Case Analysis III: Sales Promotion Planning @TML

Abstract

Mr Rath, the protagonist of the case, is facing a challenging situation, albeit a ubiquitous one in sales organizations. The key issue is a divergence between volume and value growth, TML has pursued sales by excessively spending on dealer incentives and advertising. The company operates in a market which is in the maturity stage, growing at a slow pace of two to three per cent. Such a market creates competitive pressures which compel a company to deploy a wide range of advertising and promotion triggers, targeted at both the trade and the end users. The case facts point to a relative stability of the market share for the incumbents; this is not an accident but the result of consistent efforts to preserve one’s position in the market. The flip side of this is leakages in the profitability of the firm, as it achieves higher volumes. TML now has a profit shortage of ₹7.5 million. It looks very unlikely that the additional sales can be realized without promotion support. It is also worth pondering over competitor reactions when a company rachets up the promotion efforts. A framework for understanding the decision choices is given below:

Travelware Marketing Limited
Competition		Cutting Back on Promotions	Maintaining Promotions
	Maintaining Promotions	Will be Counterproductive	The promotional efforts of all companies can reduce the impact for all companies. Efforts of competitors can have a cancelling out effect.
	Cutting Back on Promotion	This could have been the expected course of action, due to Q3 being perceived as a historically weak quarter by all the companies.	This is an optimistic scenario for the company, promotions in this situation could play a significant role in boosting sales of TML. It is important to understand which competitor’s interests are closely aligned to TML’s.

Source: Author.

The Proposed Solution

Mr Rath wants to make up for this shortfall by pushing sales by ₹55 million, over and above the proposed sales target for the year 2018. This is an ambitious target; he hopes to get a gross margin of ₹22 million. The plan is to extract the additional profit of ₹7.5 million from the gross margins. An amount of ₹14.5 million is what is left on the table, as promotional ammunition. The promotional measures will have to be deployed in the months of November and December to hit the targeted numbers. This is a challenging and complex task, Mr Rath must find the right set of measures and allocate the right quantum of support. The actions undertaken must not be counterproductive, in terms of increasing the pipeline stocks and outstanding from dealers. This is because it will have a spillover effect, slowing down Q4 sales. Mr Rath must do a tight rope walk as he wants a sales boost in Q3, based on the case facts that this is the weakest quarters in terms of sales, clocking a sales contribution of only 15 per cent for a given financial year. At this juncture a few important questions must be laid out on the table, it is important to have clear-cut answers for the same.

Is a promotional budget of ₹14.5 million sufficient to create an up-tick in sales?

What should be the appropriate mix of consumer and trade promotions?

Given that TML has an ABCDE system for the classification of dealers, what is the optimal mechanism to distribute the trade promotions?

What should be the geographic focus of the company when it decides to deploy the promotion budget?

There are no straightforward answers to these questions in the firm’s context, however one must closely assess the firm’s operating context to assess the efficacy of various promotional instruments. A study by the Boston Consulting Group (BCG)¹ found that 20–50 per cent of promotions generate no noticeable lift in sales—or, worse, have a negative impact. Another 20–30 per cent dilute margins in that they don’t generate an increase in sales enough to offset promotion costs.

Understanding TML and Operating Context

At a product level the industry seems to have three dominant product forms. TML has a stronger market presence in Integrated Moulded Luggage (IML) which constitutes about 45 per cent of the market. However, IML has the lowest price at a given size and model type. There is an average price difference of ₹300 between framed luggage (FL) and IML. The implication for TML is that it will have to always play the volume game to achieve profitability targets. TML is also a brand that caters to a very price conscious segment.

When it comes to competition, some brands like Travel Master seem to rely on premium positioning charging prices reflecting that position. Their promotional efforts are also in sync with the same. A competitor like luggage industries also has strong brand pull, this is reflected in their ability to cap dealer margins and credit periods. A strong brand generates footfalls and increases the bargaining power for the brand owner. The company Voyager has a lot of similarities with TML, both companies seem to rely on dealer push with a nil or negligible reliance on advertising. Voyager is using high discounts and longer credit periods as a selective measure to boost sales. There is a high discounting at a consumer level as well. In a market that is growing at the rate of two to three per cent, competition will be a zero-sum game, TML will have to snatch the market share from Voyager without compromising on credit terms to dealers.

