Twenty years ago, I wanted to be Gordon Gekko. He was a villain sure, but the way he worked the system – his vision, the raw ambition, that slicked-back hair… He.Was.Epic.
I must not have been the only one that felt that way, heck, Oliver Stone and 20th Century Fox have brought him back, just in time for summer. It is highlighted as part of my summer movie theater crawl.
Watching the trailer got me thinking about the practicing of hedging. That is, reducing the risk caused by adverse fluctuations/movements in assets. Hedging got a bit of a bad name a couple years ago – it turns out that some hedge funds “hedged”, but never properly secured the risks. When things went south, well, the cupboard was bare, more or less. Many reasons why it happened, but a chief driver was GREED (and we are back to Gekko).
Here is the marketized version: In creating promotions (and allocating their budgets), marketers often make assumptions on participation. If that assumption is high, then there is some money left (that could have been spent somewhere else). If the assumption is low however, well…not good. Promotional risk is always there; it is just the degree that changes.
Business, finance, marketing, and manufacturing – it’s all about getting the most out of every available dollar. Which is why the theory of hedging risk is so good. A small portion of the upside is traded for a limit to the downside risk.
On paper, it is a sensible way to manage available monies and maximize budgets to the penny. So, why don’t more marketers hedge their budgets with promotional risk coverage? Undoubtedly a lot of possible answers, but I think at the core, it goes back to a sort of greed, where marketers trade back end security and cost caps for lower upfront fixed costs (i.e. margin).
Greed is good, if you have the right hair. However, if you want to learn more about the art of the hedge, drop me a line (steve@promotionalcurrency.com), and don’t forget the subject line: Purple Horseshoe loves Endicott Steel.