Consulting group LEK has set out, in an executive insight a four-step process that it says will enable consumer packaged goods companies to achieve maximum effectiveness from their spending on trade promotion activities.
The document, Four Steps to Optimizing Trade Promotion Effectiveness, explains that, at the heart of the process is the measurement of price elasticity in the product category at which a promotion campaign is aimed. It says historical sales data related to previous trade promotions is not a good way to assess this elasticity. Because CPG companies and retailers typically do not run the same trade promotion schedule simultaneously it is difficult to determine if sales increases are caused by heightened consumer demand or by aggressive promotions.
Instead it advocates “a well-designed consumer research program that identifies how price and other category factors affect consumer purchasing decisions,” saying that this type of market analysis can determine how shoppers would respond to different levels of trade promotion across all brands, including private label brands.
Armed with this information “CPG companies can … set promotions at the highest price point possible to still achieve the desired response.” Or they can shift marketing dollars away from ineffective trade promotions and into traditional advertising or other programs that can yield a higher return.
However it also warns that cutting back on trade promotions and effectively hiking prices should not be undertaken before assessing competitors and their prices “Companies must consider all potential competitors, especially as everyday low price (EDLP) mass and club retailers continue to gain favour with shoppers, which may potentially shift consumer spending to other retailers or channels. … Consumers [might be] willing to shift their purchases from a favourite retailer that has deemphasised trade promotions in a particular category and instead shop an EDLP channel, which has suddenly become more price competitive in their eyes.”
The final stage in the four-step process is “to understand the perspectives of different marketplace participants and how a change in trade promotion by one player might impact the actions of other players.”
This it says can often be a vicious cycle in companies repetitively respond to competitors’ trade promotion campaigns. In markets where demand is inelastic, such cycles often reduce the effectiveness of trade promotion campaigns and result in marketing spend being redirected to other activities.