models.
• Measure profitability.
• Track retailers' performance and hold them
accountable.
Although it is fairly easy to assess volume gains
from trade promotion spending (via supemiarket
scanner data, for example), it is more difficult to
measure the profit impact of trade dollars. The use
of single-source data linking media exposure to purchase behavior and sophisticated models can help a
firm evaluate (1) how responsive sales are to different types of trade promotion spending, (2) the prof-
IMRKETINO mmBEMENl
Escaping the Catch'22 of Trade Promotion Spending
itability of trade proniolions. and (3) ways to cut
trade spending without huiling retailers or manufacturers.
For example, one firm in our study found that
response to a temporary price reduction for a particular product was 15%-20%, whereas response to an
in-ad promotion or display was as high as 20()%.
Manufacturers can use such results to convince
retailers to accept fewer trade dollars and spend
them differently. One manager said her firm cut
trade spending 25% in the last three years; of that
amount, spending on deal decreased 60%. "It
wasn't until we were able to demonstrate to them
[retailers] over time that it wasn't the price reduction that was moving the volume at retail, it was the
merchandising activity, and that difference [in volume] was ten-fold," she said.
However, in the absence of single-source data, it
is often difficult to track the profitability of trade
promotions. According to a 1990 Harvard Business
Review article by M.M. Abraham and Leonard
Lodish, only 16% of trade promotion events are
profitable (based on incremental sales of brands).
Managers should evaluate trade sjjending as a percentage of revenue, dollars spent per case, or percase revenue, rather than on a 100-case/volume
basis.
In addition to using scanner and single-source
data and calculating profitability, manufacturers
could do a better job of tracking retailers' performance and holding them accountable for effectiveness and results in trade spending. A common complaint from executives is that although they may see
temporary increases in trade buying from a price
concession to the trade, the spending is wasted
because consumer sales volume doesn't change.
Retailers frequently "forward buy." and tbey inventory merchandise purchased on deal, subsequently
selling to consumers at full price and buying less of
the manufacturer's nonpromotional output. These
executives bluntly refer to trade promotions as
•"retail subsidies" and '"bribes." For example, when
allowances are given to retailers, they tnay load up
on the prcKluct and sell it at lull price later.
In tracking retailer performance, managers
should monitor retail pass-through rates—tbe percent of product bought on deal that also is sold to
the consumer on deal. For example, one manager in
our study found that his competitor shipped 90% of
its product on deal, but only 22% was bought on
deal by the consumer—the rest was forward-buy.
(In a forward-buy, the retailer stockpiles product
bought on deal to avoid buying at full price later.)
However, the manager's company shipped only
50% of its items on deal, and its pass-through to the
consumer was 19%. So this firm was much more
efficient on the trade side, selling less product on
deal with a comparable pass-through rate. Hence, it
either had more money to spend or was more profitable.
What managers should be asking is. for every
dollar spent, what is gained—dollars in and dollars
out. Many managers might be asking this question,
but it is clear that the answers are sometimes difficult to obtain or off-limiis politically because of the
various reward systems for managers, as we discuss
shortly.
PROBLEM:
Financial pressures create a
sliort-temi focus.
SOLUTIONS:
• Increase the time horizon.
• Reduce trade spending gradually.
Managers face increased demands to deliver
"bottotn line'" perfomiance. particularly in firms
involved in mergers and acquisitions. Many brand
managers hinted at threats of termination if they
did not deliver financial targets. As one manager
said: "If you're behind in your numbers...and volume is your objective, it's very easy to trade in the
advertising | for trade promotions], just throw
another deal out there and Oy some more cases into
the trade warehouse."
In addition to focusing on fmancials, brand
managers also see a connection between profit and
plant utilization. A firms* desire to keep plants
operating at high levels contributes to pressure on
managers to increase promotional spending (to
gain short-tenn boosts in volume).
Tactics such as these often displace a focus on
other, more long-term issues, including long-term
market development. In addition, focusing on
financials in the current period can cause problems
in subsequent periixls. For example, one sales manager said her company would offer large trade
allowances at the end ofthe year to sell excess
product. Even though the company made its numbers for that period, it got off to a slow start in the
next period because trade inventories were very
high.
