How Much Does It Cost to Make a Promotional Video

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One of the most significant phenomena in retailing in recent years has been the shift in power from manufacturers to the trade. In frequently purchased, heavily advertised goods, the dominant players have become the big chains like Safeway, Wal-Mart, Kroger, K mart, Toys "R" Us, Walgreen, CVS, Home Depot, and Circuit City.

Partly as a result of manufacturers' relative loss of clout, they have been reducing their commitment to advertising—especially national advertising—and spending much more on consumer and trade promotion. But systemic inefficiencies resulting from these short-term incentives have blossomed into huge problems: the high costs involved in paying slotting allowances, in forward buying, in diversion of goods, and in running promotion programs. These are problems for the trade and for manufacturers, but especially for manufacturers.

Manufacturers pay dearly for burgeoning promotional programs; for example, managers at Procter & Gamble estimate that 25% of salesperson time and about 30% of brand management time are spent in designing, implementing, and overseeing promotions. The costs are high for others too. In this promotion-intensive environment, consumers pay more for the goods they buy as distributors pass along the higher costs. In the food industry, for instance, increases in manufacturer and distributor costs from trade promotion alone amount to an estimated 2.5% or more of retail sales, including the costs of administering promotional programs.

The game playing and power playing inherent in promotions and related activities, like slotting allowances, have generated an enormous amount of mistrust in channels of distribution—manufacturers, wholesalers, and retailers have big bones to pick with one another. The mistrust has dominated the headlines in Supermarket News for two years or more. Here are sample news stories:

• Some consumer-goods producers have had to set up large reserves on their accounts receivable to handle expected retailer claims for damaged or spoiled merchandise and for promotion allowances for which they allegedly have not received full credit. These claims are not speculative; in 1988, for example, Kraft took a $35 million write-off. Such instances cause great friction because retailers have been known to file claims on merchandise as a way of getting discounts they could not have gotten otherwise. The number of contested claims has risen to an all-time high.

• Last year, two of the largest grocery chains, Winn-Dixie and Kroger, boycotted some products of Pillsbury, Procter & Gamble, and other vendors after those companies refused to charge uniform prices for their goods throughout the chains' trading areas. Winn-Dixie started the imbroglio by telling the big suppliers, "Everything we buy from you will be at the lowest promotion price offered throughout our entire system." The asserted motive: to smooth operations and save consumers money. Manufacturers took Winn-Dixie's demands as an infringement on their ability to engage in regional pricing. Winn-Dixie deleted from its shelves several hundred items of Pillsbury, P&G, Quaker Oats, and others. Negotiation eventually ended the standoff.

• For years, Kellogg has refused to pay slotting allowances—the fees mass merchandisers, mostly food chains, charge packaged-goods producers to allow new products into their stores—to Stop & Shop and other companies. These fees commonly amount to four- or five-figure numbers per item per chain. Countering Kellogg's stance, Stop & Shop for a time refused to carry its new cereal varieties.

Battles like these are a common occurrence today now that retailers hold sway over manufacturers. Routinely, for example, department stores and other retailers demand from vendors cooperative advertising allowances, guaranteed gross margins, return privileges, reimbursement for the cost of fixtures, and in-store selling and stockkeeping help to promote their merchandise.

Deep-seated feelings about unfairness in today's promotion-laden atmosphere go hand in hand with the rising costs of promotions and the inefficiencies they produce. Mistrust inhibits industry cooperation on key issues like data exchange. The promotion practices also appear to be dispelling Washington's prolonged lack of interest in violation of laws upholding fair competition.

Here we will examine the by-products of the promotion explosion by putting under a microscope one widespread practice, forward buying, in key product lines sold in supermarkets: dry grocery products, health and beauty aids, and general merchandise. We examine the effects of forward buying and then of trade promotion in general on the entire distribution chain—manufacturers, wholesalers, retailers, and consumers. We suggest one pricing policy that not only helps get costs under control but also builds cooperation and trust among the parties.

