Three ways to manage promotional risk

There are three commonly used ways for managing the financial risk inherent in consumer promotions: self-insure, over-redemption insurance and fixed fee contracts.

Which option is right for your organisation and its brand(s) needs careful consideration and it will change, regularly. It ultimately hinges on understanding your organisation’s attitude to risk in general and promotions in particular. A specifically targeted promotional risk questionnaire can be used to establish your organisation’s attitude to promotional risk and create a risk profile of the promoter.

So back to those three options…

  1. Self-insure is just as it says: the promoter “insures” itself meaning that it accepts all the financial risks of a promotion, including the risk of over-redemption (i.e. the promotional offer being more attractive to consumers than anticipated and therefore costing the promoter more money than forecast).
  2. Over-redemption insurance is an insurance policy which protects the promoter if the promotion over-redeems, usually for a specified range of redemptions. For example, if my forecast redemption rate is 10% and I only have enough money in my budget to cover redemptions up to 15%, then I might choose to remove the risk of over-redemption between 13% and 25% by taking out an over-redemption insurance policy (the policy costs money, hence the 2% difference between the 13% and 15% — note this is an example and not indicative of an actual cost). If the promotion goes gangbusters and redeems at 30%, then I (the promoter) will be on the hook for redemptions from 0%–12.99% and 25.01%–30% with the insurer covering the redemptions from 13%–25%.
  3. A fixed fee contract is a commercial contract through which the promoter hands over all the financial risk of a promotion to a third party, typically a promotional risk management provider, in return for the payment of a fixed amount of money (the “fixed fee”). The promotional risk management provider will often build in to the fixed fee the handling and fulfilment for the promotion, so that it is in control of all the costs and provides a “one stop shop” service to the promoter. If the promotion redeems at 30%, then the promotional risk provider will pay out on all the redemptions up to this level and the promoter’s total exposure is the amount of the fixed fee already paid.

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