Limitations of Buy-Back Allowance Paper

Objectives of Buy-Back Allowance:
The following are the objectives of buy-back allowance:

Achieve Widespread Distribution – One of the most common objectives of trade promotions is to enhance the level of distribution of the company. When a company grants buy-back allowance to a retailer in terms of discount on specified units purchased or provision of extra ten units of the product on purchase of say 50 units, it improves its profit margin. Looking at the advantage, other retailers too would prefer re-stocking its supply of products from the company. This would help the enterprise achieve widespread distribution.

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Move Excess Stock Forward – There are many seasonal products in the market which go off demand when out of season. Trade promotions enable the companies to move excess stock forward in the market. The company offers buy-back allowances to its dealers and retailers in the form of heavy discounts on re-stocking the product in the store. The retailers taking advantage of these discounts on bulk purchase and further offer the product on sale to customers at a lower rate. This is why off-season products are often put on sale with some offers associated with them. Thus, these allowances enable the movement of excess stock in the market.

Increase Display Levels – One of the factors that influence the high sale is its display in the market. The more the display of the product, the more the customers are aware of it and hence create its demand. The customer often switches over to other brands when the one they initially demand is unavailable. For example, a customer asking for a Samsung phone will switch to another brand offering the same features if the Samsung model is not available at the time of purchase. Hence, trade promotions enable an increase in display levels.

Increase Stock Holding in Market v/s Company Warehouse – Stock of products lying in the company’s warehouse is a huge cost. To avoid such costs, the company pushes its stock of products in the market with the help of trade promotions like buy-back allowances.

To push more than the Competitors – Customers often prefer to purchase the products they see highly displayed in the stores. A retailer deals with multiple brands and keeps stock of each in its store. To make their product visible in front of competitors, the companies grant allowances to the retailers and wholesalers and hence, push more than the competitors.

Limitations of Buy-Back Allowance:
The following are the limitations of buy-back allowance:

Trade sales promotions like buy-back allowances are non-recurrent, i.e., cannot use them continuously. The company can allow discounts and coupons on the purchase of products only up till a certain period beyond which they will have to adapt different promotional tools for the product.

Sales promotions are generally used for those products that are not very popular with the customers. The popular brands perform better in the market. To improve the product’s performance, the company will have to move on to other promotional techniques such as advertisements and personal selling. These means of promotion are comparatively expensive but more effective than buy-back allowance.

Often, a rebate or discount in the price of a product may be misunderstood as a product with lower quality standards. Customers often believe that products continuously available at lower prices have quality standards lower than their competitor products of comparatively higher prices.

As the buy-back allowance is a limited period promotional tool, its impact is also effective up to a short time. The moment the company withdraws these allowances, the demand for the product also falls.

Significance of Buy-Back Allowance:
The following are the significance of buy-back allowance:

Increase the overall sales of the product.

Achieves a faster sale rate for products moving slowly in the market.

Sale fluctuations in the market.

Regulates sale fluctuations in the market.

Attracts new customers to the product.

Motivates the retailers to improve the sales of the product.

Improves trade relations with dealers.

Reserves shelf space for the product with dealers and retailers.

Increases product display at the retail stores.

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