Following the disruption caused to many business models by the pandemic, sales promotions can enhance a brand's image and boost revenues, but it can be tricky to create the perfect balance between costs and benefits.

Addressing market disruption

The pandemic has caused unprecedented disruption for businesses as it slashed demand for some products and services while pushing demand up for others. Further, government policies aimed at reducing personal contact have moved business away from the High Street to digital platforms. Promotions can help businesses reconnect with clients, instantly altering consumer behaviour. In doing so, promotions can rebalance a company’s revenue stream and improve its financial performance. 

A bad example

However, without meticulous budget management, a successful promotion can hit the company hard financially if consumer response is greater than anticipated and the promotion was to redeem at a higher level than anticipated.

A case in point is the Hoover free flights promotion, which is widely used as an example to illustrate how a promotion can go wrong. In the 90s, the vacuum cleaner and washing machine manufacturer faced a backlog of appliances gathering dust in its warehouse as a result of the recession. Management decided to launch a promotion offering two free return flights to Europe when spending £100 on a Hoover product. The offer included a maze of terms and conditions in the small print and Hoover's travel agents pressured participants to buy profitable extras designed to offset the cost of the promotion. While Hoover’s travel agents for the European promotion struggled to cope with the overwhelming response, Hoover decided to launch a second promotion - this time to the USA. The addition of the USA caused a surge in consumer response because the airline tickets held a value of around £600 in comparison to the cost to the consumer of £100. Consumers were increasingly purchasing the cheapest Hoover products available to satisfy the minimum requirement, sometimes not even picking up their order or simply throwing them away as soon as they had picked them up.

Apart from ruining the company’s reputation as clients fought for their rights, the campaign ended up costing the company £48m. A number of executives lost their jobs as a result and the European division was eventually sold to a competitor.

Limiting the financial risk

While Hoover may be an extreme example, if too successful, promotions can severely impact a company’s finances, not least because consumer behaviour can be extremely difficult to predict. In the end, success can be a problem, unless you have a safety net to protect you.

One way of limiting the financial liability associated with a promotion while allowing it to excel is “over redemption insurance”. As a risk management tool it not only keeps the budget fixed but also enables more flexibility for promotions’ planning. The insurance product transfers the risk of any redemptions that occur over a pre-agreed trigger point from the business to insurers via a premium. This will protect the budget reserved for the promotion in the event that the promotion redeems at a higher level than expected, giving planners piece of mind and allowing them to be bold in their marketing strategies. It allows you to control the activity by transferring the potential financial risk and strike the right balance between incentive value and profitability. 

Examples of promotions where over redemption can help reduce the company’s liability include: 

• Trade-In’s 

• Coupons (Paper And Electronic)

• Buy One, Get One Free

• Money-Back Guarantees

• Collector Schemes 

• Money Off Next Purchase

• Cashbacks 

• Satisfaction Guarantee

• Extended Warranty 

• Guaranteed Future Value 

• Try Me Free Or Buy And Try 

• Gift And Store Card Programs

• Pre-Paid Credit Cards

• Rebates 

Lockton have extensive experience in Over Redemption Insurance and have worked with a range of fixed fee companies, handling houses, marketing companies and brands to help them obtain protection for their promotions. Whatever the promotion we will strive to find a competitive solution for your insurance needs. 

For further information, please contact:

Harrison Costi

T: +44 (0) 20 7933 2714 | E: harrison.costi@uk.lockton.com (opens a new window) 

Richard Woods

T: +44 (0) 20 7933 2009 | E: richard.woods@uk.lockton.com (opens a new window)