Chapter 10

The five standard promotional offers

There are five traditional promotional offer types for all the variety of ­promotional objectives. An industry has grown that creates and supplies these offers to promoters. As to scale, the voucher market is worth around £5 billion (UKGC&VA, 2014). Vouchers are a ‘stored-value or prepaid solution’ in print or electronic form. Many of them revolve around travel, hotels, theatres, theme parks, films and insurance. They often offer a benefit out of all proportion to the cost to the promoter – such as something worth £50 to your customers that only costs you £1.

Of course, the £49 has to come from somewhere. An immense amount of ingenuity is put into devising offers of this kind, and most of them are largely funded by a third party. There are some very good offers as well as some distinctly dodgy ones. Before using any of them, it is essential to understand how they work, what the people supplying them are getting out of them and what conditions apply to their use.

Off-the-shelf offers

The leading off-the-shelf offers that businesses can use are included here, along with what to look out for and the questions to ask anyone selling you the latest ‘unmissable’ offer. By following the rules, you can snap up excellent deals and avoid leaving behind you a trail of disappointed and angry customers. Remember, promotions are constantly changing, so you should make your own enquiries before using any particular offer.

Free accommodation

The offer

Free hotel room offers date back to 1971 and have been going strong ever since. The concept is simple: you purchase a number of free-room vouchers from a specialist operator, which can be used by your customers to obtain free accommodation at a specified range of hotels. The stipulations vary. In the past, the standard requirement was that consumers bought breakfast and dinner at the hotel, but people became wary of overpriced hotel meals. The offer now tends to be ‘two nights for the price of one’. The rise of Airbnb may affect such offers, depending on the good or bad experiences people have recorded with Airbnb stays.

How it works

The logic of this offer is strong. Hotels have a high level of fixed costs. However high or low their occupancy rate, they still have to pay their capital costs and most of their staff. An empty room is revenue lost for ever. The ‘free room’ concept meets the needs of hotels to fill rooms rather than leave them empty. Satisfied guests can also be expected to return at a later date, paying the full rate.

Of course, if a hotel offered deals of this kind to everyone, it would soon go out of business. So the offer must be restricted to people who would not otherwise come, those who genuinely are ‘extra customers’. Free-room deals are therefore communicated by companies that put together a list of hotels on a national basis and make the offer available as a promotional tool. A newly opened hotel may also supply very low-cost or free rooms, particularly suited to those with time on their hands – and money to spend on extras (the over-55s?). SAGA, for example, and its members, is a user here.

What to look out for

Some operators are better than others, and the concept is still getting a bad name as a result of some cowboy operators. All this rubs off on the companies that use such a promotion. Giving your customers a duff promotion is bad business, and ignorance is no excuse. The answer is to select a reputable company that has been operating free rooms for some years, has a well-controlled and regularly inspected hotel network and adopts a long-term and professional approach.

The characteristics that distinguish a good operator from a bad one are straightforward:

• Do they operate a central reservations system?

• Do they ensure that bargain breaks offered by their hotels outside the free-room service do not devalue that offer?

• Do they recommend (and insist on) a description of your promotion that accords with the Code of Practice?

• Do they provide evidence that the list of hotels is regularly inspected and updated?

Two-night offers are typically valid in small-chain hotels, longer breaks in medium-chain hotels. Some operators also offer a ‘club membership’, which costs more but is for any number of three-night breaks in a 12-month period. Others offer a ‘holiday bond’ that gives £500 or £1,000 worth of accommodation costs and amounts to much the same over an extended period. Costs to the promoter for all these offers are substantially discounted for large quantities.

Free rooms have deservedly been working successfully for years and have been used to enormous effect by companies from banks to motor manufacturers. Usage of the vouchers is often as high as 30 per cent, which indicates the high regard consumers have for them. The secret of successfully using this offer, and most of the others in this chapter, is an accurate match to promotional objectives.

Holiday vouchers

The offer

Holiday vouchers give customers a saving when they book almost any package holiday. The saving can be given in a variety of ways – as a cash discount, a shopping voucher or any other item of equivalent value. The advent of cheap flights and booking everything online and the rise of Airbnb has meant these sorts of offers are probably less taken up, but for plenty of people a holiday offer is still a holiday opportunity.

How it works

Customers achieve the savings by posting their holiday vouchers to a nominated specialist travel agent, together with the completed booking form from the back of a tour company’s brochure. The travel agent deducts the value of the vouchers from the cost of the holiday.

What to look out for

There are very few drawbacks to this offer. Most people are quite capable of collecting their holiday brochures, making their choice of holiday and completing the operator’s form at the back. Most websites show views, videos and 360-degree aspects of accommodation, facilities and attractions – so travel agents have little else to offer unless they have personal knowledge of the destination. See also the brief on Thompson (Chapter 8, Brief 8.3)

There are six main things to look out for in these firms:

1 Are they ABTA-, IATA- and ATOL-bonded to act as travel agents?

2 Have they experience of running this offer? It is very easy for an inexperienced firm to get its margins wrong and end up going out of business, leaving your customers high and dry.

3 Is it the best deal available? Working this out requires some simple calculations to establish the level of discount being offered. If it is not a very good deal, it is not likely to motivate your customers.

4 Are the conditions realistic? Some operators insist on at least two adults booking. This may be restrictive if you are selling to single people. Others insist that people take out holiday insurance – you should check that their price for insurance is reasonable.

5 What upfront price are you paying to participate? This varies greatly and should be in proportion to the value of the saving to your customer. The nearer a holiday voucher operator gets to rebating the whole discount, the more it is reasonable to charge you. Some will, of course, try to charge you at a high level as well as hanging on to a large chunk of the discount.

6 Are all the relevant operators’ brochures included? Almost everyone includes the main brochures, but if your market is young people, for example, you should check that specialist brochures directed at them are also included.

Discount ‘coupons’ books

The offer

The original scheme was the purchase of books of coupons – revived most recently by, among others, the Westfield Shopping Centre. Several firms create and promote books of coupons that give savings on a range of theme parks, family days out, restaurants, cinemas and services such as dry cleaning and film processing. Some of them are off-the-shelf. For example, in the US and Canada, 141 different ‘city books’ are detailed at http://www.entertainment-savings-offers.com/entertainment-book/list/. The tourist industry is a great user of vouchers in leaflets and booklets – tourist information offices have plenty of them. It becomes economic to overprint a standard product with your own brand name and message in quantities of over 1,000. Direct Line Insurance has offered in the past, through door drops, a booklet of vouchers for its own products. The form of the saving varies greatly within each book. The main variants are a 10 per cent discount, a £3 cash saving, children free with adults, one admission free with a full-price admission or one free course in a meal for two people. They vary as widely as this because each participating outlet determines the deal it wants to offer.

Discount coupon books are different from product coupons redeemable in supermarkets and household shops, and from gift cards and store vouchers (both are covered later). There are also discount deals and coupon offers from such sites as http://www.vouchermole.co.uk/ and local deals from http://www.groupon.co.uk/.

Most of these discount books are themed on entertainment and leisure. For example, Barclays Bank wanted a reward for 16–18-year-olds opening a bank account. Entitled ‘Student cash code’, it offered savings with Red or Dead, Fosters, WH Smith, the Youth Hostel Association, Pilot Fashion, Sony Music, Deep Pan Pizza, Warner Bros Cinemas and others. On the theme of ‘Get together with your mates’, Ruddles inserted a 12-voucher book offering over £200 in savings in four-packs sold in the off-licence trade. The vouchers were redeemable in places including the SnowDome, the London Dungeon and the American Adventure Theme Park. The unit cost to the promoter was (at the time) about 20p. For large quantities, specials can be constructed. The cost has remained surprisingly cheap.

Newspapers (Financial Times, Daily Telegraph) offer ‘lunch for a tenner’ and feature a range of leading restaurants. Fundamentally the same offer, targeted at totally different lifestyles, is effective at both the top and the bottom of the market.

Online coupons are an alternative to offline media, where door-drop or postage costs are rising and brand managers and retailers can no longer afford to overlook mobile and the internet as a means of targeting new customers and motivating them to go in-store and purchase products.

How it works

These are very much two-way promotional tools. Participation is sold to those offering the discounts on the basis that it will bring in extra custom from those to whom you have given the vouchers.

If a holidaymaker seeks out a restaurant or museum on the basis of possessing a discount voucher, then that is certainly true. Everyone is happy – the participating outlet that gets the extra business, the customer who makes the saving and you, the promoter, who has paid very little to give the books of coupons in the first place.

What to look out for

The drawbacks arise in the small print. A big directory can turn out to include only a few restaurants near where any single customer lives; there may be limitations on the days of the week when the offer is valid; the location may offer its own superior offers, which make yours look second-rate; and there may be tiresome restrictions, such as on the use of credit cards. And, of course, not everyone wants to plan their leisure time round a set of discount offers.

Consumers can see these offers as a substantial and attractive bargain, but the offers can also be devalued by offers that seem too good to be true and end up being a con. An offer of ‘£100 of savings’ that turns out to be £90 off a £1,000 cruise plus a host of 10p coupons would certainly be misleading. It is important to ensure that any discount coupon really does offer genuine savings and that it is not talked up beyond what it really delivers.

Two-for-one flights

This used to be popular. The boom in internet flight bookings – Ryanair, easyJet, Flybe, etc. – has killed off this promotion. A quick check on cheap flight comparison websites often shows that you can buy flights over the internet that are cheaper than those offered in a promotion. The complications imposed by the airlines may also detract from such offers – priority boarding, seat reservation, paying for each item of hold luggage, long delays checking luggage in and the need to pay for fast-track security (Luton) where non-fast track payers are taken through over-rigorous checks. This promotion may return when new forms of air travel arrive – hyper supersonic in 2024, for example (a 4-hour flight from London to Sydney).

High-street vouchers

The offer

Vouchers allow the time to make personal decisions about when and where users will spend their reward (as opposed to coupons that are usually for a specific sum). They can be used with employees, when they are really motivational (see Case study 69 by Asda – they are viewed as more valuable than cash).

More than 200 retailers and other suppliers produce vouchers for gift and promotional use. The concept started in 1932 with the launch of book tokens, swiftly followed by record tokens. Since the 1970s, it has become a branded business: books, theatres and gardens are the only remaining generic vouchers. According to the UK Gift Card & Voucher Association, voucher use is worth £5 billion a year, and is growing twice as fast as retail sales as a whole.

Discounts for vouchers are very low – nil on small quantities, and up to 5 per cent on quantities of over £50,000. The choice is between a single-store voucher (Marks & Spencer and Boots are the most popular) and one that can be used in a wide variety of stores.

How it works

Vouchers are off-the-shelf products, but cost the promoter their face value or close to it. In this, they differ radically from the other promotions discussed in this chapter. So why use them? The reason is that they carry with them the brand values of the retailer. If £10 in cash is given, it may be used to pay a bill. However, a £10 voucher redeemable at a leading store brings with it the anticipation of a pleasurable shopping trip and a purchase that might not otherwise be made.

What to look out for

Vouchers are cash alternatives. The main point to watch is that they need careful administration. They can be bought direct from suppliers, from producers or from firms that act as clearing houses for a wide range of retailers’ vouchers.

Be aware that many department stores now offer promotional evenings to their store or account cardholders. Debenhams typically gives 20 per cent off everything for an evening open only to those on their mailing lists. Others have followed – Homebase, for example, did the same with its mailing list, offering discounts on some ranges as well as vouchers; however, it now just offers Nectar points.

Insurance offers

The offer

Every car owner or mortgage holder is obliged to hold relevant insurance. Take-up of other insurance products – for house contents, legal expenses, personal accident, travel and so on – varies enormously and is very much lower. Every type of insurance can be used as a promotional premium, but the less widespread products are particularly attractive. The growth of websites that find the best insurance offers are testament to how lucrative the business is. Many banks offer travel insurance to their top customers.

An insurance principle also lies behind assistance and helpline telephone services, whether for legal advice, pet care, travel or household maintenance. In all these cases, the cost of providing the advice (normally by means of a dedicated telephone line) depends on the proportion of those entitled to use the advice line who actually do so. Advice lines can be offered in exactly the same way as insurance. A breakfast cereal, for example, may want to offer a benefit that is attractive to pet owners. Free pet health insurance or a free advice line on caring for your pet could both be provided on an insurance principle.

How it works

Specialist brokers have put together insurance products in a number of areas that (in volume) are far cheaper than the policies that consumers can buy from their brokers or insurance companies, thus offering consumers high perceived value.

For example, insurance for a £1,000 camcorder could cost the consumer £80 if bought from a broker. Its cost to a promoter is much less, and reflects five areas of cost saving that the promoter can offer the insurer:

1 Take out the selling costs of the broker and the administration and marketing costs of the insurance company, and the actual insurance cost is just £30.

2 Part of the cost of insurance reflects the fact that it is often only taken out by those with a higher-than-average risk. Offer an insurance to everyone, and the average cost reduces to reflect low- as well as high-risk customers.

3 You could also give the insurer the opportunity of a bounce-back offer – a second offer sent to those who respond to the first offer. The bounce-back offer will give the insurer the potential for new business.

4 Offer publicity for the insurance firm on your product or in your advertising and it may subsidise the offer from its own advertising budget.

5 Write the policy in such a way that claims are settled with a new camcorder and not cash, and you reduce the level of fraudulent claims.

All these measures can mean that, in bulk, an insurance worth £80 to the consumer can cost the promoter less than £10. It’s then a real possibility to offer ‘free insurance’ as an attractive and low-cost incentive. A bank (NatWest) has offered £1,000 free life insurance for a year. The insurer continues the offer the second year, perhaps doubling the cover as an incentive. And so on. So everyone benefits.

