Basic Assessment of Sales Promotions

Exhibit 17.7   Evaluation of promotion in terms of gain in volume, value and margin.

How much did my brand gain in volume, value and profit? This is the first question that comes to a sales manager’s mind after promoting their brand, and the answer provides for a preliminary understanding of the impact of a promotion.

Sales gain/loss or incremental volume is the sales volume above the baseline sales. It is the gain or loss in volume on account of short-term causal factors, including temporary price reductions (discounts), displays, features, distribution fluctuations (stock outs for instance), seasonal factors and competitor activities. 

Exhibit 17.6   Sales of a major brand reflecting the impact of promotions.

Consider the three cases — I, II and III — circled in Exhibit 17.6. Exhibit 17.7 provides additional details such as the regular price and baseline sales for this product at the three time periods. The gain in volume for each of these promotions is the difference between the sales volume and the base line sales volume. Similarly, the gain in value is the difference between the sales value and the base line sales value, and the gain in margin is the difference between the margin and the base line margin.

Because of the price discounts, the gains in value are lower than the gains in volume, and the gains in margin are much lower. In Case III, where the brand is heavily discounted, the gross margin is totally wiped out, and the brand incurs a loss.

Each of these three promotions has a different impact and plays a different role. The promotion in week 46 (Case III) was a tactical promotion run by a local retailer during the week that a major global hypermarket chain entered the market with the opening of their flagship store. Price was slashed by 18%, volume soared 5.4 times, yet at that level of discount, profits were wiped out.

The Case I promotion on the other hand is profitable and may therefore be repeated more frequently. It yields a healthy 78% increase in volume with a 5% reduction in price.

Do note that some of the losses incurred by retailers due to discounts and other related promotional costs are offset by manufacturers’ support. Manufacturers support promotions through trade incentives such as promotional funds, and discounts on their list price, which are usually quantity based. These funds are not accounted for in the above analysis.

From the retailer’s perspective, the analysis must also account for the increase in store traffic, resulting from the promotion. This is likely to be significant for Case III, which is an example of a loss leader. If the item is a traffic builder, profits from the increase in sales of all the other products (across categories) bought by the surge in shopper traffic, could more than offset the loss in profits incurred by the item.

Case III type of promotion is also worth considering in instances where stocks are likely to expire. It would enable the retailer to recover part of the cost of the goods, as opposed to inventory write-off, which amounts to a total loss.