CPG Chatter

Several months ago I spoke at an industry conference regarding best practices in trade promotion management. I discussed the nature of collaboration between Manufacturers and Retailers and proposed that the goal of such collaboration was to create a “win-win” scenario between both parties.

One of the audience members challenged me during this point of the presentation, citing, in his opinion, that trade promotion negotiations with Retailers is a zero-sum game. Meaning any gain by a participant is equally offset by a loss.

Let’s explore this further.

Game Theory goes back to the time of Plato and remains a popular educational topic at the college level. How does the zero-sum game theory work when applied to trade promotion negotiations?  For every new promotion that is secured the Manufacturer would also lose a corresponding event either at the Retailer or potentially elsewhere in the marketplace.  Thus, any gains from the Manufacturers’ efforts will eventually be offset by lost opportunity down the road.  So while your collaborative efforts seem to be achieving its initial goal, zero-sum game theory contends that the Manufacturer will eventually give back the gain. Obviously, this is a troubling concept.

Now I suppose if you look at the industry in aggregate, including ALL Retailers and Manufacturers, one could make the argument that there is a zero-sum game.  But the Manufacturer and the Retailer who are collaborating don’t have to be the ones who give back the gain.  By focusing on profit objectives, variable-rate funding allows a Sales Manager to pursue new opportunities or re-engineer a Manufacturer’s investment to grow your sales and maintain your profitability rate, but also increase the investment with the customer.

Now, this increased investment with the Retailer does not necessarily need to come at the expense of a competitor.  Of course, in some instances that is a reasonable tactical objective — to not only gain a new promotion event, but also take one away from a competitor.  However, dispositional negotiations are very challenging to win with the Retailer.  There are many factors influencing that Retailer’s decision to promote certain products that you may not have full visibility to and therefore will not be able to negotiate on.

Any economic or social scientist would be proud to know former students are stretching the strategic thinking of today’s leading organizations by bringing game theory into the conversation.  We hear so much talk about collaboration, but what is the real impact? Interestingly, a “CPG Year in Review” survey conducted by TradeInsight revealed that almost 40 percent of Manufacturers felt that they had improved their relationships with Retailers in 2011.  But at whose expense, I wonder?