Teaching objectives. Article: Nijs, Vincent R., Kanishka Misra, Eric T. Anderson, Karsten Hansen, and Lakshman Krishnamurthi (2010), “ Channel Pass-Through of Trade Promotions ” Marketing Science, Vol. 29, No. 2, 250-267.
Teaching objectives Article: Nijs, Vincent R., Kanishka Misra, Eric T. Anderson, Karsten Hansen, and Lakshman Krishnamurthi (2010), “Channel Pass-Through of Trade Promotions” Marketing Science, Vol. 29, No. 2, 250-267. The objective is to demonstrate the value of measuring trade promotion effectiveness. Even though pass-through estimates vary significantly at each level of the distribution channel, we show that a large portion of trade deal money does not reach the end consumer. We demonstrate that manufacturers and wholesalers can avoid unprofitable trade deals for specific products and retailers by utilizing estimates of pass-through, consumer price elasticity, and margins. In our application selective use of trade promotions could improve deal profitability by 80% and reduce costs by 40%.
Channel pass-through of trade promotions • Trade promotions are incentives directed toward other members of the distribution channel • Trade promotions account for over 60% of manufacturer marketing budgets in packaged goods (> $75B) • There is a heated debate between manufacturers and retailers over the effectiveness of these promotions
How do trade promotions work? $ off Manufacturer Wholesaler $ off ? $ off ? Consumer Retailer
Data Manufacturer Wholesaler Retailer • A major product category with many sub-categories • 30 states • 1 manufacturer with many brands • 250 products • 100+ wholesalers • 1000+ retail stores Consumer
How to estimate pass-through? • Two models describe the full channel: log(PR) = αW + βWlog(PW) + γW X+ εW log(PC) = αR + βRlog(PR) + γR X+ εR • PW is the price charged to the wholesaler by the manufacturer • PR is the price charged to the retailer by the wholesaler • PC is the price charged to the consumer by the retailer • βW is the pass-through elasticity from wholesaler to retailer • βR is the pass-through elasticity from retailer to consumer • From these two models we can calculate the total pass-through elasticity as βW ΧβR
Estimated pass-through elasticities Pass-through from wholesaler to retailer Mean βW = .71 Pass-through from retailer to consumer Mean βR = .59 Total channel pass-through to the consumerMean βC = .41
Implications • How could manufacturers use these estimates? • Inclusive versus selective trade promotion strategy • Impact of trade promotion strategy on: • Manufacturer & wholesaler profits and costs • Retailer profits • Causes of unprofitable manufacturer & wholesaler deals?
Conclusions • A large proportion of trade promotions does not reach the consumer • On average, a 10% promotion from the manufacturer results in a 4.1% promotion for the consumer • Up to 56% of trade promotions may be unprofitable • Recommendation: Offer trade deals when demand is elastic and channel members cooperate (i.e., pass-through)