What to look out for

Like any insurance policies, these specialist policies need to be examined closely for exclusions that limit their real effectiveness. It is essential to use a specialist broker that understands both insurance and marketing, and to make sure that there is a genuine consumer benefit in the offer. The best of them are as good as any policy bought in the normal way, and very much cheaper. This is because they pass on real economies:

• There are economies of scale for an insurance company in providing 10,000 policies in one go, especially for low-cost policies.

• Those who have received free insurance make a good mailing list for insurance companies to sell the same or related products to, and insurance companies make an allowance for this.

• One-off policies with fairly low insurance ceilings distributed widely across the population tend not to be abused by customers making false claims, and the insurance cost can be averaged across high- and low-risk consumers.

• Insurance companies like to achieve retail visibility and be associated with leading brand names.

Because insurance companies are looking for volume, this promotion is more suited to larger than to smaller businesses, although there is no reason small businesses should not get together to make the offer. Insurance promotions have been used extensively with electrical goods, in the motor trade and with mobile phones, credit cards and leisure products such as bicycles. They could be used more widely.

Be aware of the interest shown by Which?, the consumer magazine, in electrical goods insurance. Which? researched and found that very few electrical ‘white goods’ such as washing machines failed in the first 6 years of their use. The customer was being sold a warranty that extended beyond the first year’s warranty required by law. Which? considered this a scam, and that customers were being taken for a ride. Check on social media to see the latest scams associated with insurance offers.

Packaged schemes

The offer

Take free accommodation, two-for-one flights, discounts on cinema tickets, half-price entrance to theme parks, a restaurant privilege card, 50 per cent off household insurance and hundreds of pounds off selected holidays, and what do you get? You get the kind of package that is offered by supermarkets, banks, mobile telephone companies and car manufacturers.

These packages were put together by specialists in the customer loyalty market, and there are several suppliers. A promoter could also construct them individually, but there are evident savings in using schemes that have already been negotiated.

How it works

A packaged scheme marks the point at which promotional devices become part of a long-term loyalty scheme. The emphasis shifts from providing a short-term reason for buying to providing a basis for building relationships over the long term. The contents of the package can be accurately targeted by selecting the particular balance of offers that suits the lifestyle and aspirations of the ­customers you want to attract. And the benefits to the hotels, airlines, theme parks, cinemas and restaurants included in the package can correspondingly become more long-term. The lifestyle package becomes a platform on which different companies can reach each other’s customers and strengthen their identification with them to their mutual benefit. EE offers two for one cinema tickets with Cineworld and two for one meals with Pizza Express.

Nectar and Avios (formerly Air Miles) are used for consumer promotions, trade promotions and staff incentives. Smaller companies, and those wanting to use them in low volumes, can buy them at around 20p each for a minimum quantity of 25,000 miles for employee and sometimes business-to-business use. In moderate quantities, the price drops for large-scale sector-exclusive offers.

What to look out for

Building a long-term incentive scheme is a significant investment. A major scheme may cost as much as 3 per cent of turnover. It is not worth doing unless you are clear that your target audience is going to be more substantially attracted by it than by the lower prices your competitors may offer. Case study 52 shows the different approaches to the petrol market taken by Shell and Esso.

On-pack offers: Plants, digital print (formerly film) and model car collectables promotions

The offer

A long-running off-the-shelf promotion was the offer of collectables, such as model cars (and earlier free film processing), and now plants. These offers are normally made available to promoters for a fixed fee that includes handling and redemption. In the digital age, the offers for film are now for producing prints from the electronic storage often in an album, with no developing of course necessary. It is interesting, if nothing else, to understand the calculation.

How it works

1 The OTA (Opportunities to Apply) figure is calculated. This is arrived at by dividing the number of packs on which the offer is communicated by the number of proofs of purchase required to participate. In this example, there are a million packs and five proofs of purchase. So, a maximum of 200,000 items worth say £700,000 could be redeemed.

2 The predicted redemption rate is calculated. This is the estimate of the number of people who will actually take up the offer. It varies widely, but, in the absence of specific information, it is fair to assume 5 per cent. This reduces the likely number of OTAs that will be redeemed to 10,000 with a value of £35,000.

3 The offer is linked in with a ‘bounce-back’ offer – a second offer made to those who respond to the first offer. Those who receive their model car will also receive a letter about other similar cars to buy or other plants. The money made on the subsequent offers allows the company to subsidise the first offer.

The processing company will add in its administrative and handling costs (say 6p per OTA on 200,000 OTAs) to arrive at a fixed cost £47,000 for providing the promotion as a whole. This will be expressed to the promoter in pence per OTA or, in this case, the offer would be 4.7 p per pack. This will reduce the profit per pack by that amount. Compare that with a price discount of, say, 10 per cent.

Once the promoter has accepted this quotation, there is nothing more to worry about. The processing company will supply the offer, receive the applications, send out the items and take care of all related handling issues. The company will also bear any fluctuations in redemption. Whether 500 or 15,000 people send in for plants, cars etc., the price to the promoter remains the same.

What to look out for

This is a promotion of a type that gives a fixed, all-in cost and brings to bear the interest that producers, rather than promoters, have in recruiting new users, which reduces the cost to the promoter.

This example focused on model cars as a fixed-price promotion. Companies now offer free processing, free cameras, free sunglasses, free tights, free model vans, free plants or any other item on the same principle. The common factor in all cases is the bounce-back letter – in the case of model vans, it is often an opportunity to collect more model vans.

When both the offer and the bounce-back are related, it is easy to see the commercial benefit and how this enables the producing company to subsidise the promotional cost. The picture is rather different when the commercial benefit in the bounce-back becomes tenuous, for example when a model car bounce-back is included with a pair of sunglasses.

Fixed-fee promotions then become a version of promotional risk insurance, which was discussed in Chapter 4. It can be very useful for a promoter to insure a promotion against an unexpectedly high redemption rate. There can also be good arguments for paying a company to take on the whole promotion for a fixed fee, particularly if you lack the time to organise the premiums and handling yourself. Fixed-fee operators offer that service.

However, it may cost more than if you organise the premium and the handling yourself and take out promotional risk insurance. The commercial logic of fixed-fee promotions depends on the degree of subsidy the operator can give the promotion on the strength of the bounce-back.

Summary

The offers featured in this section can strike consumers and promoters alike in two ways: it can seem a piece of magic that something worth £50 can cost only £1; it can also seem a sleight of hand in which someone must be losing out somewhere. The truth is more ordinary. Offers that sound great but cost little work on the basis of a number of related factors:

• They bring to bear the commercial interests of a third party – whether this is a hotelier seeking to fill empty rooms or a digital film/album print-processing company wanting new customers.

• They use the discount structure available in certain industries (particularly travel and insurance) to create savings opportunities that customers could not otherwise obtain.

• They are created and marketed by specialist companies with immense experience in the field that are constantly seeking to devise new offers; the best of them have been around for 25 years or more.

Avoiding the dodgy schemes and securing the opportunities that the good schemes create depends on promoters keeping their eyes open, asking hard business questions and not being mesmerised by seemingly unmissable offers. It is simply not worth degrading your business reputation by using a dubious offer any more than it is worth tarring all these offers with the same brush. If any of the offers in this chapter strike you as unmissable, be cautious. Remember not to take an offer and find a use for it; always start with your promotional objectives.

Self-study questions

1 How do free hotel room offers work?

2 What issues do you need to take into account if you are using discount coupons?

3 Why can insurance be offered in a promotion at a much lower cost than the consumer would pay for it from a broker?

Joint promotions

Establishing a mutually beneficial partnership. Most promotions involve giving away some of your margin in the form of discounts, cheap interest rates, competition prizes or premiums. Extra business should more than pay for this, but there’s no getting around the initial investment. Joint promotions involve sharing that cost with someone else. No company or charity wants to do this for you without getting something in return. The secret of joint promotions is establishing a mutually beneficial partnership.

A joint promotion is excellent for a start up – entrepreneurs, please note. The new service or product is ‘piggy backed’ onto the larger, established, brand-recognised company products or services, and benefits from using established customer lists (which may be shared for future use as well), the existing brand’s presumed endorsement and the marketing expertise of the partner. It is a fast-track way to build an engram in customers’ mind files and the brandgram.

Joint promotions are defined by two fundamental factors: they bring together organisations in different markets that share a common set of customers, and they give participants a real commercial benefit that each side is anxious to realise for the other. This section shows how businesses should go about setting up and running joint promotions. Any business can do it, and it is one of the fastest-growing and most beneficial forms of promotion. There are planning principles and four main types of joint promotion – sampling, referral coupons, charities and loyalty schemes. There is also the phantom partnership – using an event in the public domain without a formal partnership agreement.

Planning principles

Most companies spend time thinking about their own market and their own customers. Naturally enough, they think about them from their own business viewpoint and in relation to their own competitors. Identifying a joint market involves thinking about your customers in broader terms, both in relation to other people who are trying to sell to them and in relation to people you are trying to reach who are already customers of someone else. The key to planning a joint promotion is an accurate profile of both existing customers. The key profile elements of this ‘tribal marketing’ are:

• demographic data – age, sex, social class, geographical distribution;

• their relationship to you – how often they buy, at what price level, with what degree of loyalty;

• their needs, interests and aspirations – other things they buy, what they want from life.

Credit card companies were among the first to spot it, with the development of affinity cards in the 1980s. Now virtually every major charity and interest group from the Royal British Legion or NSPCC to the Liberal Democrats has its branded credit card, typically rebating the organisation concerned 1 per cent of the value of credit card spending.

Many joint promotions are short-term, designed to achieve trial or sampling objectives. The process has also developed in business-to-business markets. People in business belong to different tribes as much as consumers. Some feel an affinity with golf, some with charitable work and some with business benefits. Identifying these affinities enables you to seek out partners who are not competitive with you, and with whom you can run a joint promotion. Once you have created this profile, the next stage is to establish which other companies share the same customer profile: the closer the fit, the better it is for both sides.

The biggest obstacles to successful joint promotions lie in the process of making them work. The major culprits are greed, misunderstanding and suspicion. However well the customer profiles fit, if your intended partner is not prepared to talk to you openly about its own customers and is determined to get the maximum out of it without putting anything back in return, the result will be as disastrous as any other partnership erected on false foundations.

Look for those with whom it is possible to establish agreement about each other’s objectives and honesty about tackling present and possible difficulties. Even when there appears to be initial enthusiasm on both sides, a number of factors can emerge that can scupper the best-laid joint promotions. It is therefore vital to ensure the following:

• Involve everyone. If the deal involves other people in your company communicating details of another manufacturer’s products, they will only actually do so if the promotion is fully explained to them and they share your determination to make it work. Involvement of senior management in joint promotions is particularly important.

• Make realistic promises. Everyone is inclined to talk up the number of customers and contacts they have. It is best to be realistic at the start about what you can guarantee to deliver.

• Avoid unplanned changes. Circumstances can change in a company for all kinds of reasons. Management must undertake from the start to minimise this risk.

• Build in good liaison. Once a deal is set up, it is tempting to get on with the next job. Good liaison is essential to successful joint promotions, and it must involve people at every level of the company throughout the life of the promotion.

• Bargain realistically. Everyone wants to get the best deal, and negotiates accordingly. Bargaining should be directed at maximising mutual benefit at an agreed cost to both sides, and both sides must agree to this in their negotiations.

• Be proactive. There is a tendency for the company that made the initial approach to be expected to make all the running and contribute most. This is a mistake. Both sides should be proactive.

The only way to establish whether or not likely partners will have the qualities needed for joint promotions is to talk to them.

Each side must be able to see the promotion fulfilling one or more of these needs:

• to gain trial for your product or service from among the customers of another product or service;

• to associate your product or service with someone else’s in the mind of your target audience;

• to make a promotional offer that will attract your customers at low cost to yourself;

• to explain to your customers new ways in which your product or service can be used;

• to place your product in an environment where potential customers are likely to see it;

• to reduce the cost of a planned activity by sharing it with someone else.

Sample promotions

The offer

When people buy product A, they obtain a sample of product B. This is often something that they need to buy on a continuous basis to use product A or where there is a clear connection between the usages of the two products.

How it works

A long-established example of sample promotions is a free packet of washing powder in new washing machines. It carries with it the actual or implied approval of the washing machine manufacturer for the particular brand of detergent. The free sample is of real and significant value. Other examples include the banding of packs of Nescafé with packs of Hobnob biscuits – creating a clear link between the brands in a common usage occasion.

What to look out for

This is one of the most effective ways of gaining trial and, if the partner is selected well, it can also be highly cost-effective compared, for example, with a door-drop sample. However, the cost of giving away full samples is high, and it is normally necessary to include some repeat purchase incentive as well. Both the cost and the potential of this promotion make it one to test very carefully in advance.

Referral coupon promotions

The offer

When people buy product A, they receive a coupon they can redeem against purchases of product B. These promotions are often called ‘cross-ruff, or cross-rough, coupons’ – a name that implies that they are a hit-or-miss affair. The name has stuck, although there is nothing rough about them, and they are particularly common between non-competing brands owned by the same company.

How it works

An example is a ‘kids eat free’ promotion, first developed by Persil and Little Chef in the mid-1980s and now widely used by child-related household brands in partnership with family eating and leisure operations.

What to look out for

Referral coupons have the advantage of being far cheaper to run than sample promotions, but lack their level of trial-gaining impact. They have important benefits in that you can measure how many people have been enticed across and they do not require special packs. Run as a partnership between half a dozen or more companies selling complementary products, they can be particularly effective.

