5. Introduction
W
elcome to Promotional Risk Management For
Dummies, your step-by-step guide to protecting
your promotional budget.
Fixed fee. Over redemption cover. Prize indemnity.
Assessing and evaluating insurance options for a pro-
motional campaign, or whether you need to cover at
all, can be a mind-boggling task. This book takes you
through the process from a risk manager’s point of
view so you can see what he sees, and understand the
questions he might ask you.
The more you understand about managing the risk in a
promotion, the more control you have over the sepa-
rate budgetary elements of a campaign, and not just
those connected with risk. By looking at the individual
components you can see which ones really matter, and
which are having the greatest influence over consumer
behaviour.
About This Book
This book aims to provide you with information to
make the right choices when it comes to managing
promotional risk. It’s full of useful tips and hints about
where the risk lies in your promotional strategy, and
how you can use that risk to make your brand’s budget
work harder.
6. Foolish Assumptions
In writing this book, we made some assumptions
about you:
✓ You work in promotional marketing.
✓ You work in an agency or for a brand.
✓ You know that some promotions carry financial
risk that’s linked to the level of uptake of the offer
by your target customers.
How This Book is Organised
Promotional Risk Management For Dummies is divided
into five small but perfectly-formed parts:
✓ Chapter 1: Identifying Risk. Go here to see where
the risk is lurking in your strategy, and how to
manage it to your advantage.
✓ Chapter 2: Assessing Risk. Understand what’s
inside the head of your risk manager and why he’s
asking you all those questions; we look at what’s
in the quote.
✓ Chapter 3: Managing Risk. In this part we run
through the ways you can manage risk and how
to choose the right experts to help you.
✓ Chapter 4: Looking at Risk Management in
Action. Here we give you examples of promotions
such as scratch cards and coupons.
✓ Chapter 5: Ten Steps to Promotional Risk
Management Success. This succinct list leads
the way to success.
2
7. 3
Icons Used in This Book
We highlight crucial text for you with the following
icons:
The Dummies man indicates real-life examples
to illustrate a point and inspire you.
The knotted string highlights important infor-
mation to bear in mind.
Home in on the target for tips to enable you to
understand your risk better.
Where to Go from Here
As with all For Dummies books, you can either read this
guide from cover to cover or flick straight to the sec-
tion that interests you. Whether you read it in small
doses using the section headings or all in one go, you’ll
find plenty of information to get you on your way to
managing bigger, safer, better-protected promotion
marketing campaigns.
8. Chapter 1
IdentifyingRisk
In This Chapter
▶ Knowing why promotional marketing can be a risky
business
▶ Understanding the different types of risk
▶ Discovering how promotional risk management
works
The problem with promotional marketing is that if
you do it really well, it can cost you a lot of money.
If you create an offer that consumers find irresistible,
not only will your products fly off the shelves, but your
costs for honouring that offer could run out of control.
Risk management isn’t just about financial risk; it also
covers logistical issues surrounding your campaign
and ensures you can deliver it within the terms of the
promotion.
Effective use of risk management techniques can
enhance the creative process, allowing you to make
stunning offers within even modest budgets.
9. 5
Understanding Where
Risk Comes From
Your risk management strategy depends on your pro-
motion. You can determine the risk during the develop-
ment of the campaign by looking at elements such as
communication routes, brand history and the redemp-
tion process. Most important of all is the budget.
Budget
Your fixed costs often affect consumers’ aware-
ness of the promotion, but your variable costs
are related to how much they like it. Intrigued?
This section explains all.
Only some parts of your budget are open to risk. Your
total campaign may include elements such as advertis-
ing, pack printing and PR. These elements are ‘fixed’ irre-
spective of the uptake of your promotion, so you need to
put them to one side when deciding the proportion of
your budget that can be allocated to ‘variable’ costs.
However, the risk assessor needs to know your fixed
spend before agreeing a quote because these elements
affect the audience awareness of your promotion and
so affect its uptake. In fact, you’re likely to find your
risk assessor can help you here, suggesting changes to
fixed cost activities to enable you to meet your variable
budget.
Some promotional costs are very much dependent on
how many people participate in the offer. These
include coupon refunds, data capturing applications
and postage to send out prizes. If your promotion is
successful, these costs can mount up quickly.
10. 6
It is this variable budget that dictates the rest of your
promotion and how it is made up. It determines your
prize fund or premium choice, it affects the participa-
tion rates or winning rates you need to target, and it
affects the redemption routes you have available
to you.