Analysis of the costly inefficiencies that spill out of forward buying in food supermarkets may help manufacturers and distributors in other fields put the spotlight on practices in their own backyards. Although promotion practices are probably most widespread in the supermarket business, forward buying and diversion are also common in, say, athletic footwear, and slotting allowances are not unknown in the chain drugstores.

High Tide of Promotion

At the expense of advertising, promotion has received a big lift in recent years. Just how much a lift can be seen in the responses to an annual survey of marketing managers in consumer packaged-goods companies showing the breakdowns of their marketing budgets. In 1978, advertising accounted for 42% of those budgets and consumer and trade promotion, 58%. By 1988, ad spending had slipped to 31% against 69% for promotion.¹ Trade promotion accounted for three-quarters of the shift.

There are some powerful forces in motion that explain the intensifying stress on sales promotion:

• The U.S. population is growing at only 0.8% annually, and growth in per-capita consumption of most mature products is modest. This situation, combined with excess production capacity, has aggravated competition for market share and the use of price promotions to secure it.

• Today's consumer is less interested in shopping, more likely to hold a job, under greater time pressure, and less inclined to prepare a shopping list ahead of a store visit. Hence today's consumer is more susceptible to prominent displays in the store and more likely to buy whichever of several acceptable brands happens to be on deal.

• As the technologies underpinning established products mature, the opportunities for product and quality differentiation shrink. That fact, combined with the weaker involvement of the consumer, makes development of creative advertising copy more difficult. The result: emphasis on price competition.

• While there is no shortage of new products, most are line extensions and me-too imitations. Given the proliferation of new products clamoring for finite shelf space and retailers' limited promotion capacity, distributors try to ration their resources. They turn to slotting allowances and press for more and better deals on all products in their stores.

• Many factors influence manufacturers and retailers in the direction of a short-term outlook. On the manufacturers' side, for example, top management's concern for meeting quarterly earnings targets, plus the fast career advancement that young managers expect, reinforces this orientation. A result is a preference for boosting sales through promotion instead of taking the time to strengthen the consumer franchise through advertising.

Of course, there are many good reasons for undertaking a serious promotion program. The insert "Why Sales Promotions?" lists several of them.

They are useful in securing trial for new products and in defending shelf space against anticipated and existing competition.

• The funds manufacturers dedicate to them lower the distributor's risk in stocking new brands.

• They add excitement at the point-of-sale to the merchandising of mature and mundane products. They can instill a sense of urgency among consumers to buy while a deal is available.

• Since sales promotion costs are incurred on a pay-as-you-go basis, they can spell survival for smaller, regional brands that cannot afford big advertising programs.

• Sales promotions allow manufacturers to use idle capacity and to adjust to demand and supply imbalances or softness in raw material prices and other input costs—while maintaining the same list prices.

They allow manufacturers to price-discriminate among consumer segments that vary in price sensitivity. Most manufacturers believe that a high-list, high-deal policy is more profitable than offering a single price to all consumers. A portion of sales promotion expenditures, therefore, consists of reductions in list prices that are set for the least price-sensitive segment of the market.

A Case: Forward Buying

In our study of the important food distribution sector of the economy—accounting for supermarket sales of $240 billion in 1988—we sought to discover how much trade promotion raises certain expenses. While our estimates of such cost effects apply only to food distributors and manufacturers, we believe that they will give a useful perspective on sales promotion broadly throughout the U.S. consumer-marketing system.

During the 1980s, marketers of food, household, and personal-care products offered more frequent and more attractive trade deals to food chains and wholesalers. These are inducements used to influence a distributor to stock or display more of a product or cut its price to consumers. The distributors responded by:

• Adding to their "forward-buy" inventories. These stocks—merchandise bought at cut prices in addition to quantities needed to sell at reduced prices or to sell through retailer advertising or end displays during the deal period—are held for later sale, usually at regular prices.