Charity promotions

The offer

Charity promotions – or cause-related marketing – take many forms. The evidence is that customers are more likely to buy from firms that are seen to contribute to social and environmental needs. Many of the UK’s best-known charities go out of their way to meet both their own fundraising needs and the requirements of the firms they team up with. It is a commercial relationship, and all the better for it. Charities need funds, new supporters and wider publicity. Businesses need promotions that show their worth in extra profit and also link them to issues that matter to consumers.

There needs to be a close fit between your target market and the market from which the non-commercial organisation gains its support. Selecting the market thus involves a degree of lateral thinking about your customers:

• What sorts of charities and voluntary organisations appeal to them?

• What kinds of project would they like to be associated with?

• What sorts of charities and voluntary organisations connect with the usage area of your product or service?

• What are the charitable and voluntary concerns that are likely to have the highest public exposure over the coming months?

Answering these questions, it is possible to draw up a list of areas – sport, arts, children and so on – that look suitable. The Charities Aid Foundation can be a good starting point to find out which organisations operate in the areas you have chosen.

How it works

There are various types of charity promotion. Among the longest established are collector promotions, which require consumers to post in wrappers or coupons that are designated as being worth a certain amount to the charity. The promoter counts the wrappers sent in and hands over the equivalent sum. Very often, charities will ask for a guaranteed minimum to justify the use of their name and to reflect the difficulty of estimating redemption levels. Collector promotions run with charities can generate a huge response, particularly if schools and youth organisations can be encouraged to collect the wrappers or coupons.

Charity promotional events have taken a wide variety of forms, from the Oxo/Barnardo’s Champion Children of the Year to the Jaguar/NCH Royal Gala Evening at the Albert Hall.

What to look out for

The criteria that apply to charity promotions also apply to promotions with voluntary or community organisations, such as sports and arts associations, and are similar to those that apply to joint commercial promotions. There are four additional factors that are particular to non-profit organisations which need to be taken into account in finding out what they want. Some of them do not apply to the very big national charities, which have their own promotion departments, but they are all-important in dealing with smaller organisations. They are:

1 Locate the priority objectives. Most non-profit organisations have an almost limitless set of needs and wishes. Finding out the priority objectives that are within your means to realise takes time, patience and understanding.

2 Identify the decision makers. Non-profit organisations tend to be run by committees and have complicated internal processes. It is essential to understand these processes and to know where the real decisions are made and under what constraints and influences the decision makers are working.

3 Establish trust. The ways of thinking in profit and non-profit organisations are not identical, and an element of initial suspicion and distrust is understandable. To establish trust, you must associate with values and aspirations that motivate those involved in a non-profit organisation.

4 Have respect. The implementation of any non-profit organisation promotion must ensure respect for the recipients of the money raised. Considerable sensitivity is required to ensure that raising money is not done at the expense of self-respect.

If the process is approached in this open way, it is possible for companies to sit down with charities and other non-profit organisations and hammer out a deal that meets the needs of both sides.

Loyalty schemes

The offer

From petrol stations to airlines to supermarkets, loyalty schemes are near universal. Large-scale schemes invariably involve joint promotions – there simply is not enough in any one company’s product range to cover all the lifestyle needs that a loyalty scheme tries to meet. Research finds that 70 per cent of business and leisure travellers state that being a member of a loyalty card is a key factor in determining the choice of hotel or airline. The offer to the consumer is both simple and endlessly varied: sign up for the scheme, provide purchasing and demographic data, obtain a card and start collecting. From the management viewpoint the concept is equally simple. Develop the version that suits your business and you have a loyalty scheme … or do you? (see Chapter 1 ).

How it works

Marketing people hold widely differing views on loyalty schemes, whether they work and, actually, what constitutes a loyalty scheme. The strongest critics of the schemes point to evidence that the more someone buys of a particular product category the more products they will buy within it. Thus, the more you travel by air, the more airlines you will use. The more supermarket shopping you do, the more supermarkets you will use.

If there are loyalty schemes available and you like participating in them, you will participate in them all. Of course, market share can change, but that comes about because of an increase in both frequent and infrequent users. What does not change is the ratio between the frequent and infrequent users of your products or services. In fact, across dozens of markets, that ratio is found to be constant. Loyalty schemes are, according to this argument, a complete misnomer. Read also about bonding with a brand (see the end of Chapter 3).

So the question remains open: What part do loyalty schemes play in the bundle of characteristics (price, convenience, store layout, checkout speed and so on) that influence the consumer to choose one supermarket over another for a particular shopping trip? Think of it in terms of the six Cs of the Offer. Proponents of loyalty schemes often neglect to recognise the progress made by Asda in the 1990s despite its lack of a loyalty card, and the continuing loss of market share by Sainsbury’s both before and after its loyalty card launch.

What to look out for

It is essential to recognise that ‘loyalty’ schemes are not about loyalty, but about providing repeated reasons for customers to use your product or service. They are a bundle of promotional techniques, of which the principle one is a long-term collector scheme. On the back of that, they can be used to convey short-term incentives of every kind and to engage the consumer in competitions and special events. The downside of these schemes is their cost and complexity and the danger that they can become a substitute for attending to product and service quality. It is best to measure them on a disaggregated basis – not the scheme as a whole, but each mailer and each subsidiary offer. The scheme works to the extent that its separate elements work.

The expectation is that loyalty schemes will come to an end in their present form in due course, just as Green Shield stamps did in the late 1970s. Their demise was predicted in the promotional press within months of the take-off of UK supermarket schemes. It has not happened yet, but there is a cycle in sales promotion, well-illustrated in Case study 56 on Tesco’s experience over the last 20 years, and in Case study 62 on a classic Procter & Gamble promotion of the 1960s.

In the meantime, promoters should focus on the detail: If the individual elements are answering the question ‘Who do I want to do what?’, it does not matter whether they are dressed up as a loyalty scheme or not. If the individual elements are not persuasive reasons for the consumer to act, no ‘loyalty’ framework will make them effective. Long after the present wave of loyalty schemes have gone, these individual elements – ‘buy one, get one free’ (BOGOF) offers, special evenings, items to collect and the like – will still be going strong under another name.

Phantom partnerships

The offer

Not everyone can sign up the joint promotional partners they would like, such as the World Cup and the Olympics. The ‘phantom partnership’ can come to your rescue in such circumstances.

How it works

Phantom partnerships are about making a connection with an event in the news without breaking copyright law. McDonald’s ran a ‘game of two halves’ promotion, offering football merchandise and match tickets. Burger King built on its sponsorship of the England, Scotland, Wales and Northern Ireland teams with an instant-win promotion offering football merchandise and match tickets. Flymo gave away free branded footballs with selected mowers, produced POP material showing the cherub from its TV ad kicking the ball and offered £50 cashback in the event of Scotland or England winning (which seemed more possible as the event progressed than it did at the beginning). Case study 53 in this chapter describes a similar phantom partnership between Sellotape and the National Lottery.

What to look out for

Cross the line into implying a partnership and you will have the full weight of copyright lawyers on your head, and rightly so. Imply a partnership with a charity that you do not have, and the public reaction will be damaging. However, make a legal connection that does not infringe copyright with an event and most people will applaud your imagination. It is an ideal field for enterprising and careful promoters looking to hook their brands on to whatever is uppermost in the public mind. Do beware that draconian measures are applied to those who break copyright – see the law for the 2012 Olympic Games!

Summary

Joint promotions are the staple promotional vehicle of companies such as Procter & Gamble, Unilever and Kellogg’s. There is every reason for companies of every size to emulate them. However, it is vital to remember that joint promotions are based on a mutual business-building partnership. The best test of success is if both partners want to run it again. If you have identified your market and identified likely partners with the necessary thoroughness, and you enter into the process with integrity on both sides, joint promotions will work a treat. If not, you are best keeping away from them.

Promotions with charities and other non-commercial organisations can have enormous publicity benefits, excite tremendous response and associate you with values that are important to your customers. They must be undertaken responsibly and with respect for the needs and feelings of the people you are helping, but they are rightly a commercial operation.

Self-study questions

1 What major problems tend to arise in joint promotions?

2 What should you take into account in looking for a joint promotion partner? Think of a suitable partner for your own organisation.

3 What can you do and what can’t you do if you want to promote on the back of a major event licensed to another company?

4 What particular rules apply to promoting with charities?

Price promotions

Fixing the price as a promotion rather than just fixing the price is one of the most difficult and sensitive parts of marketing strategy. All the other techniques in promotions involve you in costs; a price promotion affects the bottom line directly. In light of the engram discovery, do appreciate that price no longer means everything to shoppers. Their subconscious ‘mindfile’ may steer them away from the cheapest item in the category. Much of the purpose of marketing is to remove a firm from dependency on perfect competition, particularly for products that are commodities. Hence, so much effort is spent creating superior-quality products, developing brand identities, building distribution strengths, matching the Offer to the customer need and establishing unique customer relationships.

So why throw wisdom away by getting involved in price promotion? That is the argument of those who regard price promotion as a destroyer of brand identities. In the present climate, alongside the knowledge of the engram held in each shopper’s mind, the price promotion now seems far less effective! When a brand manager sets the brandgram, reducing the price as a promotion must run counter to logic. If the product or service is really and seriously overpriced, two things will happen: shopper/buyers will purchase less and social media will let you know. In which case, just reduce the price. Running a price promotion may be justified as an interim measure to confirm overpricing – again, sales should increase and social media will become favourable.

All the same price promotion. In a recent walk along Oxford and Regent Streets, nearly all shops had ‘sale’ signs and ‘up to 50% reductions’ flashes (Boots and Holland & Barrett were the exceptions). To the shopper/buyer, all were identical. Crazy! No creativity, no innovation, no real consideration of ‘whom you want to do what’ consideration. The message is too curtailed.

What about 75 per cent discounting? Ten retailers at marketing surgeries (carried out by the author) asked about the effect on their brand of price discounting. In one case, ‘was their 75% price discounting affecting the brand?’ It was certainly not providing profit. And of course it was affecting the brand. Ironically, independent research showed that their customers in fact did not need the discounts, but the customers did have other concerns, which were that they were not buying because of poor customer service; poor delivery and logistics – no stock – also were quoted. That firm had never carried out a customer survey or used a marketer and the directors were untrained in marketing – they were discounting because their managers felt they had to match the competition, all of whom were discounting in their street. The shop has ceased trading!

This chapter sets out the different ways that companies think about price promotion and the techniques available. So much discussion of price promotion is hindered by different ways of thinking about price that the first two sections look at the principles of price setting and price segmentation.

How prices are set

Competition and, supply and demand variation, affect price. Some companies have made the absence of price promotion a key part of their positioning. Primark do, and others have done so for extended times (M&S, Asda, FatFace). It needs only one company to discount its prices for others to feel the need to respond. In most countries, there are laws that prevent manufacturers fixing prices between them. By reducing supply cost by means of superior productivity, firms can achieve the profits they seek and still charge lower prices than their competitors. Being the lowest-cost supplier is one of the main strategies for achieving competitive differentiation. Variation in demand can set a price – hence, for example, it costs more than twice as much to travel before 9 am than it does to travel after 9 am.

Setting the price of a product or service is not a primary concern of promotion. The normal selling price to final users and intermediaries will be a factor to take into account in planning a promotion, as are the product’s packaging and distribution. The approach a company takes to pricing strategy determines, to a large extent, how price promotion can be used and how the firm accounts for the difference between normal and promotional prices. Much of the disagreement about the use of price promotion arises from people not understanding the difference between two fundamental pricing strategies and a consideration of demand.

In the ‘target mark-up’ strategy, a company decides the margin or profit it wants to make, and adds that to the product or service cost. It may be ROI or the standard level of return in the industry; for the company, a discount equals money given away, but does it? Only if it would have been given the order at the higher price! In the ‘going rate’ strategy, it starts with the competition rather than costs. It tends to be an unstructured strategy, and the company is always engaged in promotional pricing. It may be giving money away unnecessarily. More sophisticated companies balance a concern with competition and cost with an emphasis on the third element in pricing strategy – demand. This leads to three different pricing policies:

1 Psychological pricing – works on the basis that we often think a high-priced product must be better than one costing less. Firms will set a high price and defend it. Perfume companies try to stop discounters selling their products, because the cost of perfume is part of its specialness. Those who go for psychological pricing will often aim at a small section of the market that is looking for the very best and is not sensitive to price. They will regard price promotions as totally unsuitable for them – and they will be right. This is consistent with the quality of life now sought by customers, enhanced by marketing copy such as ‘You’re worth it’ and ‘Spoil yourself’.

2 Value pricing – based on the idea that top quality and low prices can go together. This works for a company if it can achieve a volume big enough to give it the lowest production costs in the market. The aim is to set a consistently low price and maximise volume. This strategy is reflected in the ‘everyday low prices’ (EDLP) claims made by Wal-Mart in the United States and Asda, Poundland, Aldi, Lidl etc. in the UK. Price promotions can be part of this, but not a central part.

3 Segment pricing – the pricing strategy in which price promotions really come into their own. It starts with the idea that people are different. Some are sensitive to price and some are not. Some will shop around and others will not. Some will wait to enjoy a service or receive a product and others will not. The argument is that prices should be determined in accordance with the demands of each segment of the market.

Until chains of shops began setting ‘one price for all’ in the nineteenth century, the price was always negotiated between buyer and seller. In some markets (for example, the price of shares on the stock exchange or commodities on commodity exchanges), it still is. Segment pricing is a sophisticated and modern way of managing individual negotiation on a mass scale.

