What Are the Differences Between Consumer and Trade Promotions?

...

At times companies combine two or more consumer promotions into a single campaign, called an overlay. It may involve a promotion for a sweepstake or contest with a coupon attached to encourage purchasing the product. A common overlay is passing out coupons at the same time consumers are given a sample of the product.

Tie-ins are when two or more companies or products are promoted within a single campaign. An intra-company tie-in involves products with one company. Inter-company tie-ins involve two or more companies working together, such as is illustrated in this ad with Tyson and Betty Crocker.

- How do different types of customers respond to consumer promotions?

Consumers can be divided into four groups based on their proneness to use promotions. Consumers tend to fall into one of the four groups, but it will also vary by product. Someone who is brand loyal for ketchup may be price-sensitive for coffee.

Promotion-prone consumers regularly respond to various consumer promotions and like to purchase products when they are on-deal.

Brand-loyal consumers purchase only one particular brand of a product and will not substitute a competing brand regardless of the type of promotion being offered.

Brand-preference consumers have a small set of brands for which they have a strong preference. Promotions for one of these select brands will impact which brand is purchased.

Price-sensitive consumers purchase whichever brand has the lowest price and use promotions that reduces the price.

In planning consumer promotions, firms must always support the brand image and position strategy and choose promotions that reinforce the image and position that is desired. It is also important to consider the target audience and the types of promotions they are the most receptive to. In terms of types of consumers, the promotion-prone consumers respond to deals and will switch to a brand being offered on-deal. That means a competitor can offer a deal and they will immediately switch. Price-sensitive consumers don’t care about the brand name. They just want the cheapest product. While promotions will boost sales from these two groups, neither group is loyal and as a result not attractive in the long run. Brand loyal consumers will stay with your brand and don’t need a promotion to make a purchase. If they are brand loyal to a competing brand, a promotion is not going to sway them to make a purchase. The best group to pursue is brand-preference consumers. They have a small set of brands they prefer and deals for one of those brands can modify purchase behavior. They also can be encouraged to become more brand loyal. While consumers tend to be one of the four types, it also varies across product categories. Of the four groups, the brand-preference consumers are the best target.

- What types of trade promotions can help push products onto retailers’ shelves and eventually to end users?

Trade promotions can be classified into four groups: trade allowances, trade incentives, trade contests, and trade shows. Consumers never see trade promotions and most have never heard of them, but they have a huge impact on what brands are placed on retail shelves.

The largest category of trade promotions is trade allowances, which are financial incentives directed to a channel member to stock a particular brand of product. The major type of trade allowance is an off-invoice allowance, which is a discount on the product to encourage channel members to place an order. Because off-invoice allowances are used so much, retailers are reluctant to purchase products off-deal. Pressure from competitors who offer deals keeps the cycle going where manufacturers have to keep offering allowances.

The most controversial form of trade allowance is the slotting fee, which is a fee charged by retailers to stock new products.

Retailer justifications are

1) it costs money to add a new product to inventory;

2) it requires shelf space which means other products have to be taken off or less space allocated;

3) it simplifies the decision process since manufacturers will not introduce new products unless they are sure they will sell; and

4) it adds to the bottom line, profit.

Manufactures argue it is a form of extortion, it diverts money they could spend on advertising and marketing, and it is detrimental to small manufacturers who can’t afford the fee. A small number of retailers will charge an exit fee instead, which is payment of monies to remove an item if it does not sell and has to be removed from inventory.

A major problem with trade allowances is that retailers do not always pass along the savings to customers. Retailers like one brand to be on-deal all of the time so customers who are price-sensitive will always have one brand to purchase. Trade allowances permit retailers to schedule promotions and promote deals to their customers. Another problem is forward buying, which involves retailers purchasing additional merchandise when it is on-deal to sell later when it is off-deal. This allows them to earn extra money. The disadvantage is the carrying costs of the extra inventory. Another problem is diversion, which is buying product on-deal in one part of the country and shipping it to another part of the country where it is off-deal. This does not occur nearly as often as forward buying because of the cost of shipping.

For industries that use sales people, trade contests can be used to spur sales. Funds used in trade contests are known as “spiff money.” Rewards for winning can be cash, but prizes seems to work better. Trade contests can be designed for various channels, or for various companies within one channel. While it can be an incentive for salespeople to push a brand, some organizations do not allow trade contests because they see it as a conflict of interest. Salespeople may not do what is best for customers, or for the company.

For trade incentives the channel member must perform some type of marketing function to receive the funds. Most trade incentives are with retailers. The three types are cooperative merchandising agreements, premium or bonus packs, and cooperative advertising programs.

A cooperative merchandising agreement is a formal agreement between a manufacturer and a channel member (normally a retailer) that specifies the marketing functions the channel