Given the stature of various brands, dealers are also adapting their tactics. They are choosing to promote certain brands within a limited time period. Their commitment to sell TML and Voyager products is based on the special deals they receive, this reflects the weaker brand stature of these companies. TML is also strong in the cheapest product form IML in the luggage market. If a brand has weaker pull, it will have to allocate resources for channel push. TML seems to have ticked one box to support channel push, namely, channel coverage. It has a dealer base of 3,500 dealers, about 80 per cent of them can be active. However, TML needs to dig deeper to understand the dealer base, this will give them several insights into the targeting of promotions. Its classification of dealers does not reflect the full potential of these entities; however, they offer some insight into the allocation of trade promotion budgets. Twenty percent of the dealers had TML as their highest selling brand, it is important to see how much of sales expansion is possible with them.

A similar approach will have to be taken with various categories of dealers and a matching promotional plan will have to be developed for them. This is critical as consumer behaviour data reveals that dealer persuasion can account for 30 per cent of the total IML sales. Dealer commitment is vital as consumers are showing a propensity to visit multiple counters in search of a bargain. They must work hard to sustain consumer interest, push TML and pass on some of the benefits they receive from the consumer.

A Framework for Decision Making

The assessment of the operating context offers the following key takeaways for taking a managerial decision about the deployment of promotions:

TML is strong at the mass end of the market, where the price points are the lowest. The implication is that strong consumer promotion triggers must be provided to create a lift in sales. This could be in the form of trade promotions which can be passed on to the consumers.

Voyager is similar to TML in the deployment of promotions. However, TML has a wider distribution coverage. This has implications for the deployment of promotions. Should TML compete with Voyager in all outlets where its products are present or choose to bypass it in some outlets. If it chooses to bypass, part of the promotion budgets can be deployed in outlets where Voyager is not present.

Given these frame conditions TML will have to focus its efforts on certain states and dealers, this is vital as there is an enormous time constraint. The balance quota of ₹220 million just went up to ₹275 million. The company will have to focus efforts on those states (branches) which are able to support larger volumes and higher contribution of IML luggage with a healthier sales executive contribution. Within these states Mr Rath must focus on the A, B and C outlets, with a preference for outlets not stocking Voyager. The company must also increase the service level of the B category outlets to reduce the overall inventory holding pressure. A framework given below will assist in decision making:

In this framework, it is also important to consider the downstream discounts to customers, TML will have to evaluate the costs and benefits of a direct discount or a pass through from dealers on the back of increased trade promotion.

State (Branch Office)	Old Stocking Expectation			New Stocking Expectation			Increase in Incentive Offered to Dealers (% and Absolute Amount)	Increase in Incentive Offered to Sales Executives (% and Absolute Amount)
State (Branch Office)	Category A Outlets (With/Without Voyager)	Category B Outlets (With/Without Voyager)	Category C Outlets (With/Without Voyager)	Category A Outlets (With/Without Voyager)	Category B Outlets (With/Without Voyager)	Category C Outlets (With/Without Voyager)
Mumbai
Ahmedabad
Delhi
Kolkata
Indore

Source: Author.

Conclusion: Evaluating Promotion Effectiveness

Mr Rath will have to evaluate the effectiveness of the promotion based on the impact on sales and profits. In this situation, a high premium is attached to profitability. Promotions can have multiple impacts on organizations. The most effective are the ones that increase margins and sales, promotions can dilute margins but increase sales. To determine if these promotions are worth continuing, calculate their targeted ROI—in other words—the amount in incremental sales that is required for every rupee of margin invested. Some low impact promotions which don’t create an uptick in sales and margins must be discontinued, they are expensive when they lead to a compression in margins. The most harmful promotions can decrease sales, they must be immediately terminated.

It is very important to always bear in mind the limitations of promotions. It cannot reverse a genuine declining sales trend. Promotions cannot convert an inferior product into acceptable one. It can provoke a competitive retaliation. It can be counterproductive if customers pre-pone/defer purchases. Frequent cycle of promotion and/or promotion followed by non-promoted stock could create huge disruption in stock management.