Inflation can have a number of impacts on businesses and consumers, including higher costs for raw materials and other inputs, as well as increased prices for goods and services. Every marketer, salesperson, and shopper has experienced inflation. Consider the broader food category: according to the US Bureau of Labor and Statistics, ‘Food at Home’ prices have increased by 12% in the past year. As a CPG professional, how do you navigate the decision to change promotional frequency or depth?
Before beginning, we must also remember other factors which can influence the success of trade promotions:
- Brand’s target consumer and value proposition vs. competitors
- Existing category promotional environment
- Existing customer and channel dynamics
So, should CPG manufacturers invest more or less in promotions during inflationary times? The answer is not necessarily straightforward, but there are a few factors that CPG manufacturers should consider Here at CPGvision, our experts discuss the pros and cons of increasing or decreasing promotional activity.
Increasing Promotional Activity – a Temporary Solve?
It’s important to consider the implications that can arise from increasing trade investment via promotional frequency or depth.
- Pros:
- Drive bottom line (profit generated from promotional lift outweighs additional trade spend)
- Leverage enticing offers to attract new-to-brand shoppers
- Steal share from competitors during the promotional timeframe
- Attract price-sensitive consumers - Inflation can lead to increased demand for lower-priced products. CPG manufacturers can promote to help attract price-sensitive consumers who are looking for good value for their money.
- Cons:
- Risk profit margin dilution (incremental profit doesn’t outweigh additional trade spend)
- Retailers may expect future investment KPIs to repeat or exceed the current trade levels.
- Shoppers can become accustomed to the new promotional levels
- Increased competition - Inflationary times can lead to increased competition as more companies try to attract price-sensitive consumers.
Decreasing Promotional Activity – A Risk Worth Taking?
Decreasing promotional depth or frequency can drive immediate trade savings, but at what cost?
- Pros:
- Realize trade efficiencies and positively impact profit percentage per unit sold
- Potential to increase absolute profit dollars (trade efficiencies offset consumption loss)
- Cons:
- Risk decreasing topline consumption, especially if the category is elastic in price
- Prompt shoppers to consider switching to competitors who have maintained or increased promotion activity
- Risk retailer partnerships – Will decreasing promotional spending jeopardize existing retailer partnerships? Buyers may have higher-margin competitive offerings to choose from. Items may get discontinued.
- Reduced brand awareness - Decreasing promotional activity can also lead to a decrease in brand awareness, as consumers may be less exposed to the CPG manufacturer's products and messaging.
There is not a one size fits all solution. Whether CPG manufacturers should be promoting during inflationary times depends on a variety of factors, including the specifics of their products, their trade promotion management strategy, the competitive landscape, and the economic conditions. However, after considering the implications for their business, companies can leverage promotions and pivot confidently without jeopardizing long-term goals.
To learn more about how you can effectively optimize your trade promotion plan and deliver profitable results, contact our team today.