Modelling the Effectiveness and Profitability of Trade Promotions

Trade promotions have become an increasingly important element of the marketing mix. Yet, there is very little research describing how to measure the profitability and effectiveness of trade promotions. This paper describes how retailers behave when trade promotions are offered. Then, a model is developed to capture the two key components of the process: the consumer and the retailer. An example is given showing how to apply the model to actual manufacturer and retail sales data. Then estimates of the profitability for different items in a product category are calculated. Many research questions are raised in this paper which can serve as future directions for research. Why are trade promotions generally unprofitable? How can scanner data improve the estimates given? How do different types of trade promotions affect the retailer and ultimately the consumer? Which brands and items should be trade promoted?