• Diverting goods from regions in which manufacturers offer especially deep discounts to higher priced areas when different deals are offered in different areas. The means of doing it include (1) transfer from one division of a multiregional or national retailer or wholesaler to another division, (2) sale and direct shipment from one distributor to another, and (3) consignment via "diverters" who make this their business.

Both practices add to the distributors' costs. Forward buying inflates inventories and thereby boosts interest expense, storage charges, and insurance costs. Forward buying also means extra transportation and handling outlays because forward-buy stocks are almost always kept separate from the "regular" inventories. Diversion of merchandise involves trans-shipment and double-handling, which of course cost money.

To estimate the added costs from diversion would have meant determining the normal paths followed by a sample shipment from suppliers to distributors. A comparison of actual shipping and handling expenses, including diversions, with normal costs would have yielded the desired numbers. But this would have been a monumental task given the large number of shipping points and warehouses in the United States, so we did not attempt it.

Even so, we believe that the added costs of diversion are substantial. Food-marketing consultant Willard Bishop, a long-time observer of the industry, estimates that the volume of merchandise involved amounts to at least $5 billion a year.

Impact on Distributor Inventories. We did estimate the impact of forward buying by comparing distributors' purchasing patterns with those that would have been expected if there had been no (or less) forward buying. ("Distributors" here means both retail chains and wholesalers.)

If trade deals did not exist, food chains and wholesalers customarily would order from their major suppliers about every two weeks. A company would order enough merchandise to cover the next two weeks plus a safety stock, typically about one week's supply, to accommodate unforeseeable variations in sales patterns leading to above-average sales. A distributor following this pattern would have an average inventory of two weeks' supply, as shown in the chart "No-Trade-Deal Distributor Inventory."

No-Trade-Deal Distributor Inventory

Now let's look at reality: distributors take advantage of periodic trade opportunities to forward-buy goods for later sale. Most well-run distributors use widely available computer programs to determine how much to buy on a given supplier's deal. The savings that distributors realize normally more than offset the extra costs of buying, double-handling, and stocking enough merchandise to last perhaps until the next deal. Distributors usually have a good idea when the next deal will be offered because most suppliers schedule their trade deals well ahead. So a rational distributor will make nearly all purchases during deal periods.

How would average inventories then be affected? The answer depends on how often the price reductions are offered and the extent to which consumer purchases shift to the deal periods. The chart "Distributor Inventory on Trade Deals" illustrates a typical situation in which deals are offered during four weeks of each quarter, and 50% of consumer purchases are made during those weeks because the retailer features the manufacturer's merchandise. The effect on distributor inventories is drastic: year-round average inventory is 80% greater.

Distributor Inventory on Trade Deals

While this estimate is based on just one set of assumptions about deal frequency and the size of deal discounts, this estimated increase agrees with information that food distributors gave us in our study. Their forward-buy inventories normally amounted to 40% to 50% of total stocks. If forward buying raised inventory by 80% over the level it would be under a no-dealing scenario, then 80/180 or 44% of total inventory is attributable to forward buying.

Most forward buying in the retail food sector is in dry grocery goods, household supplies, and personal-care products. We estimate that supermarket sales of dry groceries, health and beauty aids, and general merchandise were $109 billion or about $87.5 billion at wholesale values. In the absence of any forward buying, distributors' inventories of these goods would have neared $4.4 billion. If actual inventories included 40% to 50% of forward-buy stocks, the increase in distributors' inventories attributable to forward buying ranged from $2.9 billion to $4.4 billion. If these forward-buy purchases were usually bought at 10% below "normal" prices, the amount invested in them ranges from $2.6 billion to $4 billion.

Moreover, some forward buying in high-volume frozen foods and dairy products also goes on. Forward-buy stocks of these products represent a distributor investment of about $500 million. This brings the total to $3.1 billion to $4.5 billion.

