Becky Munday, chief executive of promotional cover specialist Mando, gives retail marketers the low-down on assessing sales promotions for risk.
With promotional activity on the rise as marketers try to drive sales in a tough market, exposure to the inherent risks involved with these sorts of activity has become a day-to-day concern for brands as they face the potential spectre of over-redemption. Most promotions come with an element of risk and there are several avenues a company can go down to protect it.
The past few months have seen promotional campaigns in the press for all the wrong reasons; from Asda being forced to apologise for its “£75 off” blunder, to Outnet’s website crashing during its “£1” sale, and a whole swathe of promotions not living up to expectations.
What this highlights is not only the power, but also the unpredictability of this type of activity. Unless brands and retailers put tighter controls in place, the growing focus on shopper marketing and the increasing importance of promotions within the marketing mix will mean we are likely to see more of these sorts of headlines.
While promotional activity is an excellent way for brands and retailers to boost sales and revenue, it can be a double-edged sword. Get a promotion right and products will fly off the shelves, raising the very real prospect of over redemption and spiralling fulfilment costs.
Brands and retailers need to be prepared for this. So, effective risk assessment and management should be a key part of any promotional campaign. However, as most companies don’t have these skills in house, seeking the advice of a third-party risk assessor is essential. It helps them not only to get all the elements of their campaign right, but also to avoid getting caught out by over redemption costs, while at the same time enhancing the creative process and allowing them to design fantastic offers within even modest budgets.
Aside from looking at the mechanics of a promotion, any risk assessor will advise that there are basically three options available to protect a campaign: self insuring and accepting all costs of consumer redemption to whatever level and managing the logistics of redemption; buying limited levels of over-redemption insurance in case your own estimates are too low; or choosing a Fixed Fee option that covers the cost of all redemptions as well as all logistics to deliver the “reward” to consumers.
The most popular and safest option is Fixed Fee, where brands get a fixed cost solution for their promotion, which covers redemption and fulfilment (such as warehousing, packaging and distribution).
This fixed cost is worked out from the likely redemption rate, which is based on everything from current trends and what is going on at the time, to the strength of the on-pack design, and is backed up by in-depth historical analysis of similar promotions. The final calculated Fee is the one and only fee the brand will pay.
The Fixed Fee provider thereby takes on all the risk of the promotion as well as the responsibility to deliver the product. Of course, sometimes they get it wrong and while the majority of Fixed Fee companies will reinsure against that risk with their own underwriters, most will take on some themselves. This is why you should check the accounts of the Fixed Fee provider before entrusting your consumers to them.
For brands and retailers, using Fixed Fee allows them to be more creative with their promotions, safe in the knowledge a specialist is taking the risk for them. Other methods of cover will always carry a greater element of risk for the brand and could therefore inhibit the amount of creativity that is put into designing the campaign.
However, most promotional risk assessors will advise brands and retailers on the best cover for their budget and promotion. Brands shouldn’t hold back on creativity for fear of treading in the footsteps of the likes of Asda and Outnet; instead they should find a specialist who can show them that they can afford it.