Your risk assessor can advise you on budgets.
Indeed, she could suggest changes to the pro-
motion if your budget is too low for the type of
offer in the brief.
Brand profile
The personality of your brand is a consideration in any
promotion when determining the uptake of your offer.
For example, a t-shirt with a Coca-Cola slogan may have
more appeal than one from, say, Andrex. However,
Andrex has pretty much cornered the market of cute
puppies, so a plush toy Coca-Cola bottle may not excite
your target audience as much.
Frequency of product usage or, more accurately, its
purchase also affects the promotional uptake espe-
cially on collector-led schemes or campaigns where
the product must be fully consumed before entry (for
example, where an entry form is included on the pack).
The type of product
Each product sector has its own characteristics regard-
ing product loyalty and usage rates. You can expect
collector schemes on tea and coffee, where brand loy-
alty is high, to redeem higher than one on frozen ready
meals, where the consumer is more promiscuous.
Cereals, pet foods and nappies are also heavily pro-
moted compared to white goods, for example. Look
11. 7
down the aisles at any supermarket and you will see
the sectors where brand competition is high – if one
cereal brand runs an on-pack, the rest will soon follow.
Historical results
Hindsight is a wonderful thing; never more so than in
promotional risk management! Past history of similar
promotions is invaluable in assessing the likely uptake
of future campaigns. But remember that every cam-
paign has its own unique elements – even one repeat-
ing the same promotion as last year, because the
consumer environment and economic climate will have
changed. Also not all products within the same group
have the same profile; for example, Heineken has a dif-
ferent consumer profile and therefore behaviour from
Grolsch.
Historical results affect not only the likely uptake of a
promotion, but also how the insurance market will
view the campaign. Since Hoover (see the nearby side-
bar), alarm bells start to ring if ‘electrical white goods’
and ‘free flights’ appear together on a broker’s pro-
posal form. In fact, any promotion that leads to a claim
on insurance affects premiums for similar future
campaigns.
This doesn’t mean you should avoid letting your risk
assessor know of past campaigns. Far from it. Failure to
disclose this kind of material information could lead to
a difficult claim if your campaign over-redeems. And
with fixed fee arrangements, it could nullify the con-
tract completely, irrespective of the uptake. When in
doubt, disclose everything.
12. 8
Method of communication
How you communicate the offer greatly affects the
uptake – and hence costs – of your promotion. Leaving
TV and display advertising to one side for the moment,
the consumers’ reaction to the campaign depends on
whether they see the offer on a pack, on the Internet or
by leaflet or coupon.
The entry route also affects the number of
opportunities to enter, and so also the uni-
verse on which the risk assessed.
Hoover’s Free Flights campaign
The Hoover Free Flights campaign was an important lesson
in how not to manage promotional risk. In 1992, the household
brand offered free return flights to Europe and USA with
every appliance purchased.
It was a truly generous offer and the public were quick to
spot that the value of the flights far exceeded the value of the
appliance.
The company soon found itself overwhelmed with requests
for tickets; a pressure group was formed specifically to
pursue claims and the court cases continued until 1998. It’s
estimated that the whole situation cost the company over £45
million to resolve and resulted in the British division of Hoover
being sold to a competitor.
The promotion was completely uninsured, despite risk
assessment advice that the offer was too rich.
13. 9
Leaflets
Leaflet-led campaigns require the consumer to pick up
and save a leaflet to enter the offer. Leaflets could be
magazine inserts, enabling a well-targeted campaign, but
separating the communication from the actual product.
You can place in-store leaflets nearer the merchandise,
but your offer is shown to everyone, whether or not they
buy the product, and still requires extra effort from the
consumer to enter. In all these cases the financial risk is
directly linked to the number of leaflets printed.
Internet
If your promotion exists only online, the risk could
become infinite if there are no other controls in the
‘real’ world. So if you invite users to ‘click to print a
coupon’, the assessor might require forecasts of the
product sales to give some sense-check to the redemp-
tion forecasts. An alternative would be to switch off the
web page once a certain number of visitors have
printed a coupon.
On-pack offers
On-pack communication gives the highest par-
ticipation rates of all routes. The offer is shown
to the consumer each time he buys or uses the
product and requires no further action to keep
the entry route. The strength of the message on
the pack also affects its uptake, both in terms of
product pick up in store and application rate.
