Q. What is promotional risk management?
Promotional risk management limits a company's financial exposure to the success of a promotion. Normally the risk occurs from higher than expected redemption rates and their costs.
Q. What is its main objective?
Primarily to allow companies to calculate the cost of a promotion and the potential return on investment prior to committing to it, and to prevent unwanted costs from a promotion that is heavily redeemed. The two major techniques for achieving this are promotional risk insurance and fixed fee contracts.
Q. What is promotional risk insurance?
It is taken out against the risk of an activity being over-redeemed, usually to protect the promoter when redemption rates hit certain pre-defined levels.
Q. What are fixed fee promotions?
Fixed fee promotions entail the promoter paying a risk management company a pre-determined amount for the whole promotion. The contract limits the financial exposure to over-redemption for the client.
Q. What are the advantages/disadvantages of fixed fee promotions?
Fixed fee promotions ensure the brand manager can allocate a specific budget. They can sleep soundly on the knowledge that, if the promotion redeems higher than expected, not only are the costs capped up front, the risk management company actually funds all costs of consumer redemption.
Q. What pitfalls must you watch out for?
It is essential the client has disclosed all the details of a promotion, in particular any past history of promotions, or there could be problems when it comes to a claim. Also with insurance, there may be cash flow issues for promoters awaiting settlement of a claim. With fixed fee promotions, the money is paid up front, so effectively the cover for the promotion is paid for in advance. With promotion risk insurance, the initial outlay is obviously less but the promoter will have to pay for over-redemption out of its own pocket, then claim the money back afterwards from the insurer.
Q. How long does it take to set up a risk management programme?
Risk managers would like to be involved from the outset but panic telephone calls to their offices, a week before a promotion goes live, are not unusual. If they are involved at an early enough stage they can help tailor the risk in the promotion so that it comes in at the right budget for the promoter.
Q. What is the worst case scenario if you don't manage the promotion's risk?
Another Hoover free flights fiasco. Brand managers should aquaint themselves with the options and risks before they enter into a financial and legal arrangement with consumers.