Anyone who has followed this blog, or attended any conference presentations I’ve made, would get the impression that I’m not a big fan of promotions. Whilst not strictly true, I do believe that the consumer goods industry over-uses promotions; that many of them do not pay back in the short term, and even fewer pay back in the long run.
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. But whilst 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 budgeting process which is the guilty party behind so many promotions losing money.
Ironic then, that a largely finance-led process actually is one of the most profit negative processes in the business! But – before those of us on the marketing and sales side of the business gloat too much – we are unfortunately just as culpable. Flaws in the 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 budgeting process in the dock (and at the same time, the senior managers who continue to use it in its current form).
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 do 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.
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 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 budget is hit, everyone is happy. But each year, as the number of promotions increases, surely it’s getting worse: surely someone will notice sometime? Let’s consider charge number three.
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.
Preventing future crimes – how to stop running promotions that lose money
To address this problem is relatively simple. Budgets 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 this year’s strategy, not what we did last year. 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. So start today. Plan next year’s spend from the bottom up. You’ll need to make some compromises towards the end, but hopefully at least some of the original plans will survive.
If you’d like to know more about how the promotions nightmare was created, what it costs the industry, and how to address it, try The Shopper Marketing Revolution – we cover so much more there than can possibly be addressed in a blog.