Break down on-pack communication further and
redemption rates differ significantly according to how
the offer appears. Fix-a-forms and neck collars may
cause an uplift in responses because they interfere
with the product usage in the home. You have to
14. 10
remove the collar before you pour the bottle, or peel
off the fix-a-form to open the pack. This means the con-
sumer is forced to look at the offer in his hand, making
it more likely that he will enter.
Whichever communication route you choose, your risk
assessor will ask to see artwork before confirming a
level of cover and will advise on the message tone and
strength in order to keep fees within your budget.
Coupons
Coupons can be distributed in a number of ways,
each with its own redemption pattern. For example,
a coupon published in a free newspaper could be
expected to redeem at around 1% due to the dispos-
able nature of the medium. However, a coupon direct-
mailed to known users of a specific product sector can
reach as high as 40%. So it’s essential you know pre-
cisely the means of communication and, for direct mail,
what the source of the list is.
Supporting media
Your campaign’s use of media affects the risk asses-
sor’s perception of the promotion. She needs to have
all the information you can give about how the promo-
tion will be supported.
TV or display advertisements affect the sales of a
product, but not necessarily the uptake of the offer.
However, if the advertisement is itself an offer – such
as a taste challenge, or try-me-free – then you can
expect a significant uplift in participation.
Many promotions enjoy success without any media
support; the on-pack offer being sufficiently well
designed to work alone.
15. 11
Consider the value and purpose of the media
spend before committing budget to this part
of the campaign. Resources could perhaps be
more targeted at boosting the offer itself
through a better quality premium, higher
win rates or easier entry routes.
Proof of purchase requirement
For most promotions, some degree of proof of pur-
chase (POP) is required to ensure the consumer has
bought the correct product. In some cases this may
just be one or more pack tokens, ring pulls or unique
numbers printed on the pack. In others the actual till
receipt may be required.
In risk management terms, the till receipt does
more than prove a purchase. Keeping a till
receipt may put some consumers off applying
(which can be a positive or negative thing).
The receipt also carries a date which can be
very important in validating the claim (see
‘Timescale’).
Similarly, a high requirement for token collection may
be used to ensure a real effort on the part of the con-
sumer to participate in the offer.
Perceived value of offer
Remember Hoover? The free flights promotion is noto-
rious because the perceived value of the offer far out-
weighed the purchase price required to enter. Stories
of consumers buying product to claim the tickets and
then selling on their machine at car boot sales, and
now eBay, should act as a constant reminder!
16. 12
If the perceived value of your offer is going to exceed
the purchase price, ensure you have the budget and
resources to fulfil that offer. This is where campaigns
can fall down by inadequately planning the workload
generated by a high response rate.
Conversely, you want to ensure the offer is sufficiently
attractive to consumers to tempt them to purchase the
product. A free CD with every test drive of the new
Ford is more attractive than a free CD when you buy a
new Ford. The former might create a change in behav-
iour, the latter probably won’t.
The best way to avoid such issues is to ensure
your offer has a reasonable perceived value,
keep responses to a manageable level and
keep costs within your budget. Risk managers
can help here, as they want to avoid both a
Hoover scenario and a campaign flop. They
want a successful campaign. Their role is to
recommend a promotional structure that
meets your budget and ensures you can
manage the responses and finances. They
have good advice on the balance between
offer value and purchase price.
Ease of participation
You want to make the promotion easy and fun for
the consumer to engage with. So you need to strike a
balance between making it too easy (leading to over-
redemption) and too difficult (leading to a poor cam-
paign and possibly unwanted customer service issues).
Your risk manager can advise on the route to entry
you’re considering in order to meet the budget. In
some cases this may require only minor changes. For
17. 13
example, a brief requiring the consumer to collect
three tokens in exchange for a mug may be brought
into budget by simply requiring four tokens. It may be
that a postal contribution can be added, giving the dual
effect of reducing applications and part-funding the
offer.
With SMS (text) campaigns, remember to
make it easy to enter with short initial mes-
sages. If you need to confirm winner contact
details, you can do so online later.
Timescale
The time you give participants to respond to an offer
affects total redemption levels and resourcing costs.
Risk assessors like to have set parameters within which
they can determine their exposure – start and end
dates in other words.
You need to give consumers enough time to use up the
required amount of product to enter your offer, but if
you give them too long, you may incur unnecessary
costs for handling, storage or coupon management.
Your risk assessor can help to estimate the redemption
rates over time, and decide a cut-off date at which
point the level of applications becomes too low to
warrant keeping the promotion open.
