Of all the marketing disciplines, sales promotion has to be the one where the chance of something going wrong is most likely. Like direct marketing, it is an industry teeming with sub-contractors who all operate according to their own rules – which in many cases mean no rules whatsoever. And when you add an incentive to your promotional mix, you are even more susceptible to that great unknown quantity – the consumer.
When something does go wrong, it is increasingly common for clients to sue their suppliers for negligence and, where possible, claw back as much compensation as possible.
The general consensus seems to be that negligence claims against marketing services companies, and in particular sales promotion, are going up. But, by the same token, many feel this increase is more to do with the fact that clients are less likely to take mistakes, and the consequent losses, on the chin – as they may have done in the past. They are now more likely to see if they can salvage any money from the wreckage.
At the moment, there are only a handful of firms offering sales promotion companies professional indemnity services, and some people, particularly agencies, feel they are being exploited in this vulnerable area.
Option One managing director Louise Wall says: “Obviously if you look at the number of deals in the market, any promotional mechanism that involves paying back something to the customer needs to be underwritten. The problem is, there are people out there who are earning a lot of money offering this kind of insurance. We know they are phoning each other to set premiums and clients are beginning to feel shafted.
“I believe these insurance companies have spotted a way of making money. Obviously there has to be insurance and the insurance companies must provide it, but there is increasing cynicism among agencies about them. We know that when we phone around for the best insurance deals, these companies then phone each other to see what everyone else is offering and thus keep the prices up.”
Philip Circus, consultant legal adviser to the Institute of Sales Promotion, agrees that there is an element of the “closed shop” mentality among indemnity and insurance providers but also says that as it becomes more common for agencies to have professional indemnity the situation will improve.
“Insurance is no substitute for trying to iron out the risks before the promotion even starts. I believe a lot of problems would be solved with careful checking. More time has to be built into the whole procedure so that quality checks can be carried out, for example, on sub-contractors. A lot of problems that arise are fairly common and not very complicated. Insurance is no substitute for getting it right,” he says.
Circus also believes that the high-profile Hoover Free Flights disaster, which did not use a professional sales promotion agency, and did not invest in professional indemnity, will actually have a positive effect on the industry.
“A problem recognised is a problem half-solved. As a result of the Hoover case, I have found that sales promotion is now taken a lot more seriously at higher levels within client companies. Also, the spotlight is now on the industry as people look out for other disasters,” says Circus.
Charles O’Reilly is the founding director of Promotional Insurance Management Services, which writes the only specialist professional indemnity scheme for the sales promotion industry. He believes that the industry is becoming more professional when it comes to covering itself.
“The Sales Promotion Consultants Association has produced a new set of terms and conditions affecting clients and suppliers, which indicates that its clients should take out professional indemnity. It is a great step forward to have industry-standard terms. It is much easier when agencies are pitching for business if they can all use the same terms and conditions.
“The big fear in the past has been when a sales promotion agency has been pitching for tactical work which had to be done quickly, the last thing they wanted to do was hand their potential clients a 40-page legal document to study and sign.”
O’Reilly says professional indemnity covers agents for their “breach of duty of care” to clients.
“This can encompass their own internal errors, or errors made by their sub-contractors, which is absolutely critical in sales promotion as in many
cases 50 per cent of turnover is paid to sub-contractors,” he says.
When asked why so few people supply professional indemnity to the promotions industry O’Reilly says: “Most insurers are terrified of sales promotion agencies. They think they are less professional and less disciplined than other marketing services.
“It could be argued, however, that sales promotion agencies are generally a safer bet because they tend to be smaller companies where the directors are running the show and know what’s going out the door. In large ad agencies, you can end up with a couple of students or new employees handling large sums of money,” claims O’Reilly.
Chairman of professional indemnity insurance broker Anthony K Falcon, Kerry Falcon, agrees that the main danger in most promotions lies with sub-contractors.
“Sub-contractors rarely have their own policies – which they should have. But large companies, like telecommunications operations, don’t like doing deals with anyone unless they have a proper policy. And usually they want to see evidence of about 2m worth of cover,” he says.
Falcon listed a number of recent indemnity claims his company has dealt with, involving cash outlays ranging from 15,000 to 600,000.
“A promotional campaign was organised in which a free gift was offered to purchasers of a product in exchange for a number of proofs of purchase. The description of the gift inadvertently quoted a registered trade mark and the agency was obliged to supply the authentic product at an increased cost. We paid out 600,000 in insurance.
“A much smaller claim of 15,000 was paid when an advertising brochure was produced which contained a spelling error and resulted in 100,000 copies having to be reprinted,” says Falcon.
Option One’s Wall says a potential minefield to be avoided is when agencies quote expected redemption levels to clients.
“If agencies say the expected redemption level on a promotion will be 20 per cent and it turns out to be 35 per cent, the client has got to find the extra money somewhere. I know of a case in France where a client took its agency to court because redemption levels were much higher than expected,” she says.
Chief executive of travel promotion specialist Flexibreaks, Ken Spedding, says his company is still in business because it refused to imitate the Hoover promotion when competitors were banging on his door in the early days of the promotion to provide a similar deal. But he also says there is a problem securing insurance for possible over-redemption.
“The main problem is that people only try to get it if they think there is likely to be over-redemption. Insurance companies only like to give it if they do not think there is going to
be over-redemption. A meet ing of minds is not always possible.”
But if we thought Hoover was a sad story, Spedding recounts a promotional disaster which he says makes the problems of Hoover “look like a mere puddle”.
“This relates to a Pepsi lottery in the Phillipines with a prize of around 26,000 for whoever found a bottle top printed with the number 349. Unfortunately, more than one of these had been printed. In fact 800,000 of them were available which adds up to a potential liability of some 9bn.
“Before the size of the problem was realised, it was agreed to pay each winner 13 which reduced the problem to a mere 10m over budget. However, after the payout had reached 8m, even the 13 prize was withdrawn.
“Many peeved Pepsi drinkers reached for their lawyers, but others took rather more direct action in the form of burn ing down factories, throwing grenades and stoning lorries. Pepsi executives needed armed guards and it generally made the Hoover pressure group look terribly, terribly British.”