Promoting Promotions

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You can chose the adjectives and its intensity for your respective Governments.

Petrol (Gasoline) Price computation - For all those who happily pay without questioning.

Compiled by yours truly with numbers as of date from original sources

As on 12th Jan 2016.

INBOUND COSTS
-Average Purchase Cost of Crude Oil (CIF Bombay) + Clearing and Port Handling charges + Barrel charges.

-----Per Barrel of 159 Liters ----------- $ 37 USD
-----Per Liter in Rs (rounded up)____₹ 15.35 / Lit

-Add Customs Duty on Crude Oil @ 3% (Jaitly's 2015 budget) - ₹ 0.50 / Lit

-Temporary port storage and local transportation to Refinery- ₹.1.50 / Lit
(Most refineries are close to Port or Well).

Total Landed Cost of Crude Oil at Refinery = ₹.17.35 / Lit

REFINING COSTS
-Refining costs excl. Refiners Margins - ₹ 4.00 / Lit
(Conservative estimates incl. the amortized capital costs of refineries + cost of finance. Industry average, can always be disputed)

-Other Transportation and handling Costs -₹ 2.00 / Lit
(though most are close to port or well, oil refiners buy and sell crude or refined oil between them all the time for capacity utilization purposes)

-Refiners Margin Notional - ₹1.50 / Lit

Total Costs of Refined Petrol at your local refinery(rounded up) - ₹ 28/Lit

OUTBOUND MARKETING AND SELLING COSTS
-Outbound (built in) Transportation Costs (paid by Oil Marketing Companies) - ₹.2.50 per Liter

-Oil Marketing Company Margin - ₹1.50 (e.g. HPCL but varies) per Liter

-Landed BASIC cost at Dealers Pump - ₹ 32 / Lit

CENTRAL GOVT. TAXES (Jaitley's Pocket as of Jan 02, 2016))
-Central Excise Duty - ₹ 19.73/Lit (works out to 62 % of Basic cost)

-Cost before VAT, Retail Margins and other local taxes - ₹ 51.73 /Lit

RETAIL MARGINS (Pockets of Pump Owners)
-Dealers Margin (Pump) - ₹ 2.25 Per liter (Average does not vary much)

-Cost before VAT at Pump (rounded up) - ₹ 54.00 / Lit

STATE GOVT. TAXES (pockets of misc. feudal lords)
-Value Added Tax - Rs. 8.32/Lit (26% of Basic cost)

-Other surcharges (e.g. in Bombay) - Rs. 1.00/ Lit

-Local city taxes (e.g. Bombay, Pune, also called LBT)) - Rs. 2.00/Lit

Most CPG, Foods and Consumer Durable companies seem to run perpetual promotions. So do some services firms - travel, insurance, loans, investment products etc. This could be a generic or targeted ad campaign in different media, promoting special schemes or SKU’s aggressively in a region, launching a NEW AND IMPROVED promotional SKU or temporary price discounts to end customers and/or trade.

This is all good as long it adds to the top line and bottom line discernibly end of the year. Everything is excused.

Promotions are a necessary evil. The evil being you spend more to promote the promotions on top of loss of margins. A ‘30% extra’ promotional pack for same price as a ‘regular’ pack also incur a 30% extra everything costs– production, transport, storage, over-heads. The sales too need to be perhaps 100% or more for the same returns as before. Buy one get one is perhaps just recovering the costs if you sell 5 to 10 times the ‘regular’ volumes. Volume discounts on purchase? – Not necessarily commensurate here at any node.

To complicate things, everybody in the supply chain may be running their own promotions. E.g. a retail store may run their own promotions based off sellers promotions. Bundling a pack of noodles with a pack of cookies. Such promotions are not always collaborative. Demand ‘signals’ may be not apparent if the billing is not based on standard article numbers but not everything out there has an article number that means the same for everyone in the supply chain.

But I struggle to ‘model’ promotions and promotional effectiveness in the context of estimating demand. In theory a promotion is a non-recurring event and any additional demand expected in a period because of a PLANNED promotion should be added to the regular ‘de-promotionalized’ demand forecast. But the reality (for all good reasons) in most environments is not amenable to such simplistic ‘modeling’

How do we really know how much MORE WAS really sold because of a named promotion?
What if there are multiple ‘promotions’ going on? Some specific to a ‘brand’. Some specific to SKU’s. Some regional. Some national.
What about independent trade promotions? How do you get ‘signals’ of manipulated SKU’s in the trade? (Change of form fit or function)
For how long is (should) a promotional SKU really be considered a Promotion SKU?
What is the target basis of promotion? – Brand nationwide, a Brand locally, a product regionally? A type of households?
Should I really ‘create’ a promotional SKU for a bundle of some ‘regular’ products?
How WELL can you explain the fact that promoting a promotional SKU is eating into the demand of one or more related or unrelated SKU’s from your basket of products (cannibalization isn't that apparent)?
How is competition's promotion depressing (or aiding) your promotional sales.
Can we come up with a meaningful regression of promotions over demand?
Should price discounts to trade be called promotions?
What price differential (Delta) should make for ‘Extra’ Promotional SKUs?
Below is a ‘funny’ promotion I encountered just the day before. On the left is a 25 bag tea box for Rs.50. On the right is a 100 bag pack for Rs.120. The latter is not marked as promotion anywhere. Neither by the manufacturer, nor by the seller but it is order of magnitude cheaper. In this case the retail shop owner ‘suggested’ that I am better off buying the bigger box because I have been ALWAYS buying the smaller one once a week.

Should the maker (Brooke Bond) mark the bigger pack as a Promotional Pack?

Do they have any other incentive is doing so?

With the smaller pack, they are perhaps targeting specific customer groups who buy loose tea. A sort of ‘entry level’ pack

These are important questions and I don’t know what else transpired in the minds of product managers at Unilever is deciding to do what they did. The point is the differential here is TOO LARGE on ‘value terms’ for the consumer.

Promotions business is complicated not necessarily by design but by series of actions with different motivations that are soon forgotten in most firms. They are not recorded in their systems. Many a times a promotional SKU in the systems does not have a 'tag' that says it is a promotional SKU. Atleast that is what I gather and struggled with often. Consequently, the end solution for promotional demand estimation is 'unscientific' and approximate.

Can we do a better job here ? Possible with some developments of many standard tools out there, most of which lack the capability to measure, track and model the effectiveness / elasticity of demand but this is no easy job.. effort wise to do a good job.