Segment pricing

What makes a segment? See Chapter 3. Marketing people talk about segments of the market in a variety of ways. There are occupation and income classifications distinguishing ABs from C1s and C2s. In lifestyle terms – a Chapter 4 example shows where aspiring young professionals may be of similar age and income to lager and football fans, but spend their time and money very differently. People can also be segmented by their stage in the life cycle, from dependency to pre-family and post-family and by attitude. The theory is that for each segment of the market, there should be a version of your product that fits it like a glove. This is difficult to do.

For promotional pricing to be effective, segments have to be real. Business travellers will pay more to travel at a convenient hour than leisure travellers will. That is a real segment for ticket sales. However, do business travellers want something different to leisure travellers from the catering facilities on a flight or at an airport? One study suggests that for catering services, there are two rather different segments: those in a hurry and those not in a hurry. These cut right across the business and leisure segmentation.

There are three rules of thumb for telling whether or not a segment is real enough for segmented pricing to work:

1 People in each segment must have different sensitivities to price – that is, they must be prepared to pay different amounts for the same service or product.

2 There must be some physical, structural or time separation between the higher- and lower-priced segments, preventing those in the higher-priced segment from deciding to buy at the lower price.

3 The segments must be real enough for consumers not to feel dissatisfied and resentful, and for the cost of operating segmented pricing to be worthwhile.

The most common segments are formed on these principles:

1 Time. Travelling or parking at busy times of the day costs more than at quiet times. Buying toys before Christmas costs more than after Christmas. A DVD costs more when it is first released than later on.

2 Location. Conveniently located shops, hotels and restaurants charge more than less conveniently located ones.

3 Conditions. Buying in volume costs less than buying in small units. A year’s subscription costs less than an individual theatre ticket or copy of a magazine. Tickets bought in advance will cost less than tickets bought on the day – except for theatre tickets when they have last-minute seats to fill. See also http://www.lastminute.com/.

4 Version. Superior service costs more than the standard. Peace of mind can be bought, but at a price. Fundamentally, the same product or service can be versioned or packaged at different price points.

The promoter is primarily concerned with promotions that last for a particular time period, take place in particular locations, have conditions attached to the deal and apply to some – but not all – versions of a product or service. This is what differentiates intelligent price promotion from wholesale, self-­destructive discounting.

Immediate discounts

These are discounts off the normal price that are available immediately at the time of purchase. They take six main forms (see below). The thing they all have in common is that the consumer can buy a given amount of a product for less. Immediate discounts have a number of important strengths: everyone likes a bargain, and they are a powerful and immediate incentive to buy – it is a sales clincher – where 70 per cent or more of purchase decisions are made in the shop or online.

Their weaknesses, however, are very serious. Discounting can rapidly degenerate into price wars. See Chapter 9 on price promotions. Note that price wars have restarted between the major supermarkets and Aldi and Lidl – yet this has not stopped the latter from increasing their market share. Competitors can readily copy. Discounting does not distinguish between those who would have bought without the discount and those who need it. It is also extremely expensive, as an immediate discount tends to cost you exactly what it saves the customer. Discounting can also downgrade the value of your product or service and lead to a situation where no sales take place at the normal price. Very rarely do the sales gains achieved by price reductions lead to a sustained increase in market share. Immediate discounts are powerful but, like a powerful drug, they can quickly take over and destroy your business. Companies must also be aware of the substantial legislation governing the making of bargain offers that properly constrains the making of unreasonable price comparisons.

Seasonal discounts

The offer

These are price reductions designed to boost sales in off-peak seasons, move outdated lines or heavy stocks, bring forward purchases or improve cash flow.

How it works

In their familiar form of retail ‘sales’, discounts are now highly formalised and have become a seasonal sales promotion far removed from their original purpose of moving end-of-season stocks. Some retailers run ‘closing-down sales’ (typically oriental carpet shops!) continuously for several years, a practice that stretches the bounds of legality. Leisure companies use seasonal discounts very widely, charging different prices in their low, mid and high seasons.

What to look out for

The critical issue is the logic of the season. Excessive use of sales ends up with consumers deferring purchase to the next sale.

Multi-buys

The offer

These are a particular form of quantity discount offered by retailers (and funded by manufacturers) for multiple purchases of the same item. A long-established variant is the BOGOF – ‘buy one, get one free’ – that is flashed on-pack, on the shelf or in newspaper advertisements. As this book is written, the major supermarkets have stopped multi-buys and are concentrating on straight discounting.

How it works

Multi-buys normally work by means of bar codes. The shop’s EPOS system counts up the number of items with a particular bar code and applies the discount automatically. Multi-buys have become hugely significant. The leading detergent firms have increased the proportion of their consumer promotional spending on multi-buys from 20 per cent to 65 per cent.

What to look out for

Multi-buys are easy promotions to set up and give quick and measurable results. They can be very effective for a manufacturer needing to combat competitor action. However, there are significant costs. Multi-buys have become the standard mode of purchase for some consumers. The London Business School study found that 95 per cent of multi-buys are bought by just 27 per cent of households – mainly larger families who are, in general, better off. The level of sales increase a brand enjoys when a multi-buy is offered can be between 50 and 200 per cent. The hangover after the party comes later – when the same consumers switch to your competitor’s multi-buy.

Used sparingly, multi-buys are an effective way of stock building in the consumer’s home and can encourage greater usage simply by virtue of greater volume. They also block purchases of competitors’ products until stocks of yours are exhausted. They have become a millstone around the neck of manufacturers, blocking other forms of promotion. Also, the manufacturer often doesn’t get the credit: 56 per cent of consumers think retailers fund them.

Outside retail for example, magazines offer discounts for signing up for longer subscriptions.

Banded packs

The offer

There are several options for banded pack offers, but they come to the same thing: two or more of the same product are banded together or placed in an additional outer wrap so that the consumer buys them together.

How it works

Drink and confectionery brands are regularly sold in a variety of banded packs, whether of 12, 24 or more individual units. The price normally falls as the quantity increases.

What to look out for

There are packaging costs associated with banded packs. There is also a need to negotiate additional line listings and to hold stocks of the additional packaging variants. The benefits are that banded packs are clearly a manufacturer’s initiative and tend to be less under the control of retailers. They can increase the amount of space available to the product in the shops and can encourage stock building by the consumer. A banded pack can be a powerful incentive to volume purchase.

Reduced shelf price

The offer

This is the commonest form of price promotion. A standard product is on sale with a shelf sticker or poster showing a reduced price. Remember, in the future stores may change shelf prices instantly to match factors such as weather or dealing with a competitor.

How it works

If a £1 item is discounted by 25p, it can be shown in a variety of ways: ‘normally £1, now 75p’; ‘only 75p’; ‘25p off’; ‘our price, 75p’; ‘save 25p’. Signs of this kind are commonplace in clothes shops, consumer durable retailers, food stores and pharmacies.

What to look out for

The important point is the credibility of the standard price. Since the demise of resale price maintenance, it has become ineffective (and now illegal) to claim price reductions against a recommended price that is not actually charged. More generally, shelf price reductions are simple and effective to operate, but give discounts indiscriminately. They can serve to reduce the willingness of the consumer to pay the full price.

Reduced price offers

The offer

Reduced price offers (RPOs) are flashed on-pack, offering a saving (‘10p off ’) or a price slashed through and a lower price given. They differ from shelf price reductions by being printed on-pack.

How it works

It is one thing for the manufacturer to print a reduced price on-pack and quite another to ensure that the reduced price makes sense in all retail outlets. They require an additional line listing and separate stocks and packaging. Many retailers now refuse to take them and will increasingly require that they receive the same margin as if the full price were charged.

What to look out for

For the consumer, RPOs are an attractive offer – volumes of sales certainly rise when an attractive reduction is made. It also gives the manufacturer control over the price charged to the consumer. However, it is an expensive promotion in terms of margins and packaging and increasingly difficult to run with major multiples. Used too often, it can devalue the standard price. It can also lead to rapid copying, resulting in almost all products in a sector being reduced in price.

Extra-fill packs

The offer

These are packs flashed ’25 per cent extra free’ or ‘550 ml for the price of 440 ml’. They differ from RPOs in that the price remains the same, but the quantity of the product sold for that price goes up.

How it works

Extra-fill appeals to existing users of your product, who can get more for the same price. They can also be useful in trading consumers up to larger sizes. The costs for the manufacturer include packaging origination and carrying additional stock. There can also be difficulties with some retailers in obtaining new listings and shelf space.

What to look out for

The major advantage of extra-fill packs over price reductions is that the perceived value to the consumer is more than the cost to the manufacturer. Once the packaging has been paid for, the cost of additional ingredients is often low. Extra-fill does not devalue the product in the way that price reductions do. However, they are readily copied: in off-licences, it often seems as if every major lager brand is an extra-fill product.

Store entry draw discounts

The offer

At the store entrance or at the entry to a shopping mall, seemingly randomly, a shopper draws a voucher and this reveals one of a range of discount levels that applies to their purchases made on that visit to the store. This is used, for example, in beauty and jewellery outlets in the US. Airport duty-free stores have used this too (Jersey airport, for example). It is entirely retailer controlled.

How it works

The success (of increased sales) depends on footfall and reasonably rapid communication. Shoppers should be using their mobile phones to let friends, family and colleagues know of the entry draw opportunity. Canny shoppers may enter and exit until a larger discount applies. It does add an element of adventure and fun to the shopping experience.

What to look out for

Control of the vouchers is essential.

Delayed discounts

These are forms of discount that are not immediately available at the point of purchase, though often these discounts are printed on the till receipt. The purchaser will normally have to do something after purchase in order to benefit from the saving. These are much used now by retailers (and not just supermarkets). The crucial feature of delayed discounts is that not everyone who thinks he or she is going to take up an offer actually does so. Everyone is familiar with buying a product on the strength of a ‘20p off next purchase’ coupon, sincerely intending to make use of that coupon and finding it in the kitchen drawer some months later – normally after its expiry date. This is the principle behind delayed discounts.

Delayed discounts enable savings to be targeted at people who fulfil the range of conditions that you wish to impose. The non-redemption level means that the size of the saving offered can be higher and therefore more attractive. They also allow an opportunity for creativity that is not normally available with immediate discounts.

The weaknesses of delayed discounts include their lack of immediacy: a bird in the hand can be worth two in the bush. They may also involve additional handling and postage costs for both the consumer and the supplier. A £10 voucher could well have added-on costs of around £2: postage for both you and the consumer, plus the costs of envelopes, handling and voucher redemption. These costs are great news for the postal service, but can detract from the value of the offer you are making. There is also the danger that an excess of complexity can turn off participants: if a saving is being offered, it should be apparent that that is the case.

The major form of delayed discount is a coupon that can be used against a future purchase. These are discussed below under ‘Coupons’. Other common forms are cash rebates, cash share-outs and repurchase offers. Supermarkets are now offering time-limited coupons at the till, with a cash value related to the purchased items.

Cash rebates

The offer

In a cash rebate, the customer is invited to collect tokens from a number of packs and post them in to receive a cash voucher. This promotion can also be used as a variant of the BOGOF, where a coupon is sent for the full cost of another product. The value of the cash rebate can also be varied, as can the conditions of entry – for example ‘Buy a complete set, and we’ll rebate you £10’.

How it works

Cash rebates require postage from consumer to mailing house, and from mailing house to consumer, which adds significantly to their costs. They have been overtaken in consumer goods markets by multi-buys, but are effective in sectors where goods are more expensive and where EPOS systems have yet to make their mark. They are particularly popular in financial services – ‘£500 cashback when you take out a mortgage’ is a typical example, as is £100 on the purchase of a car.

What to look out for

If the offer is less substantial than £500 (which everyone will take up), the cost to the manufacturer of a cash rebate will depend on the number of people who actually take up the offer. As there is always slippage between the numbers of people who are attracted by an offer and those who take it up, this enables a more attractive offer to be made. The size of the rebate must justify the postage and handling involved. In financial services markets, cash rebates are a highly effective way of incentivising people with their own money.

Cash share-outs

The offer

In this offer, a sum of money is divided among all those returning the requisite number of proofs of purchase from a product or service. It is typically communicated as ‘Send in five proofs of purchase for your share of our £100,000 share-out’. Variants can include the option of sending in an unlimited number of proofs of purchase.

How it works

The predicted redemption rate is carefully calculated to ensure that participants will receive a reasonable sum of money, normally equating to that which they would receive on a cash rebate scheme.

What to look out for

The main advantage of the cash share-out is the scale of the sum that can be offered. This can be attractive. However, it involves a substantial amount of postage and handling and can cost more to administer than the benefit given to the consumer.

Repurchase offers

The offer

Purchasers of consumer durables, such as fridges or hi-fis, are offered a commitment by the manufacturer to buy back the product at a specified point in the future (often 5 years) for the same amount as the purchaser paid for it. A variant is to offer a lower guaranteed trade-in price.

How it works

This offer at first seems like a guarantee of bankruptcy for the manufacturer. It relies on three considerations:

1 A great many people will forget to apply for repurchase in 5 years’ time.

2 Inflation will have eaten into the value.

3 Those who do ask for repurchase form a good market for repeat purchase.

What to look out for

Offers of this kind need to be carefully calculated and insured, and low inflation levels are making them less attractive than they were. They can also seem too good to be true – certainly in the full repurchase form. However, as a means of making an offer with a higher perceived value than cost, they have their advantages in markets with repurchase cycles of 5 years or so.

Coupons

The offer

Coupons are used to provide an immediate or delayed discount on a product or service to end-users or intermediaries. They can be distributed in a wide variety of ways, all of which have different redemption rates and vary considerably in popularity over time. They are used so extensively that they form a subject in their own right. As with delayed discounts, the critical factor is the level of redemption and the slippage between being attracted by the offer and taking it up. Mobile couponing is having an impact. This is where consumers see an advertisement or website that invites them to text a particular message to a particular number. They receive in return a bar code that can be scanned in at the point of payment so that the ‘coupon’ is redeemed. A number of plastic cards are also being developed for couponing. In principle, all the systems are the same. The manufacturer or retailer ‘gifts’ a customer with a sum of money redeemable against a specific purchase.

