Editorial: Clarity welcome on promo costs

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However inconvenient the change, package-goods marketers should give thanks that greater accounting clarity already has been forced on the treatment of the huge sums spent for trade allowances and consumer discounts. Previous practice allowed these marketers, in reporting revenue, to treat goods sold at a discount as if they were sold at full price. The costs of off-invoice allowances for retailers and coupons for consumers were treated as a marketing expense. While profits were accurately reported, the system gave an inflated picture of a marketer's true revenue.

The change has meant marketing executives have escaped being swept up in the white-hot scrutiny now directed at accounting practices. Since Dec. 15, new rules have required the costs of trade and consumer payments to be deducted from sales before revenue is reported. Today the issue is to embrace the new rule, and to use it for better decision making now that the impact of trade and consumer discounting can't be so easily masked.

There has been adequate time to weigh the new policy and the potential insights that the new rule will produce for marketing managers and their superiors. Northwestern University's Don Schultz and retail consultant Ron Lunde, writing in Ad Age last summer, warned marketers to get ready to "totally rethink" how sales promotion plans are designed and implemented because of the new accounting standard. Last week, Ad Age reported that research from Cannondale Associates predicts compliance with the new rules will cut reported net sales for package-goods companies on average by 8.5% this year.

That's not an easy pill to swallow for package-goods marketers that like to report steady year-after-year revenue growth. But it will be healthier in the long run for marketers to accurately weigh the costs and impact when deciding whether to spend money on brand building or spend money on price discounting.

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