Why small to medium-sized companies need promotional risk management

Small companies need to learn from the mistakes of larger businesses who don't pay attention to promotional risk management.

It might sound daunting, but promotional risk management is what protects you from the daunting.
For companies in 2017, not having a Plan B could mean potentially throwing away all the hard work you and your team have put in to establish yourselves over the years. While large companies like Hoover and Pepsi can bounce back from disaster (more on these later), it’s the small to medium-sized companies that need this form of risk management the most.

Financial security should be high on any company’s agenda, and can be the difference between “a bad day at the office” and there being no office to go back to. That’s where promotional risk management comes in.

What is promotional risk management?

To better understand promotional risk management, it’s best to define what risk management is. It speaks for itself, but on a fundamental level it involves a group of highly-trained specialists assessing the number and severity of potential risks tied to any financial decision. The process often looks like this:

Organising a control group. These are used to test potential risks on. While these can consist of real people, they are generally fictive and based off the experience of the company and/or the risk management team.

Testing on the control group. The risks are tested on the group and the results are reviewed and analysed. After review, any anomalies and inconsistencies are identified as potential risks.

Confronting the risk. In this step, the team would focus on an individual risk and identify the damage it could potentially cause to the company. Singling an individual risk out improves objectivity and often results.

Managing the risk. The final step involves finding solutions to either minimise or eradicate the risk.

Promotional risk management, then, is the application of this on a promotional campaign. When competitions can involve investments reaching the high end of six figures, this type of security is vital. One example of what it involves is making sure that there is no possible way that more than one person can win a competition, if the company wants only one person to win the competition.
This might sound ridiculous to you. Maybe you’re thinking that there are no companies, let alone big companies, that would make this mistake. Are Pepsi big enough for you? Let’s take a look at what happens…

When companies don’t use promotional risk management

In 1992, Pepsi ran a competition where they offered 1 million pesos to anyone in the Philippines that could find a bottle cap with “349” printed on it. Simple enough.

What followed, however, was far from simple for Pepsi; they mistakenly printed half a million caps with that number on. The company was launched into a PR and financial nightmare after being unable to fulfil their promise to the customers. Bottling plants and trucks were attacked by disgruntled people that had been promised 1 million pesos, and after all the legal battles and negative PR, they ended up spending close to 200 times (adjusted for inflation) what they originally planned to pay out.

Another company that tragically dropped the ball with their promotional campaign was Hoover. In an effort to get rid of surplus stock, they ran a promotion where customers that spent £100 on their products would get a free airline ticket in return. Everyone wants their competition to be popular, but without promotional risk management, there is such a thing as too popular.

While it did help with their surplus stock issue, they were left with far bigger problems when too many people took them up on the offer. As they couldn’t fulfil their promises to every customer, the company was dragged into legal battles that lasted as long as six years in some cases. The original good intentions of the plan ended up only dragging their reputation through the mud, and even cost the company close to £50 million.

Why small to medium-sized companies need promotional risk management

The reason why you still recognise those brand names just mentioned is because Pepsi and Hoover had the capital to stay afloat after their misfortune. PepsiCo may have been in hot water recently after the Kendall Jenner fiasco, but the point is there was a PepsiCo to get in hot water.

Small to medium-sized companies need promotional risk management because they won’t have the capital and resources Pepsi had in 1992 and currently have in 2017. What they paid out may only be a fraction of their net worth when looking at the big picture. However, it could still dwarf what a small to medium-sized company could afford to pay without absolutely devastating their business.

PRM also allows for better budget control, as it often deals in concrete numbers and therefore can help you devise a more accurate budget. On top of that, it also gives you more room for creativity.

Over-redemption insurance, one aspect of promotional risk management, provides a financial safety net to fall back on; so your imagination can run much wilder than before when thinking up a competition.

As is the case with a lot of things in life; it’s better to have promotional risk management and not need it, than to need it and not have it. What if, then, you can’t afford it?

Alternatives to promotional risk management

It might sound overly simple, and it is, but just being incredibly careful and precise is the only real alternative to it. Whether it’s a good enough alternative is a different question.

The problem is that every company and person that wishes they had promotional risk management thought they were being careful enough in the first place. It’s only after they found out it wasn’t enough that the problems started.

However, to play devil’s advocate, a lot of companies don’t have promotional risk management and a lot of companies don’t go bust overnight because of it. It’s up to you to decide whether your company needs it, and whether you’re the sort of business that prepares for a rainy day or just deals with it when it comes.

Just cross your fingers it’s only a rainy day, and not the storm of the century.

Jack Bird writes for Team Umbrella.

Further reading on promotional risk management

Related Topics

Financial Management

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