Creating win-win trade promotions:: Theory and empirical analysis of scan-back trade deals

Manufacturer trade promotion spending is second only to cost of goods sold as a profit-and-loss item, yet manufacturers often lose money on these deals as a result of forward-buying by retailers. The search for more effective forms of trade promotion and the availability of scanners at cash registers has led to the emergence of a new type of trade deal-the scan-back-that gives retailers a discount on units sold during the promotion rather than on units bought. We develop a theory to compare retailer pricing decisions and profitability under scan-back and traditional off-invoice trade deals. We show that, when the terms of the trade deal are identical, retailers prefer off-invoice trade deals and manufacturers prefer scan-backs. Manufacturers can, however, redesign the scan-back to leave the retailer weakly better off and leave themselves strictly better off. Using proprietary data from the beverage category, we conduct an empirical analysis and find that during the promotion period scan-back trade deals, relative to off-invoice deals: (1) Do not cause excess ordering and (2) generate higher retail sales through lower retail prices. Implications for researchers and managers are discussed.