Misredemption, where a retailer accepts a coupon whether the customer has purchased a product or not, is rife in the grocery sector, costing the industry £20 million a year, and the IPM (when it was the ISP) launched a campaign to stop the practice. Valassis are proposing a new solution, VERSO™, which is Valassis’ real time Omnichannel Redemption solution. Download the White Paper at http://www.valassis.co.uk/wp-content/uploads/2014/08/

Valassis-White-Paper-Low.pdf.

This is also described in a short video at http://www.valassis.co.uk/solutions/new-services/.

How it works

A coupon is, in principle, a straightforward thing to organise: you print your coupons giving a specified saving on the next purchase, you invite people on your website to print out coupons, you distribute them, retailers or other intermediaries accept them in part-payment for your product or service and you reimburse the intermediary. If there is no intermediary involved, it is even simpler: you simply accept your own coupons in part-payment.

Coupons are the nearest most of us get to printing money, and we do so in huge volume. It is critical to think through questions of distribution, redemption and format.

There are eight main ways of distributing coupons:

1 on or in your product or service;

2 door to door;

3 in newspapers;

4 in magazines;

5 by direct mail;

6 in store;

7 via a website – printing off the coupon;

8 via an SMS text for a customer who has given permission.

These different ways of distributing coupons are described by the coupon industry as different ‘media’. They have different shares of the total number of coupons distributed. The difference is the radically different levels of the redemption rates of the various media, which range from less than 1 per cent to over 20 per cent. Note that there is also considerable change year on year. Although the general differences between different forms of media are clear enough, there is considerable variation over time.

So how do you decide which way to distribute your coupons? It depends what you are trying to achieve. Different coupon ‘media’ have very different uses and characteristics:

1 Coupons in or on a product or service are primarily a generator of repeat purchases and a reward for loyalty. They can be used for brand extensions – say, to trial a new product. They can also attract new customers.

2 Door-to-door couponing is most effective for targeting a particular geographical area, for example near a shop. It is effective in gaining new users, particularly when used in conjunction with a sample.

3 Newspaper couponing is apparently wasteful (up to 99 per cent non-redemption), but the figures need to be related to the huge size of ­newspaper circulations.

4 Magazine couponing is similar to newspaper couponing, but can be more carefully targeted. Magazines also allow tip-on coupons stuck on to the page.

5 Direct mail is the most expensive and also the most targeted form of couponing, and has the highest redemption levels.

6 In-store couponing usefulness must be tested to establish whether or not it really does generate extra business for your product or service or simply provides a convenient discount to those who would have bought anyway.

Getting the format of a coupon right is vital for something that can be used as money. Clear guidelines have been drawn up for the grocery trade for the design, structure and organisation of coupons. Any couponing activity requires a redemption system. If you are going to redeem your coupons yourself, the redemption systems are a matter for your own internal accountancy. If they are to be redeemed by intermediaries, you need to ensure that all likely intermediaries will accept them and that they will be duly recompensed for their trouble in so doing. The best answer is to use one of the handling houses; the leader in this field is Valassis (responsible for 85 per cent of all UK coupons), whose experience is considerable and has saved many a promoter from expensive error.

What to look out for

There are three major problems that can arise with any couponing activity:

1 Malredemption. Malredemption is large-scale fraudulent redemption. It arises, for example, from a batch of newspapers being systematically cut for all their coupons and redeemed at a friendly retailer or claimed by the retailer. There are ways of coping with it, and handling houses are best able to advise on this.

2 Misredemption. This differs from malredemption in that it is the result of individuals redeeming individual coupons against products or services they have not bought. It is almost impossible to act against without the support of retailers.

3 Fraud. Internet coupons are an example. Ease of printing requires such identifiers as 2D bar codes. The fraud here is not easy to identify.

The scheme from Valassis Verso™ should to a large extent remove these problems.

Despite these difficulties, coupons are a promotional evergreen. They are a good way to provide a price benefit without making it available on every pack sold. The secret is to use coupons in a creative and carefully targeted manner, and to calculate in detail the redemption costs against the extra business you gain.

Finance deals

The offer

Zero per cent finance is one of the great sales-clinching offers of all time in ‘high-ticket’ markets – those in which the consumer needs to lay out a substantial sum to make a purchase. It has been widely applied in the motor, furniture and consumer durables sectors. Its application is potentially far wider. The Next (credit) card makes money for the shareholders.

How it works

If a company lends money at less than the rate that it pays to borrow it, it has to make up the difference somewhere. While the principle of subsidised finance is fairly simple, the forms it can take are immensely varied. There are four key forms of subsidised finance.

1. Manufacturer and finance house deals

These deals are normally set up by major manufacturers that sell through dealers – they most commonly occur in the motor trade. A large slice of money, at, say, 8 per cent, is borrowed and then a range of interest rate options is constructed for its customers – say, 4.1 per cent (for repayment in 12 months and a 50 per cent deposit) to 6.5 per cent (for repayment in 48 months and a 20 per cent deposit). Dealer and customer would agree the actual price of the car in the usual way. The net amount owing would then be repaid by the customer at the interest rate selected. The manufacturer would pay the finance company the difference between 8 per cent and what the customer was actually paying.

2. Intermediary and finance house deals

Finance companies generally dislike concluding deals of this kind with companies other than major manufacturers. If you want to persuade them to do so, it is helpful to understand their criteria. These are the main ones:

• The item should be durable, identifiable and movable (DIM). This covers products that last, which have serial numbers on them and can be removed if the debt is not paid. Cars, boats and machinery obviously fit the bill.

• The debt outstanding should be less than the resale value of the item should the finance house be forced to repossess it. The answer to that is to have relatively high deposits and relatively short repayment periods.

• You must be an honest, trustworthy, credible business.

Given that you can satisfy these criteria – and others of a more technical nature – there is no reason for not approaching a finance house to construct a finance deal that you can subsidise.

3. PERSONAL LOAN DEALS

Items that are not durable, identifiable and movable – for example, furniture and carpets – cannot be financed by a finance house. The reason is that the items themselves cannot provide adequate security against non-payment. One answer is for customers to take out a personal loan, normally secured against their house. The manufacturer or retailer can then subsidise the interest rate in the same way as with a finance house deal. There are many credit providers with which these deals can be negotiated.

4. UNSECURED FINANCE

The final major form of subsidised finance involves the manufacturer or retailer providing the credit without direct recourse to any external source of money. Furniture retailers commonly use it.

Let us assume that a furniture retailer sells a three-piece suite on a no-deposit, zero per cent interest deal. The cash price is £1,040, and the credit price is £10 per week for 2 years. Applying discounted cash flow calculations to the repayments, the furniture retailer can calculate the value of the sale on the day it is made. Two of the crucial elements in this calculation will be the company’s view of the movement of interest rates and inflation over the 2-year period and the expected level of bad debts. Assuming these estimates are correct, it can identify the true value of the sale in profit and loss terms. The repayments then become a matter of cash flow.

Calculated incorrectly or with an over-optimistic assessment of likely bad debts, this method of providing subsidised finance is a sure-fire way of going bankrupt. It is a route that only the most hardened, experienced and cash-rich businesses should even think of.

What to look out for

Most marketing people do not need to be experts in consumer finance. Getting involved in zero per cent finance deals or other subsidised interest rate offers calls for a fairly sophisticated knowledge of the potential, the pitfalls and the economics of our financial system. If you are willing to master the arithmetic and study the systems, the rewards can be considerable. However, even so, it is best to appoint a professional to do the job for you or at least to check your calculations. It is also vital to follow closely the requirements of the Consumer Credit Act and other legislation.

Trade price promotions

A promotion that attracts the retailer but not the consumer may work; a promotion that attracts the consumer but not the retailer is unlikely to get off the starting blocks. The distinction is often made between ‘push promotions’ (aimed at pushing products via the retailer to the consumer) and ‘pull promotions’ (aimed at the consumer, pulling products via the retailer). The distinction is not an absolute one – most promotions need both pull and push if stock is not going to sit on the shelves (not enough pull) or not reach them in the first place (not enough push). This section looks at the push element in the mix – the use of price to give retailers reasons to support the promotion of your product or to do the promotion themselves. There are five main forms of trade price promotion.

1. Overriders

The offer

An overriding discount is agreed at the beginning of a year between a supplier and a purchaser and is payable by the supplier at the end of the year if the purchaser has achieved the agreed targets.

How it works

Overriders normally relate to the volume taken over the year, but can also cover display, distribution and other business targets. If the targets are not reached, the overrider is not paid. They are heavily used by food and motor manufacturers and holiday companies supplying via retailers. Some motor dealers derive most of their profit from overriders, discounting the normal trade margin to their own customers.

What to look out for

Some purchasing professionals dislike overriders on the grounds that the cost to the supplier is simply built back into the price. Suppliers also dislike them because, over time, the targets can become ritualised and purchasers can expect their overrider as a right. Nevertheless, they are widely used, and in some markets cannot be avoided – they become a cost of doing business. The trick is to make sure that the targets set for the overrider in annual negotiations give some benefit to both parties over what would otherwise have been achieved.

2. Display and advertising allowances

The offer

These are allowances for a retailer to conduct some piece of promotion for the manufacturer. The allowances can pay for media support, stack ends, leaflets, coupons, window bills, display and any other form of retail support.

How it works

Most retailers have a tariff for almost every form of promotional support – from a stack end to a window bill. Increasingly, allowances are charged for listing a product, and investment in the retailer’s in-house magazine or advertising is a required cost of doing business. Allowances that used to be at the discretion of manufacturers are increasingly at the command of the retailer. The growth of EPOS systems has enabled even medium-sized retailers to know exactly how much of a product can be sold from a given position in the store and to charge manufacturers accordingly.

What to look out for

Manufacturers need to look closely at the total profitability of each product line in each retailer. Take away the total of all allowances, overriders, volume discounts and other trade discounts from the selling price to the retailer and you have the net selling price. Take your manufacturing and promotional costs away from that and you know the contribution to overheads you are achieving from that retailer on that product line. If possible – and it often is – allowances should be targeted to achieve particular results, such as extra display and advertising. In many cases, allowances have become part of an increasingly complicated calculation of the cost of doing business with a particular retailer. You need an equally complicated financial system to work out if it is worthwhile.

If you are a small or medium-sized retailer, there is massive opportunity for increasing your margins by claiming allowances. The major multiples all have sophisticated EPOS systems that give them the power of knowledge. It is knowledge that gives the retailer power, and small retailers still have a long way to go in acquiring it.

3. Volume and case bonuses

The offer

These are short-term bonuses given by manufacturers to retailers. A case bonus is an amount of additional discount given per case bought. A volume bonus is an amount of additional discount given for buying a certain volume of product – more than would normally be bought at that time. Sometimes these take particular forms; for example, a baker’s dozen is the practice of charging for 12 cases while supplying 13.

How it works

Volume and case bonuses are used by manufacturers to fill a pipeline into the trade, to make life difficult for a competitor by filling stock-rooms or to encourage a retailer to offer shelf price reductions. They also work in some trade sectors as a means of encouraging display and support for promotional activity.

What to look out for

Nothing is easier than giving the trade additional discounts in the hope that it will increase sales of your product, but it is a slippery slope that leads to increased expectations of discounts and a steady lowering in your average selling price. It is essential to use volume and case bonuses intermittently and only in return for defined benefits. As retailer power grows in most sectors, this is easier said than done. It is one of the main reasons promoters seek alternative promotional mechanisms that do not devalue the brand’s price to the trade or consumer.

4. Count and recount

The offer

The name ‘count and recount’ derives from days when salespeople would habitually go into customers’ stockrooms to count the stock. Count and recount gave the retailer a bonus on the difference between the count and the recount – in other words, on the amount that had been sold. In most sectors, it can now be done by EPOS counting the quantity sold through the till, but the principle is the same.

How it works

Count and recount puts the focus of the manufacturer’s discount on what is sold to the consumer. It provides a good reason for the retailer to ensure that products are not just taken in but sold on to the customers.

What to look out for

In major multiples, this technique has largely been replaced by mechanics such as the multi-buy, which have a similar effect. In other trade sectors, count and recount is a way of giving trade discounts that do not simply end up increasing retailer margins. It gives an incentive to consumer sales.

5. Credit offers

The offer

The provision of credit is as important to the retailer as it is to the consumer. Providing the trade with enhanced credit terms can encourage earlier and deeper stocking of your range.

How it works

Multiple retailers derive a significant part of their profits and their positive cash flow by taking payment from their customers 2 months or more before they pay their suppliers. In these markets, the manufacturer is a key source of capital. In other sectors, trade payments can be faster, and the manufacturer can vary the payment period. This is particularly important in seasonal businesses, such as garden centres.

What to look out for

The cost of credit can be calculated for trade promotions in the same way as for consumer promotions. It is important to be aware of the risk of bad debts and to be clear that you have the financial resources to carry the delayed payment. If you can do so, using credit is a powerful means of trade promotion.

Summary

Price promoting is playing with fire. All the surveys show that consumers prefer it to any other form of promotion. The surveys also show that it devalues brands and leads to an expectation of even more price promotion. The same holds true for the trade.

Promoters are most likely to use price promotion effectively if they think in terms of segment pricing, look for concrete benefits from each discount they give and use price promotion intermittently. One of the key challenges of a promotion is to find value promotions that work as well as (or nearly as well as) price promotions and add to, rather than devalue, brand values. However, price promotion continues to be a benchmark for promotional effectiveness and is often made unavoidable by trade pressures and competition.