Coupon clearing houses usually have a minimum
monthly charge for managing a promotion, and this can
become significant once redemptions fall below this
level. Talking to your risk assessor, or direct with the
clearing house, helps you determine a cut-off date to
print on the coupon. Remember that retailers don’t
need any more than three months from the consumer
cut-off date to send in their tokens.
18. 14
Setting a time limit for applications can help reduce
cost too by asking the consumer to work a little harder.
If the consumer has only 14 days from purchase to
redeem, you can expect fewer responses than if they
had, say, 30 days, or no limit at all.
The key is to make the time limit reasonable, fair and
verifiable.
Security
Many campaigns offer high value prizes in games of
chance or skill. These campaigns not only carry their
own risks associated with the prize being won, but also
from fraudulent claims. If you plan to take out insur-
ance or a fixed fee policy, the risk assessor wants to
ensure you’ve built in sufficient security to control the
chance of winning. For this she’ll probably appoint a
loss adjuster before the campaign begins to oversee
production and administrative issues.
The loss adjuster will want to be certain, for example,
that only the specified number of winning bottle caps is
produced in an instant-win promotion. He’ll want to
witness their production, obtain audited statements
from the manufacturers and will oversee the destruc-
tion of any over-production. Once the top prize caps
are produced, the loss adjuster may add a security
mark to them to ensure they’re not reproduced (the
consumer will be asked to describe this if the prize is
claimed). The adjustor will also ensure the winning
caps are seeded correctly and fairly into the main pro-
duction run so there’s no chance of being able to iden-
tify a winning batch.
19. 15
With scratch cards, the loss adjuster will assess the
effectiveness of samples produced before giving the OK
on a full run. He’ll ensure the cards aren’t see-through,
even exposed to high-intensity lighting, and that the
winning sequences on the cards are randomised, with
enough scenarios to make predictive revealing
impossible.
In games of skill, too, the loss adjuster needs to be
present. ‘Kick-to-win’ competitions are conducted in
the presence of an adjudicator, who’ll want to place the
ball before each attempt and want to know the player
is a bona fide member of the public, not a professional.
Loss adjusters are there to ensure the promo-
tion runs fairly, as you planned it. Should a
claim lead to an investigation, remember the
adjuster is on your side even though it may
not always seem that way!
Purchasing behaviour
You need to understand the demographics of your
target market and how that interacts with the brand
Not a lottery
One promotion famously sent a pub landlord a set of three-
from-nine scratch cards, all of which carried the same pat-
tern beneath the latex panels. The landlord was able to claim
a full set of golf clubs and ten umbrellas for his trouble!
20. 16
profile. The outcome of your campaign will be greatly
affected by the way in which your product is used and
its rate of consumption. For example, if you’re consid-
ering a collector scheme you may want to know the
average purchase of your product to see how many
consumers will be able to collect a certain amount of
tokens. But statistics can be misleading, as Figure 1-1
shows.
0
1
50
100
150
200
250
3 5 7 9 11 13 15
Purchase rate per consumer
Rate A Rate B Rate C
Numberofconsumers
17 19 21 23 25
Figure 1-1: How many customers buy how many products?
Figure 1-1 shows three scenarios for buying rates of a
product. Each line represents exactly the same number
of packs bought over a certain period. But they all have
different purchase rates:
✓ Rate A shows that more consumers buy a low
quantity of the product over time.
✓ Rate C shows that there is a predominantly high
purchase rate.
21. 17
Or you can compare the average rate of purchase:
✓ Rate A has an average rate of 8 packs
✓ Rate B has an average of 12
✓ Rate C has an average of 16.
Rate C represents half the number of consumers as
Rate A, while Rate B rate falls somewhere between
the two.
This matters because if you’re estimating the redemption
rates for a collector scheme based on manufacturer-
supplied buying averages of 12, you may also decide to
set the token requirement to 12.
Now, Rate B has an average of 12 so over half the con-
sumers could collect enough tokens. And they would
need to buy nearly three quarters of the total packs.
But if consumers were closer to Rate C, with its higher
average, nearly everyone would collect 12 and nearly
all packs could be used.
So, for a collector on, say, biscuits you might provide
an average frequency of purchase of 12 per year, but a
range of between 2 and 120. While only the top 1 to 2%
of consumers may be buying at the 100+ rate, in a col-
lector or instant win mechanic they can represent a
disproportionate amount of the risk.