The carrying costs on distributors' inventories—including handling, storage, and capital charges—were about 30% per year. Applying this figure to the added inventories in the system from forward buying yields an added system cost of between $930 million and $1.35 billion a year. While this is obviously a substantial amount, it represents only between 0.65% and 0.9% of total retail sales of the products affected.

Costs to the Manufacturers. Forward buying is a chief cause of fluctuations in a supplier's rate of shipment to distributors. How much does it contribute to the total "cost of uncertainty" for manufacturers? Our study shows that the impact of forward buying on suppliers' costs depends on:

• The fraction of total sales accounted for by forward-buy purchases. Not surprisingly, the more important forward buying is, the more it contributes to total uncertainty costs.

• The interval between promotions. The longer the interval, the greater the uncertainty about demand. (At the other extreme, continuous promotions would make forward buying unnecessary and, obviously, generate no uncertainty about it. A few heavily promoted categories, like ground coffee, nearly fit this description.)

• The number of items, or stockkeeping units (SKUs), in a supplier's product line. The more SKUs, the greater the demand uncertainty for any particular item.

For a manufacturer, distributors' forward buying is a serious factor, but only one of several factors (some of them having nothing to do with sales promotion) that generate uncertainty about demand and limit producers' ability to forecast sales accurately. So they maintain excess production capacity and carry safety stocks of finished goods, which cost money. Several leading food-industry suppliers are paying the price: they have undertaken large-scale plant closings. Among them are P&G, which in 1987 set up an $805 million reserve to "restructure" worldwide production operations, and Campbell Soup, which last summer scheduled a similar charge, to cost $343 million.

From discussions with several big food-industry suppliers, we estimate that for most food companies the incremental costs related to forward buying range between 1% and 2% of their costs of goods sold. If typical gross margins are around 33 1/3% for suppliers and 20% for distributors, this added cost represents 0.5% to 1.1% of retail prices of the products involved. Applying these figures to total 1988 retail sales of dry groceries and selected dairy and frozen products makes the incremental supplier costs from forward buying between $720 million and $1.58 billion.

Costs to the System. Adding the two figures yields the total of $1.6 billion to $2.9 billion shown in the table "Total Added Costs Resulting from Forward Buying." Nonperishable food-store products represent some 5% of all retail sales. Forward buying is of course impractical for perishable merchandise, like fruit and vegetables, or short life-cycle merchandise, like fashion apparel. But if all consumer goods are considered, forward-buying costs could total several times the $1.6 billion to $2.9 billion spread.

Total Added Costs Resulting from Forward Buying

Moreover, these substantial amounts represent only a part of the true costs of trade promotion, let alone the total cost of all forms of sales promotion. Other expenses, which we have not tried to quantify, include.

• The added transportation and handling costs in diverting merchandise among regions.

• The higher administrative and selling costs that suppliers and distributors incur to operate increasingly complex selling and purchasing programs. We mentioned P&G's assertion that 30% of the brand management organization's time and 25% of field salespeople's time is absorbed by these tasks. The proportions are typical.

• The costs of the time that buyers and merchants spend evaluating deals, which would be better spent in competitive analyses and category management.

These hidden costs of promotion could easily equal or exceed the more tangible costs that we explored. The total cost is very high, both absolutely and relative to suppliers' and distributors' earnings. Reduction of these costs would produce savings that could greatly benefit consumers and retailers, wholesalers, and manufacturers.

Some Like It, Some Don't

In addition to impairing the efficiency of the distribution system, the explosion in sales promotion expense has other important, harmful effects on the distribution chain.

Our analysis of the food industry yields estimates that the increase in manufacturer and distributor costs from more trade promotion amounts to about 2 1/2% of retail sales. Since there has been no noticeable decline of manufacturer and distributor profits, the consumer has presumably absorbed these costs.

