In-store promotions are a necessary piece of the marketing puzzle for CPG brands. However, understanding the different ways they get charged creates a lot of confusion. We’re here to help. In this article, we'll outline the three main categories and the nuances between them. In addition, we'll provide our perspective on each and walk through some examples so you can see how they play out.
For brands that need a quick, high-level overview, watch the video below.
For brands that need something more in-depth, read the supporting text below.
Promoting products with retail partners allows emerging brands to both reduce the barrier of trial to potential consumers and test the price elasticity of products through different sales channels.
Bad promotions are bad, but not all promotions are bad.
However, the convoluted accounting supply chain dictating trade spend costs combined with the obfuscation of cost basis information, frequently causes brands to underestimate the costs of their promotions. Further, most brands lack the organizational framework or supporting tools to codify all promotional events into a centralized database, leading to unexpected chargebacks and cash flow constraints.
Brands must first understand the nuances of each promotional type and the costs associated with each, before trying to establish a holistic promotional plan.
Below are some simple definitions to get started and Rodeo’s perspective on when to leverage each.
These are promotional events where the discount is deducted straight from an invoice with a distributor and occur during specified periods. Typically, off-invoice discount amounts are around 15% of the regular case sales price in 2-3 separate months a year.
These are promotional events where the retailer buys a brand’s product from a distributor at a discounted rate. The retailer then passes that discount on to the consumer during a pre-scheduled promotional period.
These are promotional events where the discount on a product is taken at the point of sale to the end consumer. Typically measured in dollar amounts and not percentages, "scans" offer the most transparency to the brand since they’re linked directly to the end transaction of an item and are often accompanied by supporting documentation.
Actual months are determined with distributors individually, but brands typically try to align the months across their distributors and stack other promotional events on top of the initial ~15%. These deals are standard practice and can be a cash-efficient means of promotion. The discount is a straight percentage off of the sales price to a distributor and does not include any additional administration fees.
However, tracking that these discounts have been passed on to retailers, and subsequently consumers, requires review of point-of-sale information which is expensive. Off-invoice deals incentivize distributors to place larger quantity orders than normal, as they’re guaranteed a lower price on a brand’s products. Brands must understand their baseline demand by distribution center to combat this ubiquitous ordering practice, dubbed “bridge buying.” Shipping too much product at one time to a particular distribution center exposes brands to spoilage risks as well as lengthy periods of time without generating any revenue from a major wholesale customer. The former risk comes at a steep cost to brands, and the latter risk often manifests itself in the form of unplanned for cash flow constraints.
Oddities abound with respect to MCB deals. For starters, consider a brand's cost for executing such a deal. One might naturally assume that a brand simply covers the discounted cost at which the distributor sells their products to a given retailer. However, the amount owed by the brand is instead based on a product's "wholesale”** price as listed by the distributor and NOT necessarily the price the retailer pays the distributor. This “wholesale” price will vary by distribution center, making the costs of MCB promotions notoriously hard to estimate.
It is impossible to verify that the discounts are appropriately passed on to the consumer without purchasing point-of-sale data since the only receipts provided to brands come in the form of total cases sold from distributor to retailer. Some retailers will push hard for MCB deals due to the daunting administrative task of organizing promotions directly with brands. While these deal types are a legacy standard in the industry, they’re an inefficient means to discount a brand’s products and should be eschewed in favor of "scans" whenever possible.
** ”Wholesale” price can also be described as “list”, "catalog", or “book” price. Here, we use the term “wholesale,” as that is how it would appear on a chargeback report.
Scans are generally the most efficient means of the three for effective product discounting since they carry lower administration fees, and the discount is taken at the terminating point of the distribution chain (i.e. the cash register in a store). Further, the backup documentation for scans often (but not always) contains the individual movement details of each product from the retailer to the end consumer. This provides validation that a promotion was executed along with an idea of how effective the promotion was when compared to baseline sales data.
In the graphic below, let's assume the MCB promotion is for 20% off.
A common misconception regarding MCB deals, alluded to earlier, is that an MCB discount is taken off of the price a retailer pays a distributor for a brand’s product. In this example, that would be $2.50/unit.
However, the cost basis for the promotion actually relies on the product’s “wholesale” price at a given distribution center. Thus, if a brand arranges an MCB deal with a retailer that pulls product from three distribution centers, the deal will have three separate cost bases (that are often set higher than what the retailer actually pays for the product). In this example, that would be anywhere from $2.60-$2.80/unit.
Therefore, the cost basis for MCBs starts at a higher baseline than either O.I. or scans. These hidden costs can add up to significant sums when promoting with large retailers across hundreds of locations.
Scans offer brands the most transparency and greatest likelihood of successful implementation of the three. Scan deals are negotiated directly with a retailer, and the discussion centers around reaching a desired price on shelf.
Carrying forward our previous example, say this retailer purchases a product for $12.50 from the distributor. The retailer will of course take their own margin (not to be confused with markup) before pricing the product for their customers. To keep the math simple, let’s assume that margin is 50% so the product typically sells for $25.
The brand wants to negotiate a temporary price reduction of $5 off that $25. The retailer may accept a $5 cost from a brand to execute this deal, called a “dollar-for-dollar” or “penny-for-penny” structure. Such a structure makes the cost estimation and accounting for these deal types simple and favorable for brands
However, retailers often ask for more support than a simple “penny-for-penny” structure, either in the form of an additional discount or a flat Temporary Price Reduction (TPR) fee. These are important elements to understand when estimating costs.
Too often, brands obsess over reaching a targeted trade spend percentage and design a promotional strategy around hitting that target. However, they fail to adequately confirm that their discount rates translate into their anticipated price on shelf, resulting in disappointing sales lifts. Further, in accounting for these deals, brands often overlook the cost structure of their promotions (particularly MCB deals), causing them to blow through their trade spend targets and leaving them in a cash flow bind.
For the majority of brands, the single greatest determining factor of product movement is the price to the consumer. If the main objectives of retail promotions are to drive customer trial, increase velocity in advantageous seasons, and test price elasticity, why would a promotional strategy start anywhere else than with a targeted price on shelf? Set and confirm your TPR target with your retail partners first, and work backwards from there to negotiate exactly how much you need to discount to achieve that target price. After confirming the pricing structure, document any additional costs or fees associated with the deal, and evaluate whether the true cost of the deal warrants the support needed to actualize it.
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