Average means nothing without accurate
information on the rate of purchase. And that
means a comprehensive review of who’s going
to buy the product and how many buyers will
participate in the promotion.
22. Chapter 2
AssessingRisk
In This Chapter
▶ Knowing what risk managers look for in promotions
▶ Considering the questions you might be asked
▶ Grasping how mechanics makes a difference
When you’ve identified where the risk lies in your
promotion, it then needs to be assessed to
show how much of a risk it presents. Your risk man-
ager needs to know where it is on the scale between
high and low risks.
During this assessment you’ll be asked questions about
areas of the campaign you may not have considered. In
this part we help you understand risk assessment and
the level of detail you need to supply.
Asking the Right Questions
to Offer the Right Quote
Your risk manager will ask for lots of information
before calculating a quote. Here’s a taster.
23. 19
Product details
The product and the market it sits in give context to
the offer you’re building, so it’s important to set the
scene with this information.
Brand and manufacturer
Some brands carry more loyalty than others; some have
their own personalities that affect people’s perceptions of
them. So this information helps the risk manager under-
stand how consumers may react to the product or service
even without a promotion. It’s also important to know
whether this is a new product, an existing one enjoying a
re-launch, or just part of a sustained programme.
Purchase price
The spend:reward ratio is very important in determin-
ing the likely uptake of a promotion, whether on-pack
or as a result of a service or loyalty programme.
Buying patterns
How often people buy the product, and in what quanti-
ties affects many promotional mechanics. This informa-
tion might be hard to find, but most brands have
research showing frequency and weight of purchase.
Averages can be misleading here so try to give
the range of buying patterns to your risk
manager.
Who buys and where
The type of people who normally buy the product and
where they buy affect the uptake. Products bought pre-
dominantly by professionals online have a different
promotional profile from fast-moving consumer goods
(FMCGs) bought daily in a supermarket.
24. 20
Many brands have their target customers’ pro-
files, so look to share this information with
your risk manager so he has a better picture of
who’s likely to be involved in the promotion.
The promotion
Explaining a promotion – what it’s all about and why
you’re doing it – is often quite simple but you need to
expand on other details when looking at it from a risk
manager’s point of view.
Communication
Where do consumers see the promotion and learn how
to take part? It’s often on pack if space and production
allow, but it could also be communicated on leaflets,
TV, radio, or through sampling teams. And any combi-
nation or variation of these is possible.
Whichever route you choose affects the promotional
risk, so your risk manager needs to know your commu-
nication method.
The gift, prize or give-away
The reward you’re offering the consumer clearly affects
their perception of the promotion. You need to con-
sider how much they get back in return for their initial
efforts, whether they actually want the reward, how
well it fits with the product they’re buying and whether
they already have one.
Your risk manager will also want to know if there are
any supply issues with the rewards in terms of manu-
facturing times and minimum order quantities. These
can have a hidden and significant impact on the final
costs of the campaign.
25. 21
If you have a coupon campaign, you need to determine
the restrictions on its use in terms of the stores that
might accept it and against which products.
The universe
The universe in this context is nothing to do with the
stars, but all about the size of the risk. If you’re produc-
ing one million coupons, the universe is one million
coupons. But if the campaign is communicated on TV,
with no special packs, the universe is harder to define.
Risk managers work with you to agree the limits of
their liability, and the potential size of the campaign.
Make sure any quantifiable measures you can provide
are accurate and relevant.
The rules
All promotions have terms and conditions and while
many of these are there for legal reasons, you can work
with your risk manager to ensure they match his under-
standing of what the consumer can and can’t do to
enter the campaign.
Of particular importance for application-based
offers is whether the promotion is restricted
to one per household, if there’s a time limit for
entry and whether the consumer needs to
submit any other material to validate the
application.
Variable costs
With all this information, it can be easy to miss out
exactly what the risk management company is liable
for! This needs to be set out as clearly and in as much
detail as possible.
26. 22
At its simplest you have a basic cost per application
but the elements that make this up depend on the
mechanic of the offer.
Supporting activity
Some promotions work perfectly well on their own with
the on-pack message, leaflet or website doing all the
work. Others enjoy considerable cross-media support
and risk managers need to know all about that too.
Trade support
Store staff can greatly assist a consumer product pro-
motion if they’re aware of it, and possibly incentivised
towards it. Let your risk manager know if this is your
plan and he can factor in its effect.
