Trade Promotions: Analysis of the Key Determinants of Market Share
A proposal submitted in partial fulfillment of the requirements for the Degree of Master’s
Researcher: Priyank Mandal
Supervisor: Mr. Sanjeev Kulkarni
Date of Submission: 20/12/13
Trade Promotion can be defined as a campaign directed at channel partners like wholesalers & retailers and not at final customers. The incentives to channel partners are offered to encourage them to increase product sales by providing them with a better margin than competitors. The intention is also to have a drip down effect & pass on the margins to end customers in terms of lower retail prices. This retail pass through of margin to end consumers has been a concern for manufacturers for long. The trade promotion spending as a part of marketing budget has increased significantly over the years but the inefficiency in ‘retail pass through’ has been a big concern.
The purpose of this research to study key determinants that affect a retailer’s motivation to pass on the benefits to end consumer and help the manufacturer devise a promotion strategy to maximize its sales & help them translate it into high profits. We take manufacturers as test subjects & will make an attempt to understand the trade promotion strategy adopted by the company & determinants affecting the retail pass through. We will compare the practices of these companies & trade promotion activities to study the company’s performance & compare with industry average. We will analyze the company’s promotion strategy against market leader’s & give our recommendation to maximize the sales.
Trade promotions are inducements offered by manufacturers to retailers to encourage them to reduce retail prices. Armstrong in a study in 1991 found that manufacturers more often than not require the retailers to offer reduced prices to avail of trade deals. It was found in the study that price reduction was the main compliance requirement in a trade promotion. 94.25% of trade promotions in regular coffee category required retail price reduction. The corresponding figures for the following items as follows:
Canned tuna : 90.79%
Disposable diapers : 90.41%
Toilet tissues : 98.94%
Although trade promotions can take different forms – off-invoice allowances, bill-back allowances, flat allowances, free goods, display allowances, and inventory financing—more than 90% of trade pro- motions involve off-invoice allowances (Blattberg and Neslin 1990 )
In 1998, spending on trade promotions for frozen food alone amounted to a record $3 billion, or approximately 13% of gross sales in the frozen food industry (Merli 1999). The total spending for trade pro- motions in the grocery industry as a whole have risen from $8 billion in 1980 to more than $75 billion in 1998 (Merli 1999). This increasing reliance on trade promotions is not restricted to the grocery business but pervades many other retail segments....