Self-study questions

1 What are the key features of segment pricing and how does it differ from other types of pricing?

2 What are the pros and cons of multi-buys?

3 What are the pros and cons of reduced-price offers?

4 What alternative means of coupon distribution are available, and what are the typical redemption rates for each?

5 If a 10p coupon is placed in a newspaper with a circulation of 2.3 million and a readership of 3.9 million, and you expect a 1 per cent redemption rate, how many coupons will be redeemed?

6 What are the main types of trade price promotion?

7 What key things should you look out for if you are using a zero per cent finance offer?

Premium promotions

Premium promotions are the most frequently used value offer in which the benefit comes in the form of an item of (often branded) merchandise. Why a ‘premium’? The reason for the choice of name is lost in the mists of time. It can cover anything from a potted plant, through a virtual pet, to a magazine. It can be a standard item or uniquely created, or off the shelf. Indeed, all merchandise and all products are potential premiums. Case study 62 at the end of this section details how Procter & Gamble moved from value to price promotion and back again. The basis of premium promotions is competing without tampering with the price.

This chapter looks first at the four main premium promotion mechanics: on-pack offers, with-purchase premiums; free mail-ins and self-liquidators. It is important to understand the different characteristics of these mechanics, but in practice they are blurred by a fifth category – the brand extension promotion.

On-pack offers

The offer

This is a form of premium promotion in which the premium is physically attached to the product. If it is in the product, as with breakfast cereals, it is sometimes called an ‘in-pack’ promotion. If the premium surrounds the product, replacing its normal packaging, as with a storage jar for coffee, it is sometimes called a ‘container’ promotion. An example of a straight on-pack is a magazine covermount – a premium taped, glued or bound to the magazine cover.

How it works

These promotions have similar characteristics to the immediate discounts discussed earlier: they have instant appeal, give an immediate benefit and do not divert resources into handling and postage; they are also quite expensive to run.

Whether it is appropriate to put a premium in, on or around the product depends very much on the nature and size of both the premium and the product, and the characteristics of your packing processes. It would be evidently impractical to include a paintbrush in a tin of paint and unnecessary to go to the trouble of taping a toy to the outside of a cornflakes packet. All things being equal, it is best to put the premium in the product; next best is to attach it to the product. These steps prevent consumers taking the premium but not buying the product. However, there can be considerable costs in creating new shipping containers and in disruption to high-speed packing lines. Retailers can also be resistant to non-standard pack sizes, particularly in the grocery trade. The use of on-pack offers is thus a matter of carefully weighing costs and benefits.

Covermounts are universal in the magazine market. Note that where the attachment is on inside pages, it may also be called a Tip-on, where it is affixed to an advertisement for the product. Ideal covermounts are flat, cheap, attractive and useful – which is why calendars, diaries and books are found on magazines as different as FHM, Vogue and Yachting Monthly. IPC claimed sales increases of 10–15 per cent using confectionery as covermounts – a Chocolate Orange bar on Essentials and low-sugar Canderel on Healthy Eating. In both cases, the products were new to the market, so gave their manufacturers a targeted sampling opportunity. Use of on-pack premiums in the child and teen markets includes pens, make-up and badges on magazines and the extensive use of character merchandise on confectionery. Nestlé uses figurines of Disney characters from the Lion King to Pocahontas in the place of caps on larger Smarties tubes. Once the Smarties have been eaten, the figurine forms part of a collection of characters that the child can keep.

The reusable container form of on-pack offer makes the premium the packaging and the packaging the premium. Familiar examples include glass storage jars with instant coffee.

What to look out for

Immediate free premiums suffer from the cost of giving away anything worthwhile on a low-priced product. On-pack offers are best compared with immediate price offers, and here the advantages really show. They do not devalue the product’s price and they can develop and reinforce brand identity – the brandgram. If you have selected the right item, immediate free premiums can be a very powerful incentive to buy. The premium should be right and the offer cost effective in margin terms.

With-purchase premiums

The offer

These are promotions in which the premium is not physically attached to the product, but is available at the point of purchase. They are sometimes called ‘near-packs’ and sometimes ‘gift with purchase’ (GWP). Examples include a free portable TV when you buy a car, a free personal filing system when you appoint an estate agent and a free carnation at the conclusion of a restaurant meal. These promotions are common in duty-free outlets and at cosmetics counters in department stores, where vanity bags or other items are given away when a purchase of a particular brand is made. They also work well in the pub trade, so long as great care is taken not to overburden bar staff.

How it works

With near-packs, handling is a critical issue because arrangements have to be made for the product to be available at the point of purchase without being taken by those who do not buy the product. For these reasons, near-packs work best in outlets where there is counter service (as in the case of cosmetics counters) or where it is possible and worthwhile to use field marketing staff (as in duty-free outlets – see Chapter 8 for details of field marketing). It is generally not possible to use near-packs in grocery multiples today.

The premium can simply be a one-hit reward, such as a vanity bag with a purchase of cosmetics. It is also possible to include samples of other products in the bag, and to include coupons to be used against the purchase of full-size packs. That way the gift with purchase feeds into subsequent sales.

What to look out for

Near-packs give a direct and immediate incentive to buy one brand in preference to another without devaluing the retail price. The right incentive can add real value to the brand proposition and enhance the brandgram, but they are expensive, involve careful arrangements at point of purchase and reward those who would have bought without the incentive. They are, in practice, restricted to high-margin products.

Free mail-ins

The offer

Free mail-ins are premium promotions in which the customer collects one or more proofs of purchase and sends them in for the item on offer entirely free or at no cost beyond postage. The benefit is delayed and not immediate. It is also subject to action on the part of the consumer after purchasing the item. Unlike on-packs and with-purchase premiums, not everyone who is encouraged by the promotion to buy will send in for the premium.

How it works

The word ‘free’ is one of the most compelling and powerful in our vocabulary. Rightly, it is subject to stringent restrictions. An offer is ‘free’ only if the customer pays nothing to obtain the item other than collecting the requisite number of proofs of purchase or pays only for postage in one or both directions. It is fair enough to say ‘free with 61p for postage’ if that is the cost of the postage, but it is not allowable to say ‘free with 50p for postage and packing’. Promotions that require a telephone entry can be ‘free’ only if a non-premium telephone line is used – in other words, if the promoter is not recouping some of the costs by making profits on the telephone service.

A critical question in the structuring of a free mail-in promotion is the number of proofs of purchase that your customers must collect in order to obtain the item. This is a rule-of-thumb exercise and follows these criteria:

• The number must reflect the typical product category purchase frequency. Note that it is category frequency, not brand frequency: for cat food or a visit to a pub, 10 or more would be wholly reasonable.

• The number must also be influenced by whether or not you are seeking to influence trialists, light users, medium users or heavy users (i.e. the higher the number) of your product or service.

• The level of redemptions is directly proportional to the number of proofs of purchase required. Raise the number of proofs of purchase; lower the redemption level and vice versa.

The level of consumer redemption is naturally affected by the attractiveness of the premium (which you will want to maximise) and the closing date for applications (which you should set so that no products will be on retail sale after the closing date). You must decide whether or not to make any charge for postage and whether or not to offer a Freepost facility for customers to mail in their proofs of purchase. Note that the lower the postage costs are in each direction, the higher the response rate will be. You must also decide whether or not to restrict the offer to one application per household. Free mail-ins can be used as part of a bigger promotional package. Remember, Gale’s offered branded collectables as a consolation offer to those who failed to obtain a £10 instant win (Case study 40).

What to look out for

The operational planning of free mail-ins is critical. Things can go wrong with the handling, with the design of the premium, with delivery dates and so forth. Getting them right is a matter of sound organisation and attention to detail. You will need to organise the system for warehousing the premiums, receiving customer applications, sending out the premiums, banking the postage contributions (if any) and handling any subsequent customer complaints.

Unless you contract out the promotion to a handling house for a fixed fee or take out insurance, you will need to develop a contingency plan to deal with the twin problems of over- and under-redemption. Make an estimate of the likely flow of redemptions over the promotional period, then monitor the flow over the first few weeks to give you early warning of what the final redemption level will be.

If a free mail-in redeems at less than its expected level, you have three options: agree a sale-or-return arrangement with your premium supplier at the beginning (difficult if the premium is specially branded), sell off the surplus to a company specialising in the disposal of unwanted premiums (normally at a significant loss) or keep the premiums for another (but probably equally unsuccessful) promotion.

If a free mail-in redeems at above its expected level, you may be faced with difficulties in obtaining sufficient extra premiums in time. Clearly, your early warning system should help here. It is also advisable to make arrangements for rapid extra deliveries with your premium suppliers at the beginning. Section 35 of the Sales Promotion Code makes it clear that ‘phrases such as “subject to availability” do not relieve promoters of the obligation to take all reasonable steps to avoid disappointing customers’. If you cannot supply the premium you promised, ‘products of a similar or greater quality or a cash payment should normally be substituted’. The best option is to order slightly fewer items than your expected redemption level and have good arrangements for rapid resupply with your suppliers.

Self-liquidators

The offer

A self-liquidator promotion (SLP) is one in which the customer pays for all (or almost all) of the cost of the premium and its associated handling and postage. Such an offer cannot be described as ‘free’. At best, it can be described as a ‘bargain’ when the cost is still below what customers would pay in the shops. A typical example of a self-liquidator would be a ‘Super kitchen knife – just £3.99, plus 61p postage and packing’.

How it works

A self-liquidator works in exactly the same way as a free mail-in, except that the customer pays for all or most of the cost of putting on the offer.

What to look out for

Self-liquidators work if one or more factors are present: you locate a premium at a radically lower price than that at which it is available anywhere else; you create an image for your premium (enhancing the brandgram) that makes it a desirable, full-price item; and the margins in the category are very large. With these exceptions, self-liquidators are an attempt to run an extra benefit offer without actually giving an extra benefit. It is not surprising that customers may give them the thumbs down.

Brand extension promotions

The offer

Brand extension promotions began when companies realised that people would pay high prices for merchandise carrying their brand names. An offer that makes a profit is a particularly attractive form of promotion. It adds to, rather than uses, your marketing budget and turns the normal worry about redemption rates on its head. If each redemption makes you money, the more the merrier! The line between the premium purchased by the company for promotional use, the product manufactured under licence by a third party and the brand extension jointly marketed by both in their mutual interest has become blurred. Film companies, too, license their film names, and products used in films can benefit from such association. It is questionable, when the premium exceeds the cost, which is product and which is premium.

How it works

A brand extension promotion requires the promoter to think laterally about the brand – not just as, say, a car or a bar of chocolate, but as a bundle of values that can be expressed equally well in clothing, bags, watches, albums and magazines. Changing the product by including things in it or creating new products by putting your brand name on them is a promotional activity (see the Preface for the definition).

What to look out for

The critical question to ask yourself if you are considering this type of promotion is ‘What business am I in?’ The danger is that managers become overexcited about what are often marginal profit opportunities in branded merchandise and neglect the marketing of their core product. The Guinness Book of Records began as a promotional premium for Guinness. It has become an entirely self-standing product that many will not even associate with the dark liquid that gave it birth.

Business gifts

The offer

Business gifts are items given to trade customers to promote goodwill. In the grocery trade, they are often known as ‘dealer loaders’ – a reference to their historic use in persuading dealers to load up with stock beyond their requirements in return for an item of merchandise.

How it works

Judging by the level of advertising for clocks, calendars, ties and leather goods in the marketing press, business gifts are big business. A business gift is seen as something that has impact, attractiveness, usefulness and longevity and puts your name as a reminder in front of a business customer. The public sector and many large organisations have rules preventing their staff from receiving gifts of more than token value from suppliers, and these must be respected. However, 80 per cent of businesses are small operations run by their owners and there is no conflict of interest between owner and buyer. When NatWest wanted to encourage start-up businesses to choose it rather than another bank, it teamed up with BT to offer what was, essentially, a consumer promotion (Case study 51).

Examples of companies using items of merchandise in imaginative ways to persuade business customers to do something are Eversheds, who used a highly imaginative premium item to encourage firms to contact it about intellectual property law (Case study 17); Electrolux, who used a tape recorder in a special box to encourage buyers to list a new product (Case study 64); and the use of a single wellington boot to encourage commercial property agents to visit a new development, described in Chapter 4 (Case study 13). The key promotional question, ‘Who do I want to do what?’ therefore applies to business gifts as much as to any other area of promotion.

Approaching business gifts in this way enables you to use them in a cost-effective and focused way. Business gifts can be used to achieve the following:

• ‘We want personnel managers to have our telephone number on their desk at all times.’ Does not mean they will call you, so you may need something else too!

• ‘We want leisure centre staff to carry their personal kit in one of our sports bags.’

• ‘We want shipping managers to put a map of the world on their walls that shows our shipping routes’.

• ‘We want marketing executives to come to our seminar on opportunities on the internet rather than to those of our competitors.’

• ‘We want chief executives to understand that we are at the leading edge of thinking in our business’.

When you are looking for business gifts, there are three sources. The first is to go direct to the many companies that advertise in the marketing press. This can take time, but is the cheapest way of doing it if you know exactly what you want. The second is to use a business gifts catalogue. There are very many of these, often syndicated to local agents. The third approach is to use a premium sourcing house (discussed in Chapter 5). These used to be only really interested in large quantities or wide ranges of items, but that has changed and they will now supply small quantities. The advantage of using them is that they know about the latest technologies and designs and can search out and design something original for your company.

What to look out for

There are rules governing VAT and income tax on business gifts, particularly those given internally. Make sure you have a copy of the latest HM Revenue and Customs advice and are in touch with your Revenue and Customs office if you have any doubt.