Uncovering the hidden costs
Lurking in many campaigns are the hidden costs. These
include, but are far from limited to:
✓ Stock risk (caused by minimum order quantities and pro-
duction lead times)
✓ Text messaging
✓ Translation services if needed
✓ Complex data capture
✓ Set up costs such as SMS message responses or linking
your website to the handling house systems.
27. 23
Consumer support
You can help consumers find your promotion in store
with floor markers or shelf barkers. You can have dem-
onstrators handing out the promotional product. Or
perhaps you might create a major TV campaign to sup-
port the offer. Whichever route you choose, be
sure to let your risk manager know so its effect can be
determined.
Historical information
When you insure a car, one of the questions you need
to answer is whether you’ve had any bumps or crashes
in the past five years. The same is true for promotions.
If your brand has a history of high, or low, redemp-
tions, the risk manager needs to know in order to
assess the risk accurately.
Similar promotions
Tell your risk manager if the manufacturer has run the
same mechanic on a different brand in the past. This is
relevant because it gives an indication of the previous
promotional performance of the company.
Same brand, different mechanic
Perhaps this is the first time the brand has run a collec-
tor scheme, having previously used prize mechanics.
Let the risk manager know about the prize promotions
because it gives some insight to the behaviour of the
brand’s purchasers.
Past promotional data is highly relevant when
a promotion is insured. As we’ve said before,
when in doubt, disclose everything.
28. Chapter 3
ManagingRisk
In This Chapter
▶ Understanding your options
▶ Considering remaining risk
▶ Choosing the right company
Broadly speaking, risk management can be applied
in four ways to sales promotions, which we
explain in this chapter. Choosing the right level and
type of protection is the final step to ensuring your
promotion is covered.
Ways to Manage Risk
This section explains your options when it comes to
managing risk in sales promotions.
Fixed Fee
Fixed fee insurance typically covers all costs of a
promotion irrespective of the number of redemptions
actually received, protecting the promoter up to 100%
claim rate.
29. 25
Fixed fee differs from over redemption insurance in
that, once the fee has been agreed according to the
expected redemption rate, the fixed fee provider is
immediately liable for all costs from 0% to 100%.
Understanding how much protection you have
You need to understand the degree of risk remaining after a
level of cover has been agreed.
Total risk
Fixed Fee
Redemption rate 100%
Costofredemptions
Over redemption
insurance cover
Budgeted
redemption cost
30. 26
Over redemption cover
Over-redemption insurance, sometimes referred to as
contingency insurance, means protecting the promoter in
the event of participation being greater than the antici-
pated, or budgeted, level, usually up to a pre-agreed
maximum. So if you expect a 5% redemption level, you
can take out over redemption insurance between 5% and
7.5%. But risk returns to you after 7.5%.
Over redemption insurance may appear to be the
cheaper option for low-risk campaigns. It pays out after
redemptions have reached a certain level, and contin-
ues paying until a pre-set maximum has been exceeded.
It’s a band of insurance – all costs either side of that
band are your responsibility as the promoter.
Like any other kind of insurance, over redemption
insurance is paid for through an insurance premium,
which is subject to Insurance Premium Tax (IPT). Any
claims may only be settled after the promotion has
closed so you need to fund those costs, which may
cover more than one financial year.
In order to meet loss adjuster requirements, your han-
dling house needs to store all redemptions until the
claim has been met. Some handling houses may charge
for this service.
Fixed fee provides blanket cover for the
promotion and as such may appear more
expensive than over-redemption insurance.
However, evaluate the two with caution to
ensure a like for like comparison. Your promo-
tion will be managed by the fixed fee company
so you release responsibility for paying sup-
plier invoices and dealing with loss adjusters
to them.
31. 27
Prize indemnity
Prize indemnity protects the promoter in the event of a
particular prize, or prize fund, being won; normally
Hole-In-One prizes.. Costs of processing applications
aren’t covered in this insurance.
Promoter’s own risk
In this instance, the promoter takes on all risks and
pays all costs.
Ensuring You Check Out
the Risk Managers too
Before handing over your promotion’s liabilities to a
risk management company, ensure that they have the
financial ability to take on that risk and fulfil your
brand’s promise to its consumers whatever the
redemption levels.
You can do this by checking the company’s balance
sheet (last year’s financial statements will do); this
shows you what immediate funds they could draw on
if the promotion costs more than their fees.
Also check how they’ll re-insure themselves
against the risk they’re taking on on your
behalf. Make sure that they have enough
funding or are adequately covered through a
reputable and solid underwriter.
