Most people seem to think that it is the retailer doing the promotion as a means to attract added sales, which is true, but the reality is that the promotion is funded by the suppliers, and it is a competition for the retail space that is generally won by those suppliers with the deepest pockets, and best information.
Retailers are in two businesses, selling stuff to consumers, and renting retail space to suppliers. Chain retailers business model relies on a formula that accommodates volume, revenue, and total margin over the space allocated. This can get very complicated, as the number of variables is enormous.
For a supplier to a chain retailer, the challenge is to balance the complex and competing demands of enterprise profitability and investment in the future against the need to meet retailer margin demands necessary to retain access to the consumer via the distribution controlled by the retailer.
Of real significance is the difference between sales that would have been made irrespective of promotional activity the “base sales rate” and sales made in a period as a result of promotional activity, “incremental sales”.
The need to fund retailer margin via promotional allowances is universal, but the sales that occur as a result of the activity may not be there when there is no activity, and are therefore” rented” sales. The effectiveness of the activity has many measures, but to the supplier two measures only are of any real use.
- The real cost of the promotional activity including all discounts on deal volumes and associated co-operative advertising.
- The number of consumers who convert over time from being a rented consumer to one who becomes a part of the base sales volume.
If you are not making these calculations, and adjusting the mix of your expenditure programs accordingly, and are prepared to make some very tough choices on the basis of the information gathered, chances are you are going broke being successful, a very common complaint in the Australian FMCG market.