The Name of the Game
For more than a half century, the billions of dollars spent on channel incentives programs, specifically trade channel promotion, have been the source of one of the most controversial issues in the broad consumer products industry—the quest for the right balance of incentives between the Sell-In versus the Sell-Out.
In my book, “The Invisible Economy of Consumer Engagement,” Chapter 5 is called “The Shell Game” which delves deeply into the ongoing efforts to balance the objectives centered around the initial sell-in deal against those of the ultimate consumer incentive to purchase the product during the promotion. You would think that this is rather cut and dried, but it isn’t.
From the corporate perspective, it also means being very careful to ensure fairness and equality in the offerings, as has long been the source of several ugly legal battles between manufacturers/suppliers and their retail, wholesale and distribution channel partners…AND, the government. In most developed nations, the close scrutiny of business practices of all forms of channel incentives, all designed to keep the playing field level and fair for consumer products companies of all sizes and categories. However, the end game should always be to “protect the consumer.”
The “Shell Game” is a game of illusion where, under one of three shells a pea is placed and the shells are quickly moved around to attempt to make you lose sight of which one it is under. In the Shell Game of trade promotion planning, the pea is the consumer. The Sell-In deal certainly has a significant dual benefit for the retailer and the manufacturer/supplier; but then where is the consumer? The easy response is that the consumer is represented by the value of the incentive to buy using a tactic such as a discounted price of the product on the shelf and the fulfillment of the consumer’s need for the product.
If this is supposedly true, why is it that the majority of key account managers (KAMs) and regional sales reps have compensation plans that rarely include the ultimate success of the promotion (the Sell-Out) in the calculation? Some of the leading consumer products companies are beginning to include trade promotion success as a criteria for compensation, but the main focus of the formula is on getting the Sell-In and making forecast. A good deal for the manufacturer/supplier in terms of volume, revenue and profitability could end up a total failure when the promotion is over. According to most industry statistics, more than half of the promotions end up a failure, but the KAM and sales team get a trip to the islands for meeting their forecast, regardless.
The traditional shell game has three shells or cups if you prefer. If you consider the pea to be the consumer, and the shell or cup under which it is located the “Sell-Out” or more broadly, the eventual purchase (instore or online), then the other two are what? One would be the “Sell-Out” deal or the actual instore promotion; and perhaps the second one would be the ecommerce channel. Ideally, the pea could be under all three of them, and today, the key performance indicators of success are defined for each and every one of them.
E-commerce aside, the two “shells” or cups representing the Sell-In and the Sell-Out have their own indices, do they not? The Sell-In measures volume, price, revenue and margin. For the retailer, it is typically best measured as the profit factor. The Sell-Out measures how much product volume moved from the shelf through the checkout scanners, bagged and put into the trunk of the consumer’s car. If the argument that the Sell-In is a pure business-to-business deal wherein the consumer is only marginally represented by a tacit attempt to offer tactical activities and price incentives to purchase, then, perhaps yes, one can say that the consumer is part of the deal.
But we know that is not the case—at least from the perspective of the KAM or sales rep creating the promotion plan. The retailer usually pushes the tactics and timing of any promotion. After all, the retailer has the highest concern for the success of the promotion. The KAM will most often concede this by agreeing to the terms presented by the retailer or at least known to be preferred by the retailer when the promotion plan is created.
We know this because at the end of the day, the retailer depends upon the promotional funding as a profit center to support the generally tiny margins of product sales. Lump sum payments to support promotional tactics are clearly far more than the actual cost of the tactical activity itself, and this is a well-known acceptance of fact.
So, with all this heads down work by KAMs and their retailer counterparts in collaboration for promotion planning and execution, the question is where is the consumer in all this?
Under which shell is the pea? Where the consumer pea should be is in both the Sell-In shell AND the Sell-Out shell. But how does that work?
The answer is advanced analytics—in fact, prescriptive not just predictive. The good news is that almost every major TPx initiative today has a promotion optimization plan as part of the transformation. But there is a significant amount of advancement that must be made before the consumer products company can leverage technology to perform prescriptive analysis and recommendations.
Much of the initial problem is data—the combination of good…no, GREAT historical trade promotion data and the appropriate array of external data including more accurate, timely and comprehensive point-of-sale (POS) data, competitive analyses, instore execution compliance data, and of course a strong portfolio of consumer research and behavioral data. The “secret sauce” is the methodology and algorithms that combine to analyze and project performance. Getting there is what I call the “Engaged” Dimension of Knowledge (“The Invisible Economy of Consumer Engagement” page 179). This is the penultimate level of capability that ensures the highest ROI, least out-of-stock conditions and the most consumer-aligned success factor you can attain in a trade channel promotion.
This is the level where the consumer is the point of focus for every KPI measurement across all marketing and promotional activities. Although many of the leading consumer products companies are doing quite well along the path toward the “Engaged” Dimension of Knowledge, I don’t see any company that has achieved it. And that is more of an indicator that modern trade promotion management, execution and analytics has been long neglected as the mission critical function that sees its spending as the second largest line item in the corporate financials after cost of goods.
Every single promotion plan should be measured against the key indicators that will determine whether or not a consumer buys the product. These include measures of past promotional success, which have to be carefully analyzed against the specific conditions that occurred during the past promotion. And even after cranking in all of the conditional factors, the luck of the dice throw also factors in, doesn’t it?
Still, thinking only of the B2B deal and not the B2C is a guaranteed recipe for failure. And we have that now, do we not? With more than half of the promotions failing to reach break-even, it might be the right time to be thinking more about the consumer in each promotional plan—and not just the obvious end game of hoping the consumer is truly incited by the promotional tactics, timing and products, but a realistic process of injecting accurate and trusted data into the promotion planning that leverages technology to deliver a projected successful result.
Bringing together the three key elements of historical promotional performance, consumer intelligence, and the retailer’s vast shopper intelligence with advanced analytics and reliable projections will ensure that the consumer focus is always present. The Sell-In should be configured not only to reach the desired forecast, but also with the confidence that the consumer will react and respond to make the promotion a resounding success.
Whether in modern trade channel promotion planning for the Sell-In, the Sell-Out or any of the e-commerce channels, the consumer must be the primary point of focus. So that means that In the shell game known as modern trade promotion, if the pea does indeed represent the consumer, then it is under all three shells.
So, for modern trade channel promotion, the name of the game is the consumer.
Rob Hand is the CEO of Hand Promotion Management, LLC in the Austin, Texas area. For more information, email Rob at info@handpromotion.com.