Make sure you have also understood the internal rules of the companies you do business with. Violating a rule that puts the recipient of a gift in an embarrassing position is bad business: no one can have as a promotional objective ‘I want my customer to be embarrassed’.

Summary

Premium promotions are the most important way companies can compete promotionally without altering the price. There are four main mechanics – on-pack, near-pack, free mail-in and self-liquidator. The boundaries between them are becoming blurred with the growth of brand extension promotions.

There are considerable opportunities for promoting, enhancing and extending brand value, but companies must be careful to remember their main priorities. Business gifts should not be considered a separate category, but an extension of thinking about ‘Who do I want to do what?’ in the business-to-business field.

There are practical and operational issues to consider in sourcing premiums, and in organising, handling and dealing with redemption rates, further details of which are given in Chapter 5.

Self-study questions

1 What are the pros and cons of on-pack offers?

2 What do you need to take into account if you are planning a near-pack?

3 What contribution can you ask the consumer to make if you are running a free mail-in?

4 How can a promotion extend a brand into new distribution outlets?

Prize promotions

Prize promotions differ from every other mechanic discussed in this book in that the benefit to the consumer depends on whether they win or not. A 20p coupon is a guarantee of 20p off the product specified on it. A free mail-in is an undertaking by the promoter to provide a premium in return for a certain number of proofs of purchase. With prize promotions, there is no such guarantee. Three other characteristics distinguish prize promotions:

• They are offers where the maximum cost can be predicted in advance and does not vary with the numbers who participate.

• A far bigger benefit can be given in a prize promotion than in a promotion where the benefit is available to everyone who participates.

• They are heavily regulated by the British Codes of Advertising and Sales Promotion, by the Lotteries and Amusement Act 1976, by the Gambling Act 2005 and by other legislation that is far from simple to interpret.

There is a difficult balance to be struck in writing about prize promotions. On the one hand, they are staggeringly successful, leading promoters to forget the need for caution. The chance to win a car, a holiday or a substantial sum of money at little or no cost is permanently attractive to consumers. On the other hand, they are a legal minefield. Some promoters thus regard them as a no-go area.

There are five types of prize promotion: competitions, free draws, instant wins, games and lotteries. They are distinct in legal terms, are subject to different legal and code-of-practice restrictions and offer different mechanisms for winning the prize. The distinctions are not immediately obvious, and it is worth spending some time making sure you fully understand them.

1 Competitions offer prizes for the successful exercise of a significant degree of mental or physical skill or judgement. Participants may be required to pay or make a purchase to enter.

2 Free draws make available prizes by distribution of random chances. The selection of the winning ticket is separate and later, not instantaneous with its distribution. No skill or judgement are involved, and participants cannot be asked to pay or make a purchase to enter.

3 Instant wins offer prizes by distributing a predetermined number of winning tickets. Consumers know instantly whether they have won or lost. No skill or judgement are involved, and consumers cannot be asked to pay or make a purchase to enter.

4 Games are forms of free draw or instant win that give the appearance of requiring skill but, in fact, rely on probability. They can be based on brand-name games, such as Monopoly or Trivial Pursuit, or on generic games, such as bingo or snakes and ladders. Because no significant degree of skill or judgement are called for, no purchase or payment can be required in order to enter.

5 Lotteries work in the same way as free draws or instant wins, but participants pay to enter.

These distinctions become clear if we take an example of a prize promotion a local travel agent might put on. The promotion could be headlined ‘Win a weekend break with Sunshine Travel’:

• It would be a competition if it required entrants to identify the capitals of five countries and to complete a tie-breaker. It would be legal to subhead the promotion ‘when you book your next holiday with Sunshine Travel’.

• It would be a free draw if it said ‘Just drop your name and address in the box’. It would be illegal to subhead it ‘when you book your next holiday with Sunshine Travel’. Anyone walking through the door must be allowed to enter.

• It would be an instant win if Sunshine Travel overprinted its booking confirmation with numbers that could be revealed by scratching off a latex panel, and a particular combination of numbers instantly won the prize. To be legal, anyone walking through the door should be given an equal chance of winning.

• It would be a game if the promotion read ‘Play snakes and ladders at Sunshine Travel and win a weekend break’. The game may require the use of a dice and even a certain amount of skill. The rules for a free draw would still apply to it.

• It would be a lottery if the subheading read ‘Raffle tickets available at just 10p each’.

To all intents and purposes, lotteries are a no-go area for commercial promoters. The only exceptions are small-scale lotteries, held at a single event (such as a dinner) with non-cash prizes below £50 in total value, and where the proceeds are entirely devoted to charity.

The other four types of prize promotion are subject to specific rules relating to the closing date, the judging process, the description of prizes, the announcing of winners and so forth. The key features are described in the sections that follow, and in more detail in section 40 of the British Codes of Advertising and Sales Promotion Practice. Anyone running prize promotions needs to be absolutely clear that they follow the complicated laws that govern prize promotions, and the best way to do that is to have your copy checked by the IPM, the ASA or a specialist lawyer.

Competitions

The offer

To qualify as a competition – and therefore for it to be legal to ask for a purchase to be made – the winner must be determined by the skill or judgement shown. There are many forms of competition, the main ones being:

• Order of merit: ‘List the following five items in order of importance.’

• Complete a slogan: ‘Complete this sentence in not more than 10 words.’

• Question plus slogan: ‘Answer these five questions and complete this sentence in not more than 10 words’.

• Spot the difference: ‘Identify 12 differences between pictures a and b.’

• Estimate: ‘Estimate how many packs of this product will fit inside this car.’

• Spot the ball: ‘Mark the position of the football on this photograph.’

• Identify: ‘Identify these famous people from the photographs of their eyes.’

• Be creative: ‘Draw a picture, take a photograph or write a story.’

• Treasure hunt: ‘Use the clues to find the hidden treasure.’

By far the most common type of test is the question plus slogan. It is the easiest to fit into the limited amount of space available to communicate most competitions, the easiest to explain and the easiest to judge. Its benefit over a slogan-only test is that the questions filter the number of slogans that have to be judged.

That said, there is a simplicity to promotions that do not have a filter to reduce the number of tie-breakers. It makes the competition easier to enter for consumers, and can increase participation. Captioning a photograph is a good one-shot test of skill and judgement that many people enjoy entering. The advent of cameras on mobiles and the popularity of the ‘selfie’ make photographs a probable success.

About 3 per cent of the population always enter competitions; 40 per cent do so from time to time. The scale of competitions used to be enormous. Today, competitions are much less frequent, having been replaced in many cases by instant-win promotions and put in the shade by Lotto, in respect of the prizes they offer. Radio stations frequently run competitions that ask a number of simple questions but have no tie-breaker: the winning entry is the first correct set of answers drawn from a hat. These are, in reality, free draws. It is the skill and judgement in the tie-breaker that is the criterion of skill and judgement in the competition as a whole.

Competitions are known for attracting professional competition entrants. These are obviously small in number, but it is wrong to think of a clear divide between professional competition entrants on the one hand and non-entrants on the other. The secret of good design is to make your competition attractive to the 40 per cent who sometimes enter and not just the 3 per cent who always do.

How it works

Competitions tend to have a low level of entry – 0.5 per cent of opportunities to participate would be considered high. They do absorb management and sales-force time; however, this ignores ‘promotional slippage’ – the number who are attracted by an offer but do not enter. Competitions can also be useful ways of drawing attention to a product’s characteristics. The Zantac 75 promotion (Case study 75) used an imaginative competition mechanic for exactly that purpose.

There is a major benefit in running a promotion that has a fixed level of costs and makes limited demands in terms of premium supply. Once you have established the competition prizes and paid for the communication materials, you know the limit of your costs. This is a characteristic shared by other types of promotion and is of particular value when a company’s budgeting procedure makes it difficult to cope with open-ended costs.

There are various guidelines it is wise to follow when designing a competition. Remember that it is not a Mastermind test. There is no point in making the test obscure and difficult. There is, however, considerable purpose in making it fun and amusing for your target audience. Competitions continue to be attractive to children.

Once you have selected the type of competition you want to run, design it so that there is an identifiable winner. A competition that consists of only a series of questions is likely to result in a great many correct solutions. The winner cannot be selected at random, as otherwise it becomes a draw. This is the reason for the common use of the tie-breaker slogan. Creative tests are also capable of yielding a single winner. Every other kind of test needs a method of judging between those who get the correct answer to the estimate, the identification, the order of merit or the questions.

It is essential to set it up from the beginning so that a judge is able to judge. The requirement in a competition is for the exercise of ‘skill and judgement’. These are prone to subjective interpretation. It is therefore important to indicate on what grounds ‘skill and judgement’ will be assessed. This is the reason for the inclusion in tie-breaker instructions of phrases such as ‘in the most apt and original way’ or ‘in the most amusing way’. Any independent judge will want to know the grounds on which the selection of a winner is to be made, so it is sensible to build this into the structure of the competition from the beginning.

When you come to writing the copy, make sure everything that the entrant has to do, from obtaining the necessary number of proofs of purchase to completing a tie-breaker, is as clear as possible. The events that follow, from the judging process through to any obligation to participate in publicity activity, must also be made clear from the beginning. The British Codes of Advertising and Sales Promotion set out what must be included.

The level of response to competitions is strongly influenced by the prizes on offer. The best starting point is to fix the budget available. There are then several ways in which you can think about the prizes you offer.

There is an argument that a single major prize creates the greatest interest; another is that the greater chance of winning one of many lesser prizes is more attractive. There is no absolute answer to this. Partly in response to Lotto, there has been a decline in the conventional system of a complicated and graduated prize structure: a big first prize, three second prizes, five third prizes and so forth. This structure dissipates impact and increases costs. The best solution is probably a single major prize and a large number (perhaps 100 or more) of runner-up prizes. It can be possible to use a variant in which everyone gains an item of some value, for example a coupon for money off future purchases. If you are doing this, be careful not to describe it as a prize. Something that every entrant obtains is not a ‘prize’ but a ‘gift’.

Holidays and cars are tried-and-tested prizes, so be special. Try a twist to a standard prize, for example ‘Get your hair cut in New York’. This combines a good standard prize with a special that (importantly) relates to the item in question – in this case, say a haircare product. Many competition rules specify that there is no cash alternative; however, in the case of the delightful but impractical tropical island, the amount of the cash alternative should be specified up front. If you intend to use the prizewinner for publicity purposes, it is important to make this point in the competition rules and to specify it as a condition of entry.

What to look out for

There are several things to look out for when running a competition, and some require very careful thought. Asking entrants to predict a future event, such as the outcome of a football match, is considered forecasting and is illegal in a competition. Asking them to predict when the first goal will be scored is also illegal in a competition, but on the different grounds that it is a matter of chance. Asking them to predict the weather at the London Weather Centre on the day the match will be played may not be illegal because the weather is a state of affairs and not an event; its legality will depend on whether or not a substantial degree of skill is required. No wonder lawyers are needed!

Judging is an area of administration that causes headaches, particularly if you are faced with thousands of entries. Resist the temptation to treat it as a draw – choosing the first tie-breaker slogan that catches your fancy. You could find a dozen other entrants providing evidence that they had submitted the same slogan. Be clear before you start judging how you are going to interpret the rules. Is ‘100’ two words (‘one hundred’), one word or not allowed because it is not a word? Do hyphenated words count as one word or two? A good guide is to reduce the number of potential winners by making a strict interpretation of the instruction to complete a sentence in ‘12 words or fewer’. Being strict also protects you against those who may complain that, if they had known that ‘words’ meant ‘words or numbers’, they would have submitted a different entry.

Slogans are often required to be ‘apt and original’. There is a trap for the unwary here. If two entries use the same slogan, neither can be the most original, for how do you choose between the two? Slogans that echo the long-established advertising of a brand (‘I love Cadbury’s Roses because they grow on you’) are unlikely ever to be original, however flattering they may be to the advertiser.

In a judging session, use a team of eight people. The first stage is to take a pile of entries, choose the ones you like and pass those you have rejected to your neighbour to do the same. When the process has been carried out by five of the eight, that is a majority. The short-listed entries have been short-listed by a majority. The second stage is to go through all the individual favourites and reverse the process – putting to one side any that any single judge dislikes. These two stages will have produced a crop of entries that could all be winners. The third stage is to choose the winner or winners by asking the question ‘Is this entry better than that?’ This is done by all the judges together. If you need to select one winner, take the entry at the top of the pile as the provisional winner and read out the slogan. Take the next entry, read the slogan and ask ‘Is it better?’ If not, discard it. If it is, it becomes the provisional winner. The process continues until all entries that have reached stage three have been reviewed, and the last remaining provisional winner becomes the actual winner. If there are 10 winners to be selected, follow the same process, but select the 10 entries at the top of the pile as provisional winners. If any subsequent entry is better, discard the least good of the 10 and replace it, continuing until all entries that have reached stage three have been reviewed.

The Code of Practice requires that both an expert and an independent judge are involved in the judging process. They can be one and the same person, for example a teacher for an art-related competition or a travel agent for a travel competition. They can prove a help in managing the judging as well as demonstrating that the process is fair and seen to be fair.

A large number of entries is a reasonable test of the attractiveness of a competition, but not of its promotional effectiveness. The number of entries can be quite unrelated to the promotional objectives. Attracting entries depends on presenting the competition in the most compelling way for your particular audience – offering a free or low-cost means of entry and making the competition easy. Clever word games will be attractive to some groups, if not to most. It may be, however, that your promotional purpose is trade related, for example to gain display. Once that is achieved, the number of entries makes no difference at all. The question ‘Who do I want to do what?’ discussed in Chapter 4 and implemented in Chapter 12 is the basis on which you can determine the style of competition you use and how easy and attractive you make it to enter.