This cost burden has not affected all consumers equally. Those with the time and inclination to shop for bargains, termed "cherry pickers" by the trade, have probably enjoyed lower prices as a result of the higher proportion of items offered on sale. But most consumers, whose shopping time is often constrained by work and other responsibilities, have probably seen their prices on affected items rise by somewhat more than 2%.

Other consequences of higher sales promotion expenses have affected consumers too. Because it is harder to predict the rate of sale of merchandise offered at special prices, stock-outs of preferred brands may be more frequent. This phenomenon would apply more to risky, short life-cycle fashion merchandise offered at special prices than to staple items where forward-buy inventories probably offset the less predictable sales rate of merchandise that is sold on specials.

Another probable effect of the availability of more merchandise at special prices is a deterioration of in-store service. Special sales exaggerate the normal peaks and valleys of store traffic and thus impair service, whether it is the availability of a salesperson in a department store or the length of a checkout line in a discount store or supermarket.

The extra costs that trade promotions impose on distribution channels do not affect all classes of trade equally. Such distributors as deep-discount drugstores and warehouse clubs—which carry few items in each category and have no commitment to item continuity—favor heightened manufacturer sales-promotion activity.

Warehouse clubs especially have this attitude. The burgeoning volume of trade deals, in particular, means that more items (or the same items more often) are available to them at sharply reduced prices. Moreover, since they usually offer only a few brands and sizes in a category, they can quickly dispose of the promoted items with no effect on the movement of competing items. Competitors allege that the frequency of trade deals, combined with relaxed enforcement of the Robinson-Patman Act and manufacturers' hunger for more volume, allows these limited-line distributors to buy at more favorable prices than traditional channels or to obtain other concessions like direct store delivery of smaller quantities at no extra cost.

Food wholesalers are ambivalent about promotion practices. While they vigorously condemn the allegedly better treatment that nonfood channels receive, they do not advocate elimination of these practices. Because quasinational or multiregional operators dominate food wholesaling, they have established their own internal diversion networks. Moreover, the difference between forward-buying income and expense gives them added flexibility. While passing on some of these funds to customers in proportion to their purchases, they can use a portion of the income to subsidize weak areas, underwrite new operations, support added services for retailers, or boost their own profits.

The wholesalers' ambivalent attitude toward promotion practices contrasts sharply with the views of some food retailers. They argue that the labor and storage costs of forward-buy inventories and the extra transportation costs in diverting merchandise, while more than offset by lower purchase prices for merchandise, nevertheless add to their costs of goods sold. These expenses, many retailers assert, undercut the advantages of just-in-time replenishment practices for their regular inventories. They fear that an overriding concern for buying at the lowest cost diverts their merchandising organizations from the primary goal of serving consumers better. What these retailers would prefer is a system that provides them with the lower purchase prices for merchandise without the added costs of forward buying and diversion.

Producers of health and beauty aids and food also take exception to these promotion practices. Apart from the incremental manufacturing or inventory costs they incur, they perceive serious, though non-quantifiable, consequences. Among them is a decline in brand loyalty arising from elevated consumer price sensitivity. Even consumers once faithful to certain brands may switch to other products that are on deal or time the purchase of their preferred products to coincide with available deals.

Food manufacturers also complain that retailers often fail to discharge their responsibility to provide temporary price reductions, special displays, or feature advertisements. Often retailers allegedly accept promotional allowances for more deals than they are able to fulfill. Manufacturers' attempts to enforce deal terms, however, may spur retailer retaliation, such as deducting unearned merchandise allowances from invoices, increasing claims for damaged merchandise, or delisting low turnover items.

The aforementioned trade-deal terms that favor limited-line distributors, like warehouse clubs, are another sore spot for manufacturers. Because the main goal of limited-line distributors is to sell merchandise at the lowest prices rather than have particular brands always in stock, their priorities inherently conflict with brand loyalty. Furthermore, limited-line distributors refuse to carry the slow movers in a manufacturer's line—but these are often the manufacturer's most profitable items.

