In this article, learn about:
Common types of trade promotions used in retail
How allowances work and why they are used
The benefits of trade promotions for suppliers, retailers, and consumers
Retailers and suppliers have a shared mission: sell more products and keep shoppers coming back. Trade promotions and allowances, also be referred to as trade spend, are levers they pull to make that happen. Whether it’s a temporary price drop, an in-store display, or sharing advertising expenses, these tools help retailers boost traffic while giving suppliers visibility and sales momentum. Let’s take a closer look at what these terms really mean and why they’re essential to retail success.
What Are Trade Promotions?
In their simplest form, trade promotions are an agreement between a supplier and retailer to offer a temporary discount or promotion on a product to consumers. The goal of trade promotions is to increase sales and consumer demand. A key differentiator of trade promotions from other promotions is that the cost of the trade promotions is covered by the supplier/manufacturer, not the retailer.
Common Types of Trade Promotions
Trade promotions come in many forms and may have different terminology depending on the retailer, but some well-known types are:
Price Promotions: Temporary price reduction given to the retailer from the supplier to encourage increased purchasing. This also enables the retailer to pass savings on to the end consumer. Some examples of price promotions include:
Off-Invoice Discount: When a supplier deducts the amount on an invoice before sending the invoice to the retailer.
Bulk Discount: When a retailer is given a better purchase rate to buy products in bulk.
Point-of-Sale (POS) Promotions: These types of promotions often take place at or near checkout to increase visibility and encourage impulse buying. Some examples include:
Endcap Displays: Products featured at the end of aisles for increased exposure to store customer traffic.
Impulse Lanes: An area near checkout to promote impulse and last-minute purchases.
- Coupons and Rebates: With this type of promotion, the supplier/manufacturer offers the end-consumer a direct financial incentive to buy a product.
Samples and Incentives: These are promotions that are designed to encourage first-time buyers.
Product samples: Offering customers the chance to try a product before buying. Sam’s Club in-store samples are a great example of this.
Buy-one-get-one-free offers: Encourages customers to purchase more than one item or multiples of an assortment when they may have only chosen one.
Allowances: Incentives or discounts a supplier offers directly to a retailer to support promotional or operational costs.
Trade promotions drive sales by not only offering the consumer a deal, but also by increasing product visibility, encouraging shoppers to buy a brand they may not have considered before, and even prompting the shopper to share the deal they found with friends and family.
Related Reading: How Do Trade Discounts Work?
What Are Allowances?
Allowances refer to the specific payments or discounts that a supplier gives the retailer for marketing, promotional, or operational activities, which are typically outlined in the partnership contract. It’s important to note that some retailers may have different terminology for these types of agreements.
While some allowances may be for trade promotions, they can also be used for things like funding in-store marketing, compensating for freight or warehousing costs, or covering product handling and returns.
For example, Walmart utilizes allowances for a variety of business activities:
Promotional Allowance: Usually used for certain products for a specified period of time.
Advertising Allowance: Negotiated to defray advertising costs.
Warehouse Allowance: Eliminates work and expense required for Direct Store Delivery (DSD) shipments.
Freight Allowance: Used to compensate for transportation costs.
Swell Allowance: Negotiated to help defray the costs involved in handling defective goods.
Related Resource: Understanding Walmart Allowances and Trade Promotions
Amazon, on the other hand, has a program for these agreements called Amazon Co-Op. This program encompasses a variety of agreements to help Amazon vendors promote their products and raise brand awareness by increasing traffic. Similar to Walmart’s allowance strategy, Co-Op agreements can also be used to cover the cost of things like freight and damaged goods.
Related Reading: What is Amazon Co-Op?
Put simply, allowances are a means for retailers and suppliers to share the cost of promoting and managing products, with the ultimate goal of increased sales and operational efficiency for both parties.
The Benefits of Trade Promotions and Allowances
The beauty of trade promotions and allowances is that they have the opportunity to benefit all parties involved—from the supplier to the retailer and even the end consumer. When planned strategically, these strategies can improve profitability, strengthen the supplier/retailer relationship, and even create more loyal shoppers, who enjoy the benefit of lower prices.
For Retailers
For retailers, trade promotions and allowances offer the chance to boost sales, reduce financial risks, and provide shoppers with a positive experience. Retailers enjoy the benefits of:
Increased sales velocity: Promotions are a powerful tool for increasing sales of certain products and encouraging shoppers to buy more in general.
Marketing and merchandising support: Suppliers cover costs for in-store displays like endcaps and product features.
Collaboration with suppliers/manufacturers: Building promotional plans with suppliers/manufacturers can deepen business partnerships and drive mutual success.
Financial savings: Allowances can help offset costly operational costs like transportation, damaged products, returns, etc.
For Suppliers
While suppliers and manufacturers may be covering the expense of trade promotions and allowances, these strategies are a powerful lever to increase product visibility in stores and build long-term relationships with retailers. Some benefits include:
Increased visibility: Standing out against competitors who aren’t running promotions or who offer very similar products.
Moving more inventory: Turning over products more quickly with customers incentivized to buy more with the promotions.
Building customer loyalty: Shoppers love to get a good deal and often become loyal to brands that they believe provide the most value.
Strengthening relationships with retailers: By sharing costs with retailers, suppliers signal investment in the partnership.
For Consumers
Although end consumers may not even be aware that trade promotions and allowances are taking place, they often get to enjoy the benefits, such as:
Financial Savings: Keeping more money in their pocket on products they need or want.
Product Discovery: Trying or discovering new products at a lower cost: Feeling more inclined to try a new product or brand because it offers a lower price than alternatives.
Improved shopping experience: Feeling excited and valued as a customer by receiving a good deal on a product.
In summary, trade promotions and allowances are a powerful means of driving mutual success for suppliers and retailers. When executed strategically, they not only boost sales but also strengthen partnerships, improve brand visibility, and create value for consumers.
