Every year, organizations spend too much time going through their annual budgeting process. With each budgeting season comes new challenges for CPGs to navigate. Namely, how can we better manage trade promotion costs while spurring revenue growth?
In the article, Analytics CFOs’ Top Goal for 2017: Better Analysis and Reporting, 90% of CFOs surveyed express a common goal: to use data for better decision making. The implication: a move to analytics as a decision-making tool will improve budgeting.
How’s it going? We’re not in Kansas anymore…
The consumer goods and retail sectors are in transition. It’s no surprise that the article, Kraft-Heinz Shuffles Leadership Ranks, reports that packaged food companies are dealing with weak demand. Couple weak demand with serious pressure from traditional retail trading partners to slash prices in the name of staying competitive.
The reality is that CPG manufacturers cannot rely on the same strategies that once allowed them to stay afloat to sustain the revenue growth objectives of their organizations.
This puts incredible pressure on CPGs as they scrutinize and build their new budgets.
CPGs will succeed by building a budget with a data-driven understanding for what has worked in the past, using predictive intelligence to realize what the future will hold, and being agile in order to shift when something unexpected disrupts the plan.
If we’re honest with ourselves…
CPGs have been vulnerable to revenue-impacting shifts for some time. It was common to make large investments with little oversight as a strategic approach to reach goals. This is particularly true for trade promotions, where decision making has been left to gut feelings and quick wins instead of a sustainable investing strategy.
From a budgetary perspective:
- Logic says: Cut trade spending and I’ll eliminate much of the uninformed (and possibly unprofitable) expense.
- Reality says: Wait! You didn’t consider the reaction of my retail partners that rely on pricing promotions to drive traffic throughout the aisles.
With this paradox, companies are paralyzed in their current trade promotion practices for fear of upsetting the balance. In other words, what we don’t know can’t hurt us. Until it does.
It’s this same tactical approach to planning and executing trade promotions that left a data trail that can be used to map a different future.
Informed vs Intelligent Trade Promotion Budgeting
Promotional performance data is nothing new for CPG companies. In fact, as it relates to budgeting, this data is regularly pointed at in order to justify additional spend or when making generalizations about pricing. It’s been used to substantiate the fear that if we don’t spend more in trade, then we risk losing the volume sold during these promotions. Likewise, promotional performance data has been used to rationalize deep discounts in the name of “making a number” — stretching budgets without a quantified understanding of the return on this spending.
As companies take a more analytical approach to their business and budgeting decisions, they also make a transition to being informed about their trade dollars to making intelligent investment decisions.
An analytical approach to trade investment as part of a comprehensive trade promotion optimization (TPO) solution, includes using POS, shipment and spending data to predictively model the outcome of an event or customer plan.
These predictive plans include quantified KPIs that not only show the predicted outcome, but can be compared to the budget for a real-time understanding of the investment and its impact prior to execution. Furthermore, the optimization capabilities of a TPO provide the ability to apply constraint-based modeling to improve revenue, profit or volume within the defined manufacturer and retailer budgetary constraints.
Today’s CPG leaders must have an informed plan and be able to remain agile in the face of disruption. Building flexibility into your trade investment budget is a requirement. Leverage a TPO’s real-time post-event analysis to visualize trends, assess risk, and quantify promotional ROI for quick fact-based decisions. Having this intelligence at your fingertips means that Actual vs. Planned spending can be quickly referenced when decisions need to me made.
Budgeting is time-consuming, but can become simplified and more accurate with the right tools in place.
During a time where many CPG companies are looking for ways to trim their budget, it seems illogical to invest in a new initiative with analytics, let alone a new technology like a trade promotion optimization solution. However, the failure to make the transition to this revenue growth management approach driven by analytics means that you are preparing a future budget for a significant miss. From a competitive standpoint, a retail partnership standpoint, and a corporate growth standpoint companies have to accept that “what we have always done” is no longer is working. Invest in the ability to make better decisions while delivering an annuitized return of at least 3%-5% on your annual trade investment to your bottom line.
Trade Promotion Cost Cutting Does Not Need to be Your Only Option
Procter & Gamble announced a move to cut $12 billion in costs by 2021. And they aren’t alone. Cost containment goals are echoed on the earnings calls and corporate objectives of CPG companies across the globe. When decisions are guided by historical and predictive data, these initiatives do not have to be met with fear. The ability to proactively strategize for different outcomes (with a TPO solution), allows you to avoid potentially damaging decisions in the name of temporary relief.
A TPO enables better decisions regarding optimal allocation of trade spending through visibility. Furthermore, you can predict the impact of changes to trade spending with specific customers and then adjust to meet mutual objectives.
When this happens, the conversation shifts.
It’s less about cutting trade spending and scrambling to fine-tune, but more about the focus on trade investment optimization for a better return – an outcome that is both preferable and sustainable.
Use constraint-based modeling to optimize revenue, volume and profit generated on specific customer’s annual plans. Create success through a comprehensive analysis of past performances, quantifying trade promotion benchmarks. Use the analysis to eliminate poor performing tactics, monitor trends and logically pivot.
CPG companies will continue to use cost reduction as a strategy to control the financial outlook for their business. However, it’s important to avoid reactive processes that arise from fear. Instead, should arm decision makers with the information to turn risks into opportunities.