The trade promotion climate has had two disturbing effects. First, as we have indicated, it has aroused mistrust between manufacturers and distributors. This could inhibit cooperation on matters that benefit the whole distribution chain, including electronic-data interchange, modular packaging, and more use of direct product-profit accounting.

Second, today's climate invites political intervention to rid the system of the wasteful expenses of forward buying and diversion. The Federal Trade Commission has been studying slotting allowances for some time. If the Bush Administration decides to renew enforcement of the Robinson-Patman Act, manufacturers and distributors would be endangered. Running afoul of this law in the past has resulted in prolonged and costly litigation, stiff fines, and government-imposed sanctions and reporting requirements that are competitively disadvantageous. Improving sales promotion practices ethically and legally would reduce this threat.

Despite their concern about the situation, manufacturers have not acted in concert to change matters. Competitive rivalries and fear of being charged with illegal price fixing have inhibited them.

Living with Promotions

Forward buying, diversion, higher manufacturing expenses, and inflated selling and administrative expenses for manufacturers as well as distributors are costing consumers billions each year. And all indications are that the problem is becoming worse. Trade promotions cannot be wished away. But surely there must be a means to execute them at lower cost.

One way to smooth the expense peaks and valleys is a policy of everyday low purchase price (EDLPP). A retailer arranges to buy a particular product from a manufacturer on an as-needed basis at a weighted average price reflecting both the proportion of merchandise recently bought on a deal basis and the proportion bought at the regular price. In return, the retailer agrees to support the product with a certain number and type of promotional events or, more likely, a guarantee to "sell through" to consumers a given quantity of the particular item over a designated period. (Scanner tapes reveal whether the retailer has met the commitment.)

This arrangement has three great benefits. It avoids forward-buy inventory buildup for manufacturers and distributors. It reduces SG&A expenses for producers and sellers because they spend less time negotiating—the contracts run for six months to a year—or supervising performance—because the scanner tapes supply the evidence. Finally, it makes the relationship a collaborative, long-term effort and fosters a spirit of partnership that is seldom found in the monthly deal-buying frenzy.

True, wholesalers would lose some of the flexibility they now enjoy in the use of forward-buy income. In addition, since they have less influence over their retail customers than a chain store does, they could find it difficult to fulfill sell-through guarantees. EDLPP also violates tradition. Chain and wholesale buyers and suppliers' salespeople would have to be weaned away from deal-to-deal buying and selling. Moreover, performance evaluation and incentive systems geared to current practice would have to be changed.

Despite these obstacles, a number of distributors and manufacturers view EDLPP as a source of competitive advantage and are expanding their use of it. In New England, two leading supermarket chains, Hannaford Brothers and Shaw's, are doing business with suppliers on this basis. If EDLPP is superior to deal-to-deal transactions in executing trade promotions, it will gain greater acceptance. (Moreover, we believe, it leads to lower average prices for consumers because of pass-through of savings on handling costs and interest and transportation expenses, as well as administrative costs.)

Clearly, however, EDLPP does not constitute a panacea for all the problems associated with the current promotion climate. With EDLPP, friction among particular channel members will lessen but it will not disappear altogether. Manufacturers will therefore have to dedicate more resources than ever to evaluating their individual trade promotion policies.

While for the most part trade power is rising, the balance of power between manufacturers and distributors depends on the industry, product category, and market shares. Formulation of a trade-promotion program should begin with an examination of what is practical and profitable for a particular manufacturer to do in lieu of trade promotion to market its products effectively.

We say "in lieu of" because trade promotion should be a last resort in the marketing mix. Product improvement, more effective advertising, and better packaging that more favorably differentiates the manufacturer's offering to the targeted consumer segments (that is, better marketing) are the best avenues for reducing promotion spending and its attendant costs. Investment in R&D is the best way to differentiate and to avoid the necessity of promotions. Even if the payoff is not immediate, discretionary funds can be invested in activities that strengthen a product's consumer franchise unless the present value of the resulting earnings stream is lower than the returns from comparable outlays on promotions.

