A Quick Outline of the Promotional Planning framework

23 Jun 09

For some time those seeking to measure promotions have talked about efficiency and effectiveness. However I have never seen a universally accepted definition of these terms, and in my book I set out a number of ways of measuring each. It seems logical to me to use the term efficiency to relate to the overall promotional program – a period of time that is reasonably long, and the inclusion of all promotional costs for a number of promotions compared to the total sales over that period. On this basis, efficiency is a measure of the average cost of trade spend. To relate this to a single promotion, the promotional costs would be expressed as a percentage of the sales on that promotion. Individual promotional efficiencies would be related to the overall promotional program efficiency in terms of the frequency with which that promotion is repeated. To use an example, if a single promotion has an efficiency cost of 20% to sales, and the frequency is such that 30% of the total sales in a period are on a promotion, then the overall efficiency will be 6% of sales.

Effectiveness on the other hand would seem to relate to any gain in sales achieved by the promotion, and be measured in terms of the costs to achieve that gain. A simple theoretical model using real world price/volume relationships indicates that efficiency and effectiveness can have a minimum point – that there are optimum price points. It also indicates that both measures reach a minimum at about the same price point. This suggests that if you optimise effectiveness you will optimise efficiency at the same time. However my own experience indicates that this is not the case, and indeed I have now developed a promotional evaluation system which proves this to be the case. If effectiveness and efficiency are independent, there are four possible states for a product on a promotion.

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