Free draws

The offer

In a free draw, winners are determined entirely by chance and it is not permissible to require any payment or proof of purchase from entrants. Free draws differ from instant-win promotions in that people do not know immediately whether they have won or not. Second stages in free draws vary, and include waiting until the closing date to see if your entry is selected, posting a set of numbers in to a handling house to be checked against a predetermined list of winners (a practice much favoured by direct-mail magazines) and hoping to find the matching half of (for example) a banknote on your next visit to the outlet that hands them out.

Why should promoters use free draws rather than competitions, and lose the ability to ask for a proof of purchase? What is the advantage of issuing prizes at random to people who may never be customers? There are four reasons for using free draws:

1 They can be highly effective in generating interest, awareness and participation. In particular, free draws are a strong traffic builder for retailers and a proven readership builder for newspapers. The absence of tie-breakers means that free draws attract up to 20 times as many participants as do competitions.

2 They are easy for the promoter to administer, easy for consumers to enter, involve a fixed prize fund and are a quick and easy way of building a customer and prospect database.

3 They can involve an implicit encouragement to purchase. This needs to be treated carefully. Newspapers invariably state (as they are required to) that consumers can check their tickets without buying the newspaper; petrol stations invariably state (as they are required to) that tickets are issued to all those who visit the petrol station, not just those who buy petrol. This is the ‘plain paper entry’ route. In practice, between 80 and 90 per cent of those who enter also make a purchase.

4 They allow substantial opportunities for creativity. In comparison with competitions, which are the main alternative for those seeking a mechanic with fixed costs, free draws require far fewer rules and do not require questions or tests, but do allow free rein for games of every kind.

Free draws share some of the features of competitions: a fixed prize fund, a range of prizes and the need to make conditions of entry clear. These points are therefore not repeated here. This section looks at the characteristics particular to free draws, those relating not to the offer itself but to how it works.

How it works

The simplest way to operate a free draw is to have a pile of cards on which consumers can write their names, addresses and any other information you want to collect from them; a box for them to make their entries; and a declared date on which the winner will be drawn from the box. For business customers, it is even simpler – simply provide a box into which they can drop their business cards. When you make the draw, it is important that it is done by an independent person and that it is done with witnesses so it is seen to be independent.

Another way is to issue consumers with a card printed with a unique set of random numbers. These numbers are openly displayed and not covered by latex. The winning numbers are announced separately – on a board in a shop or in the pages of a newspaper. Consumers have to check the winning numbers against the number of their card and, if the numbers are the same, contact the promoter to claim the prize. Most newspaper cards operate in this way, with winning numbers displayed daily in the paper. There is a clear advantage of a double hit – first obtain the card, and then check the winning numbers. Note that, to be legal, consumers must have a no-cost way of checking the winning numbers.

Predetermined number cards are a variant on the random number system. Each card is uniquely numbered but, instead of the winning numbers being announced for consumers to check, cards must be returned to the promoter to be matched against predetermined winning numbers. Direct-mail operators often use this format because it encourages consumers to respond to direct mail.

A fourth method is to distribute a series of different cards that have to be matched together to create a set. Only a limited number of the cards needed to complete the set are distributed. Once the set is complete, the win is instant. Petrol stations have used this format to good effect with matching halves of banknotes. The left-hand halves were plentiful and right-hand halves very rare.

These are very much the bare bones of each type of free-draw offer. Actual free draws can be very complicated and can have characteristics of two or three of these types. For example, you can have an instant-win card that is also (when mailed in) a predetermined number card and gives the opportunity to match and complete a set. Numbers can be replaced with symbols or words and a whole range of other variants introduced.

What to look out for

Out-of-the-hat draws are perfectly straightforward. They are regularly used by retailers, motor dealers, at exhibition stands and by companies holding an exhibition as a traffic builder, as a way of capturing names and as a focus of attention. As long as the guidelines in the Code of Practice are followed, they present no terrors. Indeed, they are one of the fastest and simplest forms of promotion to organise, and highly attractive on those grounds alone.

Other types of free draw need careful attention to the mechanisms that prevent fraud and ensure an equitable distribution of winning tickets. You need to use a security printer to make sure that you do not have multiple winning tickets in circulation. A means of verifying the winning ticket via hidden but unique marks is also advisable. You need to carefully seed the winning tickets so that they do not all turn up in the same outlet at the same time. Also, you need to ensure that there is no one involved with the distribution of winning tickets who can take advantage of his or her knowledge. A good way of doing this is to ask an independent person to do the seeding. That way you are also protected if you are publicly accused of fixing the scheme.

All these factors are manageable if you do three things. First, use a specialist printer (discussed in Chapter 5). Second, consider the use of promotional insurance (also discussed in Chapter 5). Third, make sure your copy is checked by the ASA, the IPM or a specialist lawyer. A good promotion agency can help you with all of this as well. These three golden rules for successful prize promotions apply even more strongly to instant wins.

Instant wins

The offer

Instant wins have been around for a number of years in the form of scratch cards overprinted with latex or with perforated windows to hide the winning or losing combinations; or the winning symbol is inside a can, cap or carton; or the code can be checked on a website. Only a limited number of winning cards or cans are distributed, and consumers know instantly whether or not they are a winner. There has to be a way for free entry. Promoters are cautious about releasing figures for the proportion of free entries they receive, but a figure of 10–0 per cent would be considered reasonable.

How it works

Instant wins work best on low-cost, high-volume products that have relatively low product differentiation. This enables large prizes to be offered and the possibility of winning the prize to be a major factor in the purchase decision. A decline in response to instant-win promotions is seen each time it is used. This is a standard promotional experience. It has been experienced by Camelot, with its ‘Instants’. To continue working, the instant-win principle needs constant refreshing with new formats. Among the best people to advise on new ways of delivering the same concept are the specialist printers of scratch cards and games discussed in Chapter 5.

What to look out for

The considerations that apply to free draws also apply to instant wins, notably in respect of security and seeding. An additional issue to take into account is the possibility that the top prize is won early on in the promotion. From then on, consumers are, in effect, being misled about the possibility of winning. The same applies if the promoter keeps back the pack containing the top prize until later on. It can be advisable to have two or three big prizes, though this militates against the attractiveness of the mega-prize.

Games

The offer

‘Games’ in a promotion are anything from a newspaper fantasy football league, a word search with prizes or a scratch-off game of Monopoly, to predicting the temperature on Christmas Day. Some require proofs of purchase and some do not. They are distributed variously on-pack, door to door, in advertising and as free-standing cards. Everyone knows what these games look like, and they can be hugely successful. They are really versions of a free draw, instant win or competition.

How it works

Most people think of a game as something that involves skill. In fact, English law defines a game of skill very restrictively. Most games, including complicated card games such as whist and bridge, count in law as games of chance. Only in such games as duplicate bridge, chess, darts and snooker does the element of skill predominate over the element of chance. If it is a game of chance you cannot ask for payment or purchase.

Don’t people pay to enter games of chance such as bingo, roulette and the football pools? Yes, they do, and these are regulated under the Gaming Act 1968, Gambling Act 2005 and other legislation. The general purpose of that legislation is to restrict the availability and attractiveness of gambling and to subject it to taxation and detailed regulation.

Games used in a promotion are generally of two types. They are a form of instant win or free draw dressed up as ‘playing’ a version of Monopoly, Scrabble, Trivial Pursuit, Ludo or snakes and ladders. Alternatively, they are a form of competition dressed up as ‘playing’ a word game, predicting a future state of affairs or taking part in some other test of skill and judgement. What they are not (because that would be illegal) is the sort of game that the Gaming Board regulates. It follows that ‘games’ do not really exist as a separate category of prize promotion; rather they are a version of either a free draw/instant win or a competition.

This distinction has been tested in law. In 1995, News International won a case against Customs and Excise, which wanted to charge it pool betting duty of 37.5 per cent or general betting tax of 7.5 per cent on its ‘fantasy’ promotions. These varied from ‘fantasy fund manager’ in the Sunday Times to the ‘Dream team’ in the Sun and two cricket competitions in The Times – a classic case of versioning the same concept for the different interests of different readers. Three of the four promotions operated by premium telephone line. The crucial question was whether the payment that this involved amounted to a bet. If it did, News International would have to have paid up. The tribunal held that it did not.

What to look out for

If you are going down the free-draw/instant-win route, games are in practice a clever and interesting way of dressing them up. All the considerations given in the sections on those two mechanics apply. Above all, ensure there is a free-entry route that is genuine and realistic. The opportunities for a great promotion rely on your skill and ingenuity in devising a game theme that is original, simple and exciting.

If you are going down the competition route and requiring a proof of purchase, the considerations in the section on competitions apply. Be careful not to ask for any payment other than the proof of purchase. It is here that you can take advantage of promotions that are based on probability. These are discussed in the next section.

Probability promotions

The offer

Golf clubs have long enjoyed ‘hole-in-one’ competitions where an enormous prize is made available in the unlikely event of a hole-in-one being achieved. The possibility is insured against by specialists who have calculated the probabilities and are prepared to underwrite the risk for a fee. Exactly the same principle can be used in promotions that require a series of 10 items to be listed in order of priority or the temperature on a given day to be predicted.

How it works

The basic form of this offer requires the entrant to list a number of items in order of importance, such as the world’s best cricketers or the factors that make for a good holiday. The ‘correct’ solution is chosen in advance by an independent judge and placed in a sealed envelope. Skill and judgement must be required on the part of those entering. It would be wrong, for example, to ask entrants to list a series of numbers in order of importance, because that would require only guesswork.

Who can objectively place in order of importance the all-time best cricketers or the factors that make for a good holiday? Objectively, no one can, in the sense that they could list the countries of the world in order of size or population. However, the judgement of an expert amounts to an objective test. It is fair enough, therefore, to ask a cricketing journalist to determine the all-time best cricketers and a top travel agent to determine the list of the factors that make for a good holiday and to use your expert’s answer as the correct solution.

The basis of a promotion in which, say, 10 items are listed in order of priority is the probability (or unlikelihood) of anyone listing the set of items in a particular order. The chances of so doing depend on the numbers of items to list, and these are as shown in Table 10.1.

Table 10.1  Probabilities of listing items in a certain order

Number of items	Probabilities of being right
2	1 in 2
3	1 in 6
4	1 in 24
5	1 in 120
6	1 in 720
7	1 in 5,040
8	1 in 40,320
9	1 in 362,880
10	1 in 3,628,800
11	1 in 39,916,800
12	1 in 479,001,600

The exponential nature of the increase is obvious. If there are 10 items to list in order of importance, the chance of someone getting it right is 1 in over 3.6 million. It should be possible, therefore, to risk offering a prize of £1 million for the inverse of the probability – just 28p. The risk in letting 1,000 people enter is around 1,000 times greater, but should still cost only £278. Of course, an insurance company needs to cover its administrative costs, security, reinsurance and the possibility of more people entering than expected. The normal minimum for insuring a £1 million prize is £25,000. A rule of thumb for working out the insurance cost is to divide the expected number of entrants by the odds, multiply by the prize value and double the resulting number.

Increasingly imaginative ways are being found to integrate high-value prizes with high odds and lower-value prizes with lower odds. For example, an offer with a football theme could promise a huge prize for getting three questions right:

• the number of goals in a match (odds 4 to 1);

• how many players will be booked in the match (odds 20 to 1);

• the time in minutes before the first goal (odds 90 to 1).

The odds of getting all three questions right are several million to one, but you could offer a voucher or merchandise prize to those getting one or two of the questions right. You could also risk – and insure – the possibility of offering more than one huge prize on the basis that fewer than half the people who win a prize actually check that they have done so.

What to look out for

Promoters using this mechanic should remember that these offers can produce substantial negative publicity and give an impression of sharp practice. Case study 73 shows how Faber & Faber dealt with this possibility by offering a prize of such high value and high odds that it was unlikely anyone would win.

Particular care needs to be taken with promotions that involve predicting the future. The distinction between predicting an event (illegal) and predicting a state of affairs (legal) needs to be borne in mind if a competition format is being used and a proof of purchase is asked for. Note that, if no proof of purchase is required, both are legal. In all these cases, a specialist insurer, such as PIMS-SCA (see Chapter 5), can quote a price for insuring the prize you want to offer. It can also work the calculation backwards, telling you, for example, what prize and what odds you could offer if you had (say) £30,000 available to pay for the insurance and a reasonable estimate of the likely number of entrants (how these firms work is described in Chapter 5).

The golden rule, as in any other promotion, is to think about the people who will enter the competition as being people with whom you want to build a long-term relationship. People don’t mind high odds – they are high enough in Lotto – but they do mind being misled.

Summary

The five types of prize promotion each have their strengths and can be used to achieve different promotional objectives. It is vital to be clear about the differences between them. They are among the most powerful promotional techniques, but are subject to quick wear-out.

The administrative rules are well covered in the codes of practice and should be followed in detail. Copy should always be checked, and insurance is often a good idea.

Prize promotions offer particular opportunities for creativity and have the major advantage of largely fixed costs.

The law in this area is particularly complicated and uncertain. Parliament has legislated separately for gaming, lotteries and betting, and in none of this law did it specifically address the needs of promoters.

Prize promotions are an enormously successful promotional device, as major national newspapers from The Times to the Sun have discovered. Like them, you should take specialist advice before using all but the simplest forms.

Self-study questions

1 What are the main differences between a competition and a free draw?

2 What types of prize promotion do games actually consist of?

3 What sorts of lotteries are legal for promoters to run?

4 How can companies offer a £1 million prize without having £1 million to give away?