If the manufacturer nevertheless concludes that it must continue to invest at least some funds in promotions, we recommend adherence to the following guidelines:

• Focus on the particular support needed from the trade. What these are depends on an understanding of consumer buying behavior. In stimulating sales on impulse-oriented products—cookies, for example—displays are more effective than extra feature ads in retailers' circulars.

• Think through the ways that your trade-support needs differ by distributor. From one distributor, a manufacturer may want authorization for additional sizes and flavors; from a second, more shelf space for existing items; and from a third, better pricing on advertised items.

• Productivity improves when promotions complement distributors' merchandising thrusts. Money for a feature ad may work more effectively if it ties into a distributor's special-event promotion, while funds for a special display may spark more cooperation than a feature ad from a distributor committed to everyday low pricing. Provide a menu of promotions that distributors with different merchandising strategies can choose from.

• Look for ways to reduce the administrative burden imposed on distributors as well as on yourself. For example, there is much to be said for using scanner tapes to verify sell-through objectives instead of using hard-to-track measures like number of incremental end-aisle displays.

• Spread trade-promotion funds fairly among distributors. Fairness should take into account differences in the services they demand from you. A distributor that, say, wants a lot of help from your salespeople to do shelf resets will ordinarily be entitled to less trade-promotion support than a distributor that takes on this task itself. Therefore, be familiar with the components of your cost structure to know how many dollars to give an account in trade-promotion funds.

Effective use of trade-promotion funds means allocating them quantitatively and qualitatively on an account-by-account basis. A field sales organization that is close to the distributors is obviously better positioned to take on this burden than headquarters marketing personnel. Sales force upgrading, training, and performance criteria that recognize trade-promotion profit as well as volume are therefore a necessity.

Of course, there are often ways to cut costs even in a full-scale promotion program. P&G has established product-supply managers for each of its products. They are charged with supervising the procurement and smoothing the logistics of getting Procter goods to market. The company has also eliminated special packs after discovering that the cost of running these promotions was far greater for distributors as well as for themselves than the cost of regular price promotions of equivalent value. For distributors, using special packs means removing regularly priced goods from the shelf and replacing them with the special packs, and then reversing the procedure at the end of the deal period. For P&G, the necessity of adding SKUs, for which demand had to be forecast, and the increased chances of residuals after the promotion ended were the villains in the cost structure of special packs.

The elimination of special packs has been a major factor in the dramatic improvement of P&G's relationships with wholesalers and retailers. We believe that P&G's success in taking this action is compelling evidence of what can be accomplished by a more rational approach to pricing and sales-promotion management. Many manufacturers are experimenting with EDLPP sales programs; we are confident that the resulting improvements in efficiency and trade relations can be even greater than those achieved by P&G via eliminating special packs.

Obviously, the responsibility for a more rational sales-promotion climate does not lie entirely with manufacturers. Retailers and wholesalers have to take advantage of their enhanced power in ways that do not encumber the distribution system with additional costs.

One way is through a switch in accounting systems so they can distinguish between "the most deal money" and acquiring merchandise at the lowest net cost, including their own expenses for storing and handling inventory. Accounting systems, however, are only as good as the people who use them. Therefore, reorientation and incentive programs that encourage their merchants and buyers to think in this manner are also necessary.

The balance of power in marketing is changing. Companies will best preserve and enhance their positions if they adjust their sales-promotion programs to reflect this reality without burdening the distribution system—and ultimately consumers—with additional costs.

1. Donnelley Marketing, Eleventh Annual Survey of Promotional Practices (Stamford, Conn., 1989).

A version of this article appeared in the March–April 1990 issue of Harvard Business Review.

How Much Does It Cost to Make a Promotional Video

Source: https://hbr.org/1990/03/the-costly-bargain-of-trade-promotion

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