In-store promotions are a necessary piece of the marketing puzzle for CPG brands. However, understanding the different ways they get charged creates a lot of confusion. We’re here to help. In this article, we'll outline the three main categories and the nuances between them.
For brands that need a quick, high-level overview, watch the video below.
For brands that need something more in-depth, read the supporting text below.
In-Store Promotions Explained
Promoting products with retail partners allows emerging brands to both reduce the barrier of trial to potential consumers and test the price elasticity of products through different sales channels.
However, the convoluted accounting supply chain dictating trade spend costs, combined with the obfuscation of cost basis information, frequently causes brands to underestimate the costs of their promotions. Further, most brands lack the organizational framework or supporting tools to codify all promotional events into a centralized database, leading to unexpected chargebacks and cash flow constraints.
Brands must first understand the nuances of each promotional type, and the costs associated with each, before endeavoring to establish a holistic promotional plan with their retail partners.
Below are some simple definitions to get started and Rodeo’s perspective on when to leverage each.
Definitions
Off-Invoice
"Off-Invoice" discounts are deducted straight from an invoice with a distributor, and occur during specified promotional periods. Typically, off-invoice discount amounts are around 15% of the regular case sales price, and occur in 2-3 separate months per year.
Manufacturer Charge Back (MCB)
“Manufacturer Charge Back” or "MCB" deals are promotional events where the retailer buys a brand’s product from a distributor at a discounted rate. The retailer then passes that discount on to the consumer during a pre-scheduled promotional period. This chain of events unnecessarily involves the distributor in a discount which in some cases could be arranged solely between brand and retailer, often leading to higher than anticipated costs and lower than anticipated discounted prices on shelf.
Scan Back (Scans)
"Scan" deals are promotional events where the discount on a product is taken at the point of sale to the end consumer. Typically measured in dollar amounts and not percentages, "Scan" deals offer the most transparency to the brand, as they’re linked directly to the end transaction of an item, and are often accompanied by supporting documentation evidencing the successful execution of the deal at the retail level.
Our Perspective
Off-Invoice
Actual months will be determined with distributors individually, but brands typically try to align the months across their distributors, and stack other promotional events on top of these distributor "promotions." These deals are standard practice with many industry distributors, and when used effectively, can be a cash-efficient means of promotion, as the discount is a straight percentage off of the sales price to a distributor, and does not include any additional administration fees.
However, tracking that these discounts have been passed on to retailers, and subsequently consumers, requires review of point-of-sale information which often comes at a steep cost to the brand. O.I. deals incentivize distributors to place larger quantity orders than normal, as they’re guaranteed a lower rate on a brand’s products. Brands must understand the baseline demand for their products by distribution center to combat this ubiquitous distributor ordering practice, dubbed “bridge buying.” Shipping too much product at one time to a particular distribution center exposes brands to product spoilage risks, as well as lengthy periods of time without generating any revenue from a major customer. The former risk comes at a steep cost to brands--over the initial sales price of the product--and the latter often manifests itself in the form of unplanned for cash flow constraints.
MCB
Oddities abound with respect to MCB deals. For starters, consider the cost back to the brand for executing such a deal. One might naturally assume that a brand simply covers the discounted cost at which the distributor sells their products to a given retailer. However, the amount owed by the brand is instead based on the products’ “wholesale” or “catalog”* price as listed by the distributor, and NOT necessarily the price the retailer typically pays the distributor. This “wholesale” price will vary by distribution center, making the costs of MCB promotions notoriously hard to estimate.
It is essentially impossible to verify that the discounts taken off of MCB deals are appropriately passed on to the consumer without purchasing point-of-sale data, as the only receipts provided to brands come in the form of total cases sold from distributor to retailer. Some retailers will push hard for MCB deals, due to the daunting administrative task of organizing promotions directly with brands. While these deal types are a legacy standard in the industry, they’re an inefficient means to discount a brand’s products, and should be eschewed in favor of "Scan" deals whenever possible.
* ”Wholesale” price can also be described as “list”, "catalog", or “book” price. Here, we use the term “wholesale,” as that is how it would appear on a chargeback report.
Scans
Scan promotions are generally the most efficient means of the three for effective product discounting, as they typically carry lower administration fees and the discount is taken at the terminating point of the distribution chain (i.e., at the cash register in the store). Further, the backup documentation for "Scan" deals often (but not always) contains the individual movement details of each product from the retailer to the end consumer. This evidence affords the brand a validation that a promotion was executed as intended, and an idea of how effective the promotion was when compared to baseline sales data.
Strategy | Recommendations
Too often, brands fixate on reaching a targeted trade spend percentage, and design a promotional strategy around hitting that target. However, they fail to adequately confirm that their discount rates translate into their anticipated price on shelf, resulting in disappointing sales lifts. Further, in accounting for these deals, brands often overlook the cost structure of their promotions (particularly MCB deals), causing them to blow through their trade spend targets and leaving them in a cash flow bind.
For the majority of CPG brands, one of the highest correlated variables to product movement is the product’s end price to the consumer. If the main objectives of retail promotions are to drive customer trial, increase velocity in advantageous seasons, and test price elasticity, why would a promotional strategy start anywhere else than with a targeted price on shelf? Set and confirm your TPR target with your retail partners first, and work backwards from there to negotiate exactly how much you need to discount to achieve that target price. After confirming the pricing structure, document any additional costs or fees associated with the deal, and evaluate whether the true cost of the deal warrants the support needed to actualize it.
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