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How to Possibly Save on Trade Deals

October 2016

Today’s post is quick (though people who work with me think it’s impossible for me to not be verbose): what’s the difference between a “scan” versus an “OI”? What is a scan and what is an OI?   Why am I reading this?

Very simplistically, think of a scan as a deduction that’s taken when a customer actually buys your product (as in, when the store clerk literally scans the barcode), whereas an off invoice (“OI”) is taken when the customer (your distributor or retailer) buys your product and deducts it from the price that they are paying you. Theoretically, the OI is passed along to the consumer, but if consumers don’t buy everything that your customer has purchased from you during the deal period, arguably you’ve wasted money.

An Example

An example to the rescue!: Hypothetically, let’s say your product retails everyday for $5.95 per unit, you sell it to your distributor for $3.50 per unit, its packed into a 10-count case (case price = $35.00) and you typically sell 100 units per month.   You want to run a promotion whereby the consumer only pays $5.00 per unit (what a bargain!) and this promotion runs for a full month and past history suggests your sales will double during this period.   Scan vs. OI?:

  • Scan: as a scan, you’d be “billed-back” approximately $190 ($0.95 per unit X 200 units).
  • OI: under the OI scenario, your distributor would buy for $25.50 ($3.50 – $0.95 per case X 10) rather than the full price of $35.00.

Sounds pretty simple, right? Here are possible pitfalls of the OI:

  1. For some unknown reason, what if you don’t sell 200 units during the promotion, but only 150?   The distributor has bought all 200 units at a reduced cost, and those extra 50 units would carry over into the non-promotional time period when you would have otherwise filled those sales with inventory at your regular cost ($3.50 per unit). In this case, the distributor’s margin goes up.
  2. Along this same vein, you can almost guarantee that your distributor’s balance sheet is strong than yours (at least most of the time). Distributors love to “load-up” on inventory during OI periods, particularly for items that have long shelf lives and with pretty consistent sales patterns.   In this scenario, your distributor might purchase three months of inventory even through the deal only lasts a month. This happens quite regularly (read my anecdote below).
  3. You’re not always guaranteed that the OI is 100% passed on to the consumer. It’s not common practice but also not unheard of for some of those funds to be withheld by the distributor (i.e., of the $0.95 you’re giving above, the distributor only passes on $0.85 to the consumer, making your deal price $5.10 per unit).

So Why Not Always Scan?

From a strategic standpoint and as gathered from the above, I’m always in favor of the scan versus that OI as you’re giving the promotional incentive to the consumer, rather than simply reducing your customers’ cost of inventory. By extension, you’ll likely spend less as well under this scenario (hence why I really prefer the scan!). Unfortunately, from a practical standpoint, these aren’t always an option. Buyers, particularly for larger accounts, are constantly monitoring their margin and cost of inventory (in many cases are incentivized off this metric) and simply won’t allow the scan option – they want everything cheaper and are happy to go long on inventory to take advantage of the better price.

My advice: like all things it’s typically a case-by-case scenario. If you can get away with the scan and it’s appropriately executed (namely, you’re still getting the promotional tag at the shelf), go for it. You’ll likely see a lot more (little) deductions (as in $0.95 * 200 times) from your invoice to account for this, but in the long run you’ll save. Unfortunately, when dealing with large distributors, you’ll be pushed to do the OI.

In a future post I’ll talk about how you can use a scan with an OI – a shorthand way to save a little bit of money for deeper deals. Stay tuned!

An Anecdote

Sadly, what I am about to tell you is true, and this happens all the time. I had one distributor (a big, important one) that would do major buy-ins anytime our line was on deal. We were “encouraged” to structure four OI’s throughout the year, each of which was the traditional 15% off. They would buy heavy during those periods, and then essentially go radio silent (i.e., no PO’s) during the off periods. Of course in good faith we thought that the deals were simply priming the pump for the off deal sales, but when after six months we analyzed what was going on with their business, it was blatantly clear. The problem with this is that it left us with no money to further promote through the retailer. It was so bad, in fact, that I flew to their headquarters to confront our buyer on this, who with great pleasure admitted that that’s exactly what she was doing (I vividly remember her words: “oh yeah” when I posed the question). I’ll likely further elaborate on this experience and how it played out (it was ugly) in a future post.

Your Experience?

As the title of this series suggests, there is an art (or perhaps better positioned, negotiation) to how deals are structured and there’s always give-and-take, particularly as your brand grows and you begin seeing more shelf facings, which in turn opens up new promotional tactics (end cap displays, shippers, etc.). The above post talks about the most simplistic deal, a temporary price reduction for the consumer. These can be very taxing from a management standpoint.

What best practices have you implemented that help control the execution and management of promotions? Please share the outcome or other best practices.

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