Published: ETRetail.com, September 29, 2015  Depending on traditional trade promotions to generate sales is unwise. But this folly is generally apparent only in hindsight... Companies vie with each other to spend more and more on BTL (Below-the-Line) activities and schemes, hoping that these will translate into sales. Sometimes the anticipated sales materialise, but, unfortunately, more often than not, sales do not keep pace with exorbitant promotional budgets.  <h2>The carrot-and-stick approach </h2>One of the most expensive marketing and promotions budgets in a typical consumer goods company is ‘trade partners’. Trade partners, such as retailers, wholesalers, resellers, are targeted with as much as 20%-60% of the total budget! Most of this spending is in the form of discounts, which can take various forms, i.e., foreign trips, gifts like gold, appliances, bonus pack deals or even cash. Needless to say, most of these doles are limited period offers that run until targets are met. Companies dangle these carrots in front of their channel partners, assuming they need to be incentivised to sell more. The companies also use the stick, blocking channel partners’ capital in stock, under the assumption that the partners will then be forced to sell more to release their own capital. But are these realistic assumptions? Do fat schemes and blocked capital really help grow sales? Do these truly motivate them? Or is this just a cherished industry myth? Let’s first consider what happens to the hard-won margins or price discounts that channel partners wrangle from companies. Do they keep them? Nope, it’s passed on; it is used as a lubricant to flow goods down the channel and to increase inventory turns. Obviously, they value inventory turns more than margins. Moreover, for either the carrot or stick to work, the retailer ultimately has to have the clout to convince customers to pick brands of his choice i.e. the retailer should be taking every opportunity to promote the products that he has thus been incentivised to sell. Many companies genuinely believe that if they corner their partners’ stock and/or retailers are incentivised with competitive margins directly or through discounts and schemes, they (retailers) will naturally, in their selfish interest (to make more money or to unlock their working capital), sell more of their products. But do retailers really behave this way? Do they have the power or will to influence customer’s decisions?  <h2>Putting a myth to rest</h2>At Vector Consulting Group, we decided to study retailer behaviour in the field. Typically, products from leading brands fly off the shelves, but their margins are lower. They also tend to have the least number of schemes and discounts. Similar products of new or relatively unknown brands are likely to have higher margins. So, it is in his best interest to sell more of these higher-margin products, provided he can convince the customer. An experiment was conducted at 1,200 small and large mom-and-pop (kirana) stores, where buyers had the chance to interact directly with sellers. Only those shops where both leading and non-leading brands were available were chosen for the study. To create an ideal opportunity for retailers to push a brand of their choice, the researchers who approached the shops asked for a product without specifying a brand; thus, they ceded complete control over their buying decision to the retailers. They insisted that the retailer choose for them. The expected result was that retailers would ‘push’ a high-margin brand to these brand-agnostic customers. To ensure that the level of customer involvement in decision-making does not bias the results, the experiment was conducted for both low-involvement products (e.g. toothpaste) and high-involvement products (e.g. auto components). Interestingly, the results were always the same: inevitably, the opposite of the predicted effect. 97% of retailers sold researchers the products of established brands (with low margins) despite having stocks of high-margin brands! This experience and the retailer’s logic for this behaviour have been described in detail in the book I have co-authored called ‘Apparent in Hindsight’, but many other studies on retailer behaviour have also revealed that retailers prefer to offer products of established brands to customers as it has a positive influence on the consumers’ image of the retailer which can then translate into more business. Essentially, the retailers’ aim is to make a 'safe' decision on this occasion that will ensure that the customer is not unhappy and will continue to patronise them. Faced with the choice between possibly losing a customer by making him unhappy (but earning a little more money on a single sale) and the possibility of keeping the customer’s patronage (but by sacrificing an opportunity to make a little money), the retailer clearly chooses the latter. <figure class="image"><img style="aspect-ratio:3918/2446;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1777275928.png" width="3918" height="2446"></figure>In