Increasing managers' time horizons to a two-tofour year planning period is easier said than done.
Current financial needs often are more pressing
than long-tenn planning needs. However, enduring
brand strength requires a iong-temi focus. One
manager commented: "1 think the change has to
come from top management. The more enlightened
ones will set up long-term programs and then stick
with them. Long tenn takes courage."
One way to ease into a long-tenn focus is to
reduce trade spending gradually over the course of
several years, rather than take a drastic reduction in
'. I No. 2 37
any current period. For example, otie firm's goal
was lo get lo the point where factory sales equaled
consumer sales in any specific time period. It wanted to eliminate forward-buying and ensure that
retailer purchases ended up on consumer rather
than warehouse shelves. Rather than biting the bullet in a one-year time period, the company gradually reduced trade spending over a three-year period.
"We want to use the minimum dollars necessary
to generate retail support and then use the rest of
the money to drive consumer advertising," said a
manager of the firm. "Our feeling was that we
were spending too heavily against the trade over
the last four to five years. We were determined to
get back into the branding of the business and get
the message out to the consumer,"
Another manager said its firm started cutting the
depth of its allowances and reducing the number of
protnotions each year. Once that was accomplished, it repealed the process over a two-to-three
Additional Reading
year time period.
Managers, salespeople, and retailers won't balk
at such reductions if their compensation systems
are adjusted accordingly. For exatnple, sales quotas
should be gradually reduced in proportion to trade
spending. Salespeople are happy to have reduced
targets and the tools to make their numbers over a
52-week period, rather than forcing retailers to buy
product at the last minute each quarter.
And trade custotners don't like to buy excess
inventory-—they have lo store it and manage il.
Retailers also will be happy with the concept of
spreading sales evenly over the year because many
are moving toward just-in-time delivery. They
wouldn't have to pay inventory bonuses lo their
buyers, either.
The short-term focus on financial performance
also is related to the nature of compensation systems. Managers are responsible for short-term
earnings, and it is unlikely that a manager who is
evaluated monthly and quarterly will take a longterm perspective.
PROBLEM:
Abraham, M.M. and L.M, Lodish (1990). "Getting the
Most Out of Advertising and Promotion," Harvard
ss Review, (May-June), 50-60.
Sales pressures to maintain
trade protnotion spending.
SOLUTIONS:
• Modify evaluation and reward systems
Buzzell, R,D,, J.A. Quelch. and W.J. Salmon (1990).
"The Costly Bargain of Trade Promotion," Harvard
Business Review, (March-April), I4t-49,
• Include sales managers in the planning process.
• Add trade managers.
Farris. P,W. and J,A, Quelch (1987), "In Defense of Price
Promotion," Sloan Matiai^ement Review, (Fall) 63-9.
Jones, John P. (1990), "The Double Jeopardy of Sales
Promotions," Harvard Business Review, (SeptemberOctober). 145-52.
Low, George S, and Jakki J. Mohr (1992), The Advertisin}>-Sales Pvomoiion Trade-ojf: Theory and Practice,
Report #92-127. Cambridge, MA; Marketing Science
Institute.
Parsons, Andrew J. (1992), "Focus and Squeeze: Consumer Marketing in the '90s," Marketing Management,
I (Winter), 50-5.
Quelch, John A. (1983), "It's Time to Make Trade Promotion More Productive," Hatvard Business Review,
(May-June), 130-36.
., S.A. Neslin, and L.B. Olson (1987), "Opportu•L nities and
Risks of Durable Goods Promotion," Sloan
Management Review, (Winter). 27-38.
38 Vol. 2Jo. 2
Volume movement is still ihc basis of evaluation and compensation for many retailers, as well
as for salespeople. Such compensation methods
overtook the fact that increases in volume, if
attributable to heavy promotional discounts, may
add very little to the bottom line. In fact, in some
instances, the incremental profit frotn gains in
volutTie can be negative.
However, brand managers often are accountable for some combination of profit and
volume/share goals. The manufacturer's
brand/product managers have to show steady
gains in revenue from period to period.
