Creating Win-Win Trade Promotions
Theory and Empirical Analysis of Scan-back Trade Deals
Download a pdf version of this paper.
- Xavier Drèze
David R. Bell
- Marketing Science
Winter 2003, Vol. 22 (1), 16-39
- By 1996, average manufacturer trade promotion spending had risen to around 13%
of net sales (from 5% in 1978) and was second only to cost of goods sold as a profit
and loss item. It has nowb ecome common for manufacturers to lose money on trade
deals as retailers often subvert the profitability of the promotion by forward-buying
merchandise. The search for more effective forms of trade promotion and the availability
of scanners at cash registers has led to the emergence of a newt ype of trade deal
called scan-back which gives retailers a discount on units sold during the promotion
rather than on units bought.
We develop a theory to compare retailer pricing decisions and profitability under
scan-back and traditional off-invoice trade deals and showho wscan -backs can change
trade promotion practices. The theory assumes only downward-sloping demand (i.e.,
no particular functional form), and makes use of the following result: Retailer prices
and profits depend only on average costs during promotion and non-promotion periods
and the price elasticity of demand.
We showtha t when the terms of the trade deal are identical, retailers prefer off-
invoice trade deals and manufacturers prefer scan-backs. Manufacturers can, however,
redesign the scan-back to leave the retailer weakly better off and leave themselves
strictly better off. While there are many ways to redesign the scan-back, there is at
least one solution in which retailer behavior (in terms of prices) and therefore consumer
behavior (in terms of quantities purchased) remains identical to the off-invoice case.
From the retailer's point of view, the redesigned scan-back generates identical revenues,
but eliminates inventory costs and increases cost of goods sold, such that total costs
are the same. The increase in cost of goods sold, (i.e., manufacturer revenues) leads to
the increase in manufacturer profits.
Using proprietary data from the beverage category, we conduct an empirical analysis
and found that during the promotion period, scan-back trade deals, relative to off-invoice
deals: (1) do not cause excess ordering, and (2) generate higher retail sales through
lower retail prices. Implications for researchers and managers are discussed.