light of these findings, can we really argue that retailers who don’t even push high-margin products to 'antsy' customers would actually expend time and energy in converting customers with actual preferences for either margins or schemes? In addition to the fact that schemes and discounts have no positive impact, the propensity of companies to push products with 'irresistible' schemes and discounts actually has a sure-shot negative impact. Many retailers pick up stock under these schemes in bulk, and since they cannot liquidate these, they end up with a lot of slow-moving stocks which limits their ability to pick up more stock from the company in the future. Instead, the company and its trade partners can actually have a win-win if channel inventory can be significantly reduced!  <h2>Reduce inventory and increase rotation</h2>Most companies in India have established stocking points near traders’ warehouses. It takes not more than 10 days to transport goods from the former to the latter. Traders can comfortably manage with 15-20 days’ stock. In reality, however, they carry 40-60 days of stock! So, slashing inventory by even 50% isn’t as far-fetched. Most companies are aware of this, but they believe that a fall in inventory will also crash availability, hurting sales. But this is not necessary if they work towards ensuring that all their SKUs are present in the trader's stock on a daily basis, it is possible to achieve high availability at low inventory. This can be achieved if companies build a rapid response supply chain that operates on pull-based replenishment. With this, the gains for the trade partners are far higher than if the company offered a significant margin increase (say, 10%). It cannot be denied that a higher ROI can be an unbeatable motivation for channel partners to invest more in the same business. <figure class="image"><img style="aspect-ratio:3918/2446;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1777275981.png" width="3918" height="2446"></figure><h2> </h2><h2>Customer should indeed be the king</h2>It is clear that higher margins for channel partners do not significantly affect their business’s profitability and, therefore, do not motivate him to sell more. So, the only entity that can push sales growth is the customer. Therefore, we can argue that all funds earmarked for promotional activities should be used to generate real customer demand. One way this could be done is by organising in-store activities to help the customer appreciate the features of the products. Funds could also be better used to directly motivate the key influencers in the buying process. A shining example of how this can be done effectively is Fleetguard Filters, a leading manufacturer of heavy-duty air, fuel and lube filters. Rightly recognising that it is not the retailer but the local mechanic who has the power to recommend a filter to the customer, the company launched a lifetime loyalty programme for mechanics. Enrolled mechanics gain points for every filter they recommend. Sales skyrocketed! Following the success of the programme, the company has diverted all funds hitherto set aside for incentivising retailers and distributors to strengthen its ties with mechanics. Distributors and retailers continue to thrive in the business, too, thanks to high ROI. Pidilite Industries has also launched a similar loyalty programme for carpenters. It is past due that we take a hard look at the role of trade promotions in motivating trade partners and analyse whether they truly help build strong channel partnerships.

Key Takeaways

A study by Vector reveals that 97% of retailers sold products of known brands (with low margins) despite having stocks of high-margin brands when approached by a customer who did not specify any particular brand!  Read about the results of this field research for insights into retailer behaviour.

A folly called trade promotions

Problem: Relying heavily on trade promotions to boost sales is a flawed strategy. Companies spend 20%-60% of their budget on retailer incentives, assuming it drives sales. However, studies show that retailers prioritise established brands over high-margin products, rendering trade schemes ineffective. Excess stock from schemes also leads to slow-moving inventory, blocking future purchases. Solution: Instead of promotions, companies should reduce channel inventory and improve stock rotation with pull-based replenishment system. Shifting funds to direct customer engagement and influencer programmes drives real demand. Benefits: Lower channel inventory improves availability and cash flow, while customer-focused marketing boosts sales. Success stories like Fleetguard Filters and Pidilite Industries show that engaging end users and influencers is far more effective than retailer incentives.

<h5>A folly called trade promotions</h5>

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Explore why traditional trade promotions may not drive sales as expected and insights on effective strategies from Vector Consulting Group.