Managing Promotions

Hundreds of companies are regularly putting the operation of their business at risk by underestimating the difficulty in forecasting sales promotion redemption levels accurately - and they certainly do not sufficiently appreciate the awful consequences that can follow. Yet, there are tried and tested ways to eliminate the risk completely.

Research by Fotorama into the accuracy of forecasts for sales promotion redemption has shown only eight per cent of offers coming within ten per cent of expected levels. This research focused on promotions for fast moving consumer goods that were featured in multiples, and compared actual redemption levels to marketing forecasts. The promotions covered a wide variety of mechanics, such as 'try me free', special price vouchers, token collectables, money-off coupons and loyalty schemes.

The research results highlight how difficult it can be for skilled marketers to forecast promotions accurately. Even repeating an identical promotion can produce a widely different response. It is highly unpredictable and potentially very expensive when it goes wrong.

While many promotions were under forecast, those that over-redeemed often did so spectacularly. A financial services company found that 79% of those who claimed a free UK weekend break actually booked, against a forecast of 35%, adding £1.1m to the cost of the promotion. A 'try me free' offer on a specialist household cleaning product attracted 45% redemption even though only 10-12% was anticipated. When a food company repeated an offer in national newspapers, redemption was less than half in the second year, using a different but directly competitive tabloid. Coupons are said to be more consistent. Yet a 50p off next purchase coupon for a non-dairy spread generated 35% response after the marketing team forecast 15%. The extra cost of redemption was over £100,000.

There are many instances of inaccurate forecasting in popular promotional mechanics - all of which can be financially devastating. Certain examples that have emerged in the past are even more alarming, with promotions both under-forecast and spectacularly over-redeemed.

The most famous example of an underestimated promotion was the Hoover 'free flights' fiasco in 1992/93. Hoover massively miscalculated the number of people who would buy Hoover products to claim two free international airline flights, and when Hoover was unable to honour the promotion many consumers turned to the law, making this one of the most expensive marketing blunders in history and costing its parent company a reported £72m.

Difficult to estimate

Most sales and marketing costs can usually be budgeted, set and controlled with reasonable accuracy, but sales promotion costs are different because they are directly linked to an unknown and scarcely controllable factor, customer response, which can vary considerably and be extremely difficult to predict. It may be influenced by weather, fashion or promotional offers on competitors' brands. Uncontrollable costs resulting from the unpredictable nature of customer response can include prizes and 'cashback' claims, handling incoming enquiries or entries, packaging, fulfilment and postage.

When the variance may be hundreds of thousands of pounds, promotions budgets can not only have a major impact on the bottom line, but can also affect cash flow and financial reporting. Even the most experienced promoter cannot always accurately predict redemption, particularly if the company is trying something new.

Managing the risk

When planning a promotion there are two main choices - to trust the promoter's judgement in a forecast and take the risk of over-redemption, or to eliminate the uncertainty by contracting it out. Many companies choose the latter method if running promotions offering big prizes or using a relatively new technique. The next decision is whether to contract the risk out on a fixed fee basis or to insure the promotion.

Promotion insurance is purely focused on financial liability, leaving the promoter to handle the logistics of the promotion, and is only used to protect against over-redemption up to a predetermined level. Usually a policy offers a segment of cover, for example, between three to six per cent redemption, with the risk above six per cent remaining with the brand. The promoter will have to pay the costs of all redemptions and then make a claim against its insurance policy for the insured element. Insurers usually appoint a loss adjuster to investigate all aspects of the claim before agreeing a settlement.

In the fixed fee approach, for one agreed set cost, the fixed fee company will handle all aspects of a promotion from sourcing and database management, right through to customer service and fulfilment, and take all the risks. Even if the response is 500% over forecast, the cost to the promoter will remain fixed.

Management of logistics

Handling and fulfilment is the 'uninteresting' part of any promotion but has the greatest influence on consumers' perception of a promotions performance. A promotion that is efficiently managed, delivers gifts to consumers in good time, and where any customer service issues are handled professionally, will remain in the consumers' memory as a great success. Efficient handling is essential for a successful promotion, and it should include every stage of the process, however small:

- providing specific PO Box address

- handling and despatch of applications

- 'no purchase necessary' route handling

- database management

- packaging advice

- customer service telephone response

- promotion reporting and analysis.

Choosing a fixed fee partner

The chosen fixed fee company must have secure financial backing to enable it to withstand over redemption costs - after all, if a promotion does over-redeem, working with a fixed fee company which cannot afford to pay up is pointless. The partner should also have extensive experience of major fixed fee promotions, be able to cope with large numbers of consumer communications and have the time commitment to handle all requirements. Track records, references and case studies for potential suppliers can all be important.

A fixed fee company should be willing to sign a confidentiality agreement in the early stages of planning. Cooperation and dialogue between the promoter, agency (if appropriate), and fixed fee company are also important. It is vital that all are fully informed at all stages about the development of plans such as marketing and advertising activity.

With the right advice and the risks covered, running a promotion does not have to be a gamble.

Philip Penlington is account group director of fixed fee specialists Fotorama, www.fotorama.co.uk

Fixed Fee

One fee covers whole promotion

Cost of whole promotion is included. No surprises for the budget

Good fixed fee company should provide sourcing and fulfilment, customer service and phone lines, warehousing and transportation

No claim to be made. Full cost met by fixed fee company regardless of redemptions

Fixed fee is promoter's only cost: all operating costs paid by fixed fee company. All fixed fee costs can be budgeted clearly into one financial year without any ongoing liability

Fixed fee companies experienced in calculating risks and redemption levels take all risk

Insurance

Insurance premium only covers over redemption and then only within an agreed band

Premiums initially cheaper but do not cover sourcing, handling, fulfilment or stock risk and cost of over-redemption

Only covers financial liability. Promoter deals with all administration and logistics

Insurance claims for over redemption are subject to loss adjustment and may be rejected if conditions have not been met. Also claim not settled until after promotion closed which will impact cash flow

All costs must be paid out by promoter and can only be claimed back from insurer once promotion ends.

Promotional redemption may run across more than one financial year, so budget must be accrued

Promotions manager in control of promotion but accepts risk to budget

FIXED FEE PROMOTION GUIDELINES

- Set manageable objectives

- Understand your target audience

- Choose rewards or prizes with care

- Evaluate the opportunities and risks of a potential promotion

- Only seek quotes from fixed fee companies that are financially stable, have long-term credentials and deep resources and experience

- Decide on how much, or how little of the promotion and risk you want to handle yourself

- Agree what data collection and analysis will be required later for customer relations management or review

- Provide a clear brief and as much information as possible about this and previous promotions

- Ensure that all communication is clear

- Check legality with the ISP before running the promotion.

PROMOTIONAL RISK AND OPPORTUNITY

Starbucks blundered last year when it e-mailed a coupon for a free ice coffee to employees, telling them to share it with friends and family members. Circulation of the e-mail extended beyond the original employees and Starbucks cancelled the promotion.

Adding insult to injury, rival coffee chain, Caribou, said it would accept the coupons issued provided they were redeemed on a specific day within specific times, in effect they converted a poorly thought-out promotion by Starbucks into a marketing opportunity for Caribou.