TRADE PROMOTIONS 389Th e dealer adds an agreed-upon percentage to the fund, and uses it to advertise the brands of
the manufacturer. To stimulate the retailer to put a new brand or a renewed version of the
product on the shelves, the manufacturer sometimes off ers to buy back the ‘old’ product, or
commits to buying back the stock of the new product that is not sold during a specifi c period
of time. Th is is called a buy-back allowance. To motivate retailers to sell more of the manu-
facturer’s product, a contest among them may be organised in which, for instance, trips or
other prizes can be won. In some cases, additional materials ( dealer loaders ) are off ered dur-
ing a promotional campaign, for instance a refrigerator during a soft drink promotion. Aft er
the promotion, the retailer can keep the extra equipment.
Trade allowances result in a higher profi t margin for the wholesaler or the retailer. Th is
higher margin can (partly) be used to off er a discount to the end-consumer by means of retail
promotions, or to stimulate sales by means of more shelf space or other in-store communica-
tions tools. In those cases, the trade promotions can eventually result in a favourable eff ect
on end-consumer purchases. If the (volume-based) trade allowance is used by the retailer
only to increase inventory temporarily, the trade promotions will not result in an increase in
sales to the end-consumer. Although trade promotions have become increasingly important
as a result of the growing power of the distribution channel, their eff ectiveness largely
depends on the incentives given to the retailer to pass on the benefi ts to the end-consumers
and to stimulate short-term sales in-store.Although some recent studies^23 find a (small) positive long-term sales evolution from promotional efforts, most
studies lead to the conclusion that, although promotions may be effective in the short run, they result in negative
effects in the long run. Competitive campaigns neutralise the effects, and the only result is an increase in promotion
costs for the same amount of sales, and stable, long-term market shares. Furthermore, promotions may undermine
the effect of more strategic marketing instruments, such as advertising and sponsorship, which try to build brand
image in the long run. Therefore, some manufacturers increasingly rely on the EDLP strategy, aimed at maintaining
a relatively low stable price, as opposed to the ‘high–low’ (HILO) strategy in which frequent promotions are used.
The potential effects of sales promotions are summarised below.
In the short term most promotion campaigns lead to an increase in sales and market share.^24 Reported promo-
tional price elasticities range between 4 and 10, but do not always exceed short-term advertising elasticity.^25 The
effect of promotions on short-term profitability is unclear, though. Some studies indicate that promotions lead to
higher profits, whereas others warn of pressured margins.^26 Furthermore, various studies indicate that 80% of the
sales increase as a result of promotions is attributable to attracting buyers of competitive products.^27 However, a
retailer does not benefit much from brand-switching within the store. Retailers are more interested in the extent to
which sales promotions stimulate store-switching or increase category demand in the focal category as well as in
other categories (cross-promotion effects). Research shows that sales promotions indeed attract new customers
to the store leading to an increase in the retailers’ market share.^28 Increased store traffic also leads to additional
sales in other product categories.^29 According to a recent study, one in two price promotions expand own-category
revenues with a probability of 61% that at least one other category is positively affected. These cross-promotional
effects seem more likely to occur between the categories more closely located to one another in the store.^30
In the medium term (4–6 weeks after the promotion), the effect of the campaign on repeat purchase and the lack
of a ‘post-promotion dip’ become important indicators of effectiveness. When not only new customers are
attracted by the promotions, but also existing customers buy more of the product during the promotion campaign,
a ‘post-promotion dip’ in sales can result. Therefore, to assess the effectiveness of a promotion campaign, both the
sales during the campaign and after the campaign have to be measured. If the product is frequently on promotion,
also a pre-promotion dip may occur: consumers anticipate the campaign and postpone their purchase.^31 Further,RESEARCH INSIGHT
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