The Promotion:
Which trade promotion really sells
A price promotion doubles sales in the promotion week. Three weeks later sales sit below normal because shoppers stocked up. An effect model separates incremental sales from pulled-forward sales and cannibalisation within your own range.
This module is part of a nine-part model calculation on a fictitious mid-sized chocolate manufacturer (€95 million net revenue, 140 items, 4 lines). All euro amounts are derived from the documented assumptions of the sample company. They are not results of real customers and not a performance promise. Which values are achievable on your data is shown only by a pilot.
01 The problem - the promotion budget is a large cost block next to materials and staff
Part of it shifts revenue instead of creating it
The sample company spends €7,600,000 per year on trade promotions, 8 % of net revenue: price cuts, secondary placements, leaflets. The promotion week always looks good. Whether the promotion earned contribution margin only shows in the weeks after and in the neighbouring items.
The effect model decomposes every promotion into three parts: real incremental sales (new purchases), pulled-forward sales (purchases that would have been missing later) and cannibalisation (purchases at the expense of your own neighbouring items). Only the first part justifies the promotion budget.
The same budget, shifted from promotions with a contribution margin return below one to promotions above one.
02 The model - comparison chains without promotion as control group
Difference-in-differences on weekly sell-out: promotion chain against comparison chains, promotion week against lead-up and follow-up
Median contribution margin return per mechanic (example values): Secondary placement 1.21 Leaflet 1.04 Price cut 15 % 0.88 Multipack 0.71
The multipack brings the highest bar in the promotion week and the lowest remainder: a large part is pulled-forward sales, another cannibalises the single pack next to it. The secondary placement brings less volume but new purchases. The promotion-week bar is not a metric, the decomposition is. Without a control group every decomposition is an estimate; that is why the model works with comparison chains without promotion.
03 Business impact - return in percentage points, not in bars
The lever: a quarter of the budget moves from promotions below one to promotions above one
Every assumption comes from the sample company and is stored centrally. With your figures the input changes, not the method.
| Position | Value |
|---|---|
| Budget for trade promotions / year | €7,600,000 |
| Base: Shifted share | 25 % = €1,900,000 |
| Contribution margin per budget euro of the shifted promotions (assumption) | 0.90 |
| Contribution margin per budget euro of the target promotions (assumption) | 1.02 |
| Lever: Return difference on the shifted budget | +12 percentage points |
| Result: savings / year | €228,000 |
Assumptions of a sample company - in a real project your data replaces these values.
A proven decomposition is also a negotiating argument: whoever can show that the secondary placement brings new purchases and the multipack cannibalises their own single pack negotiates the next annual agreement differently. The returns of the sample company are assumptions; those of your promotions are in your data.
04 Next steps in your factory
From decomposition to promotion planning
Two years of promotions with mechanic, discount, chain and period, plus the weekly sell-out of all chains - the control group emerges from the chains without promotion.
Every past promotion gets its three parts and its return. You see which mechanic carried which category.
Before every annual agreement a template: expected return per proposed promotion, with an uncertainty band, as the basis for the conversation with the buyer.