This inconsistency in compensation systems
and the use of differential criteria for brand and
sales managers lead to a conflict over the best
way to achieve goals. The manufacturer's own
employees, therefore, may be hampering each
other's efforts to achieve organizational objectives. Sales managers wbo use trade promotions
t<» reach their volume goals can thwart the profitability and revenue goals of brand managers.
Firms can alleviate the problem by modifying
evaluation systems for salespeople to include the
UARKETING MANAmm
Escaping the Catch-22 of Trade Promotion Spending
incremental profits from volume gains; and evaluation criteria must be unifonn for brand and
sales managers. For example, some firms evaluate sales managers—and even trade members—
on the basis of profitability. One manager commented: "One of the things...we are doing at the
moment is...allocating more points to more profitable volume. So that, in essence, the salesperson is getting rewarded on profit, even though he
or she doesn't know it. So if we make $4 on one
package and $1 on another and they are both one
pound, [the salesperson's] points are roughly four
to one."
The salesperson who is 20% behind forecast
for the quarter probably is not interested in the
fact that a great, new ad campaign will be rolled
out in four months. He or she needs some way to
sell more product to retail customers and make
the quota.
These salespeople often make a compelling
and immediate case for increasing trade spending
rather than waiting for the uncertain gains from a
new ad campaign, in fact, the brand managers
with whom we spoke said the sales staff is a huge
political force that is a natural factor for increasing promotions. Cuts in Irade spending may
mean cuts in commissions and bonuses for salespeople.
Some firms are solving the problem by including sales managers in the brand mix planning
process, not only to get their input, but also to get
their commitment to the resulting allocation.
One manager said: "Our chief sales guy and I
had a tremendous working relationship; he was
part of the thinking and learning process all the
way through, and he understood we couldn't
keep this incredible level of spending forever. It
definitely helped, not only to get his depth of
experience, but to get his ownership of the plan."
Other firms are adding trade promotion managers, who work with the sales force and regional
sales managers to determine the specific needs
for trade dollars. Trade managers plan specific
trade activities and can help allocate fund.s and
spend them. For example, if a firm wants 10 features per year or a certain percentage of display
space, it can evaluate the trade manager not only
on achieving these goals, but also on the costs
required to attain them, volume gains, incremental sales, and the resulting profits.
Revamping compensation systems, involving
salespeople, and hiring trade managers all can
help alleviate sales pressures to maintain unreasonable levels of trade spending. One brand manager in our survey said that two sales managers at
his firm were vociferous in their arguments
against trade reductions: tbey felt they were
being cheated out of making their quota. Howev-
er, these same managers came back a year later
to apologize because the brand manager's program bad worked—sales based on new advertising were strong, and margins were high.
The systemic causes of trade promotion escalation still exist. Even though managers recognize the causes and problems associated with
trade spending, they also have not been able lo
bring it under control. Marketers of consumer
goods may find that, by implementing the solutions proposed here, they may be less subject to
the whims, vagaries, and demands of the retail
trade. And retailers may see the advantages of
working with manufacturers that position themselves on quality products and services.
Reduced levels of trade spending will be
inevitable in the future. Ultimately, the marketing
war will be won on great selling ideas, great
products, and strong consumer loyalty—not on
spiraling trade spending. |ZQ
About the Authors
Jakki J. Mohr is an Assistant Professor of
Marketing in tbe Graduate School of Business Administration at tbe University of
Colorado-Boulder. She has worked in
advertising at Hewlett-Packard and other
computer firms. She conducts studies on
the effect of organizational characteristics
on managerial decisions and communication behaviors in organizational relationships. Her research has been funded by the
Marketing Science Institute and published
in the Journal of Marketing and the Strategic Management Journal. She won tbe
Frascona Teaching Excellence Award for
younger faculty at her university in 1992,
and she does consulting work in the hightechnology/computer industry.
George S. Low is a PhD candidate in marketing at the University of Colorado-Boulder. He has worked in advertising as a
media planner, and his research interests
are in the area of integrated marketing communication management. He has received
grants from the Marketing Science Institute
and his article. "Brand Management and
the Brand Manager System: A Critical-Historical Evaluation," will be published in
1994 in a special issue of the Jotsrnal of
Marketing Research on brand management.