Changing the Channel: A Better Way To Do Trade Promotions

In theory, trade promotions should benefit everyone involved. In practice, however, manufacturers and retailers often use trade promotions as weapons in a zero-sum game, and consumers are sometimes left out altogether.

It need not be that way. Over the past three years, David Bell, an associate professor of marketing at the University of Pennsylvania’s Wharton School, and Xavier Dr_ze, a visiting assistant professor of marketing at UCLA’s Anderson School, have examined the theoretical and practical problems associated with trade promotions, and they explain how the right kind of deal can be created — a transparent system that generates mutual trust and provides benefits to both manufacturers and retailers. The key is proper implementation of what is thus far a little understood tool: the pay-for-performance trade promotion, in which retailers get rewarded according to how much they sell, not how much they buy.

The authors explain how the most accepted way of doing promotions today — which rewards retailers for effective buying rather than effective marketing — creates a variety of inefficiencies that drain resources from their intended purpose. Using a hypothetical case involving much-simplified mathematics, they go on to demonstrate how manufacturers can design pay-for-performance options that retailers can embrace. They also illustrate how one national beverage company made pay-for-performance deals work in practice. Finally, they offer practical advice to help senior managers rethink the elements of organizational culture that stand in the way of a more effective approach to trade promotions — and, by extension, block better, more profitable relationships all along the channel.