Trade Promotions: How much to spend?
In my last post we discussed the basics of Trade Promotions. It’s my opinion that offering trade promotions is necessary and something you should plan on if you are going to find your way to the majority of grocery shelves in America as you become a National brand.
We discussed that this expense generally cost manufacturers 10-25% of their wholesale price. For example, if your case wholesale cost is $20 it’s probably wise to plan on a minimum of 10% or $2 per case. If that addition expense cannot be handled in your profit picture, you may need to rethink your pricing. If you do not have the cost of trade promotions covered in your wholesale price you may find yourself in a constant investment mode, because trade promotions don’t go away.
Of course there is a big gap between 10% and 25%. And for some start-ups and small manufacturers even 10% can be a big number. So today we are going to focus on factors that will help you determine what might be the right amount of trade expense to plan for your products. In future posts we will get into the what, when, where and review some of the technical, legal and accounting aspects of trade promotions. We’ll learn how larger companies begin to manage what can become an overwhelming part of their margin picture.
Deciding how much to spend on trade promotions is more of an art form than a science. Here are key factors to consider:
- Your product itself: We have all seen products that have so much demand that retailers sell all they can get at regular price. If your product is one of those, trade promotions are a moot point. On the other hand, if your product needs to get traction off the shelf deep promotions may be needed.
- Your margins: What can you actually afford to spend? While planning a minimum of 10% is recommended, your margins must help you determine what can be invested.
- Category: What are like product spending in the category where your product exists? Most retailers want to see a number of promotions per year on each of the brands in a category. However some categories get promoted more than others. Your Broker or Distributor partners are invaluable sources of information in this area.
- Competition: If the category is spending at a rate 15% but your key competitor is spending at a higher rate, you may have to compete at the higher rate for a while.
- Customers/Channels: What kind of customers dominates your distribution? Rates and promotion types vary between customers and channels. Many grocery chains work on a hi-low basis. They run a regular suggested price with occasional low promotions at low prices. Big box stores often work on an everyday low price. Drug and discount retailers may require different approaches, where promotions may have to be rolled into a price.
- Markets: Some markets are more promotion driven than others. Affluent and urban markets where retailers have captive audiences may not require the number and level of promotions that retailers might in markets driven by big box retailers and lots of options.
- Distribution: Your trade rate is somewhat dependent on where you are in your product distribution. Once you have distribution in a large part of the country you may be able to decrease spending. Competition keeps most companies promoting heavily, however. Cereal is a good example. Those guys have their products everywhere, yet continue to run deals!
Each of these key factors must be considered as you work through what is right for you to establish trade rates for your products.
In coming posts we will discuss the difference between your trade rate and what you may spend on a single promotion as well as how the considerations above will affect the what, when, where and how of your promotional calendar.
For now, keep working…..to the grocery shelf!