I’m not a big fan of promotions. Well – that’s not strictly true. Some promotions are awesome, adding huge strategic value and moving plenty of volume. But I do believe that the consumer goods industry generally over-uses promotions; that many of them do not pay back in the short term, and even fewer pay back in the long run. Most brands seek the holy grail of growing brand penetration, yet most promotions do little to move the needle on this important metric. So why is it that brands over-rely on promotions despite the fact that so many of them lose money?
Too many promotions lose money for brands
Studies we have conducted suggest that up to 70% of promotions lose money for the manufacturers. Those that do make money in the short term often do little for brands in the long term: shoppers forward buy but don’t consume more; or become trained to expect discounts and low prices – in effect a devaluation of the brand. None of this does anything to drive brand penetration. There are many downsides to an overreliance on promotions. And sure, for marketers it is often a difficult trap to get out of. But the fact that so many brands continue to do something which, on the surface, makes little financial or marketing sense, does beg the question:
There are many reasons as to why this happens, there is a question which is rarely asked: how is it that sensible CEOs and CFOs have not done more to challenge this – to challenge the numbers? Surely, any activity which costs lots of money and loses lots of money would be challenged all the way up to the board? Apparently not. And it appears to me that the main reason for this is quite simple. It lies in one of the most important processes in the corporate world. Yes – it is the annual planning and budgeting process which is the guilty party behind so many promotions losing money.
Why aren’t business leaders putting an end to this promotion madness?
Annual planning processes – guilty of destroying value
Can we blame all of this on a process? Even such a central one as the annual planning process? Of course not! Flaws in the annual planning and budgeting process are only a problem if they are exploited to do dangerous things. Or, as is more the case, nobody challenges the process as it is far more convenient to do so. But today, let’s put the annual planning and budgeting process in the dock (and at the same time, the senior managers who continue to use it in its current form).
Annual Planning Processes in the dock: Charge Number One: Willing entrapment of marketers and sales people
We’ve all been there. Last year we were tracking well behind our numbers so we did a huge promotion to drive some extra volume and to ensure we hit them. Now, almost a year later, the promotion is a distant memory, but the massive spike in volume isn’t. Because this year’s sales numbers were based on last year’s sales numbers, and somehow I need to hit a huge quarter three number! So what does the average brand manager, channel manager, category manager or sales manager do? The only thing that is guaranteed – another big promotion.
The way some companies build their targets and budgets almost forces managers in marketing, trade marketing and sales to commit the same crime again and again. But – I can hear you ask – if promotions lose money, doesn’t the cost of the promotions cause everyone to stop and think? And that brings me onto the second charge.
Annual Planning Processes in the dock: Charge Number Two: Hiding the evidence
Not only is there a crime going on, but the evidence is being neatly tucked away so that nobody can see it. The costs of these activities are hidden in the sneakiest way. They are hidden right out in the open! Because not only is the top line ‘baked in’ to the budget numbers, the bottom line is too. In effect, the annual planning and budgeting process completely legitimizes the loss-making activities by including all of the negative impact in what is, overall, a profitable mix. The monies are lost in a big thick soup of marketing and trade spend, often with the elements in different pots so it’s difficult to track down all of the pieces. And so, as long as the target is hit, everyone is happy. But each year, as the number of promotions increases, surely it’s getting worse: surely someone will notice sometime? Not at all. Let’s consider charge number three.
Annual Planning Processes in the dock: Charge Number Three: Killing me slowly.
Each year the cost of doing business with retailers goes up. The number and depth of promotions increases. But, typically, not by too much every year. Just a fraction of a percent on the total spend. What is dangerous though is that it is a fraction of a percent every year. Year on year comparisons can be hidden by annual fluctuations and changes in so many other numbers (sales, material costs, shipping costs) that these little amounts get lost. But over the years many companies have seen this number rise and rise. Many companies now spend more than their entire profit on trade promotions – and remember many of these lose money.
Annual Planning Processes: Preventing future crimes – how to stop running promotions that lose money
To address this problem is relatively simple. Annual plans, and the budgets and targets that drive them, should be ‘zero based’ – that is, built up from nothing, every year, not based on last year’s numbers. Promotion plans should be based on on our strategic goals first. If we are trying to drive brand penetration, which activities are likely to do this? And by activities I don’t just mean promotions. We should view the entire shopper marketing mix in the round and focus on what changes to the shopping experience are most likely to drive the changes we want. Trade spend should be allocated based on what we are trying to achieve, not what we paid last year.
Impossible to achieve? Well, in the real world, attempting fix all of this in one go would be painful for both the company and their retail partners. But surely a steady program of rehabilitation, which at least moved in that direction would be possible? Small changes over a ten year period, would, a decade later, have a profound impact. After all, it is small changes over the last three decades which have led many brands into this mess. We work with brands to deliver a change in year one: to drive brand penetration, and set up the business to sustain that growth over the coming years.
And its not too late for 2025. We have a track record of making significant changes to your plans and results within weeks, so that you’ll get the benefit in this financial year. Drive penetration AND hit your sales target.
If you want to understand how to create a better plan for your brand or business, one that drives brand penetration as well as short term sales, DM or email ‘penetration’ and I’ll share a video which explains how you can make it happen in your business. . We have helped countless companies improve their investment decisions, drive growth and improve profitability in this way. Get in touch now – and I’ll happily share.