Any insurance documentation they provide
must mention your promotion by name,
otherwise it may not cover them against your
activity.
32. Chapter 4
LookingatRiskManagement
inAction
In This Chapter
▶ Using scratch cards and coupons
▶ Challenging tastebuds
▶ Guaranteeing quality
Promotions can take many forms, so it follows that
risk management varies from promotion to promo-
tion. This chapter runs through a few scenarios.
Free Prize Draw
A chewing gum brand wants to run a prize draw offer-
ing tickets to an exclusive concert by a major pop star.
The offer is shown on outdoor posters and in store
dump bins with leaflets. The entries to the draw must
include three chewing gum wrappers in order to qual-
ify. The wrappers aren’t specially marked. Applicants
send their wrappers to a freepost address to enter the
draw.
✓ There’s no risk on the ticket costs – all the tickets
will be won.
33. 29
✓ There’s a risk on entry costs because each entry
incurs a cost from the freepost rates and from ver-
ifying the application is complete.
✓ The scale of the risk is proportionate to the sales
of chewing gum over the time period.
Instant Win
A fast food chain offers millions of prizes ranging from
food to cash. Every burger and chips carton carries a
win or lose message. Food prizes can be claimed in the
store instantly. Other prize claims must be mailed in
for verification.
✓ The risk is proportionate to the number of prizes
on the packs, rather than the number of packs in
total.
✓ Food prizes are outside a risk management
arrangement due to their instant nature and low
cost of redemption to the manufacturer.
✓ Costs would be incurred to verify the other prizes,
particularly very high-value prizes which must be
independently audited.
✓ The costs of the other prizes would be covered by
the risk management company.
✓ There’d be a difference in claim rate between
the lower value prizes and the very high value
prizes because the higher value prizes are more
desirable.
34. 30
Coupon
A soft drinks brand runs a promotion in a newspaper
offering every reader a free bottle of soft drink on the
day of publication. The offer is flashed on the front
page of the paper and the coupon is printed within the
main body of the paper. The coupon is only valid in
one supermarket chain.
✓ The level of risk is proportionate to the circula-
tion of newspaper on the day of publication.
✓ The coupon bar code would be set up to be valid
only in the specific supermarket chain.
✓ The forecast redemptions based on the newspa-
per circulation were sense-checked against daily
sales of the product in the specific supermarket.
✓ Depending on the electronic point of sale (EPOS)
systems at the supermarket chain, the single-day
validity would be hard to verify, so reasonable
judgement would need to be applied.
✓ The front page flash wouldn’t be guaranteed until
the day of publication dependent on that day’s
news. Risk managers would have to assume the
flash would be used.
✓ The artwork for the coupon advert and the rest of
the page are put together by the paper, with very
little control from the brand or agency.
✓ The cost of each redemption is the face value of
the coupon plus clearance at the coupon process-
ing house.
35. 31
Quality Guarantee
A health yoghurt brand offers consumers their money
back if they write in and say why they don’t feel better
after trying the product for 14 days. The offer is pro-
moted on special packs, two of which are required to
complete a 14-day trial. Applications need to include
till receipts showing purchase of the right number of
packs as well as the promotion token from the special
packs.
✓ The maximum number of applications is equal to
half the number of special packs, because two
packs are needed for each application.
✓ Verification costs include checking the till
receipts, consumers’ statements and capturing
the total cost of the consumer’s purchase (which
could differ from store to store).
✓ Redemption costs would include the costs of pro-
ducing branded cheques for the refund and all
bank charges for clearing those cheques.
Collector Scheme
A bread manufacturer wants to tie in to a major TV
series by offering its consumers a range of branded
goods. Consumers collect different numbers of tokens
for each item and can reduce the token requirement by
including a cash contribution with their application.
Every pack of bread carries one token.
✓ The risk is related to the number of on-pack
tokens that will enter the promotion, and then
which gifts they’d be redeemed against.
36. 32
Explaining money-back offers
There are three types of money back offers, each redeeming
at different rates:
✓ Try Me Free. The consumer must send in a till receipt to
receive their money back. This typically redeems at
between 10% to 40%.
✓ Quality or Taste Challenge. As well as a till receipt, con-
sumers must write a short statement telling the brand
what they think of the product. They receive their refund
whether or not they like the product. Challenges normally
redeem between 4% and 10%.
✓ Quality or Taste Guarantee. Like a Challenge, but refunds
are only available if the consumer didn’t like the product,
so the statement must be negative. Because consumers
generally don’t like to complain, guarantees often
redeem below 2%.
✓ Consumer’s cash contributions could be off-set
against the costs of each gift.
✓ The branded gifts are only available in production
runs of 5,000 each, making the stock risk
considerable.
✓ Redemption costs include lengthy verification of
the number of tokens, the contribution and the
gift required.
Collector schemes with just one gift carry far
less stock risk than those with a range of gifts.
37. 33
Scratch Card
A drinks manufacturer offers cash prizes on a scratch
card included inside large packs of its major vodka-
based brand. To play, consumers scratch off three
from the seven panels. If they reveal three matching
symbols they win a prize. Every card is a potential
winner with prizes ranging from 50p coupons against
the next purchase, to £2,000 cash.
✓ Every card is a potential winner so the liability is
fairly high.
✓ The chances of successfully revealing 3 matching
symbols from 7 panels are 1 in 35 so this helps to
bring the risk down (see the nearby sidebar for
more on statistics).
✓ Consumers are less likely to claim a 50p money off
next purchase coupon than they would a £2,000
cash prize, so this is factored into the risk profile.
✓ Risk management costs need to include the secu-
rity of the scratch card production to ensure the
cards can’t be predicted or tampered with.
Statistical risks in promotions
Sometimes the risks within a promotion are driven more by
maths than human behaviour. You can consider a number of
statistical scenarios in promotional mechanics:
✓ Scratch card. You have a scratch card with nine panels,
but you can only scratch off three of them. If you reveal
(continued)
38. 34
three identical symbols you win a prize. The odds of
matching three panels from nine is calculated like this:
9/3 x 8/2 x 7/1 or 3 x 4 x 7 = 84:1. So you have a 1 in 84
chance of being successful.
✓ Ranking statements in order (factorial). You’re pre-
sented with seven statements about the product and
need to rank them in order of importance. Forgetting per-
sonal preferences, the chances of putting these state-
ments in the same order as the judges entirely by chance
is calculated as follows: 7 x 6 x 5 x 4 x 3 x 2 x 1 = 5040:1.
So you have a 1 in 5,040 chance of ranking the state-
ments correctly.
✓ Safe cracking. A safe has five dials that need to be cor-
rectly aligned to open. Each dial has ten numbers on it,
from zero to nine. The chances of opening the safe are
calculated as follows: 10 x 10 x 10 x 10 x 10 = 100,000:1. So
you’ve a 1 in 100,000 chance of opening the safe.
✓ Probability risks aren’t statistical, but the same princi-
ples apply. So if you want to offer £100 off a product if
England win the World Cup, you can take the percentage
odds of this happening and apply it to your costs.
Once you’ve applied the statistical or probability odds to the
promotion, you must then apply the play rate (how many
people play the card) and, if relevant, claim rate (how many
people apply for their prize) to calculate the risk.
(continued)
39. Chapter 5
TenStepstoPromotionalRisk
ManagementSuccess
If you remember nothing else from this book, remem-
ber these tips:
✓ Get the risk manager in early.
✓ Be prepared to be flexible if the budget isn’t.
✓ Find out what promotions the brand has run
before.
✓ Meet your risk manager face to face – don’t rely
on phone quotes.
✓ Check the financial credentials of your risk
manager.
✓ Share even the earliest versions of artwork to
avoid surprises later on.
✓ Treat your risk manager as a partner, not just a
supplier.
✓ Ensure your risk manager is insured with the
correct documentation.
✓ If you’re not sure whether something is important,
include it on the brief anyway.
✓ Don’t be scared of risk; use it as a creative tool.
40.
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HISTORY
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43. some use risk
to create fear.
Mando knows
better than that.
You can trust our 30 years’
experience of identifying,
assessing and managing
promotional risk. Some of the
world’s leading brands and
agencies already have, and
still do. Because it helps them
create value.
call on 01296 717900
or email
riskisgood@mando.co.uk
www.mando.co.uk
44. ISBN: 978-0-470-97572-5
Not for resale
Successfully protect your
promotional budgets by getting the best
from risk management specialists
Make sense of the bewildering array of
options and when you should be using them.
By taking a risk manager’s point of view, this
guide gets you into his mind,which helps you
create more exciting, cost effective and,
above all, budget-safe campaigns every time.
Spot your
campaign’s risk
Effectively
manage risk
Control your
budget
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Use risk as a
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Explanations in plain
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