To evaluate trade spend effectiveness, specific KPIs (including ROI) are used to gauge success.
However, for many CPGs it’s a challenge to determine ROI or set ROI targets during sales planning. Nonetheless, in the justifiable quest to maximize trade spend outcomes, CPG leaders continue to set ROI benchmarks for promotional investments – leaving finance, sales, and marketing teams searching for reliable metrics to reach corporate expectations.
Terry Ziegler, General Manager – Blacksmith TPO, spoke with Martech Zone to give them the scoop on how small changes in CPG event planning can lead to big results in trade promotion performance. These wins put points on the board for both manufacturers and retailers.
The consumer goods sector is a space where large investments and high volatility often result in grand shifts in the name of effectiveness and profitability. Industry giants like Unilever, Coca-Cola, and Nestle have announced reorganization and re-strategizing to spur growth and cost savings.
Meanwhile, smaller consumer goods manufacturers are being hailed as agile, innovative party crashers experiencing significant success and acquisition attention. As a result, investment in revenue management strategies that will impact bottom-line growth are readily prioritized.
Nowhere is the scrutiny greater than on trade marketing, where Nielsen says that CPG companies invest more than 20% of their revenue, only to see 59% + of promotions be ineffective.
With such alarming results, one might suspect that trade marketing is susceptible to the next sweeping change in CPG innovation, but the reality is that improving trade promotion performance should not require a monumental process, people or product overhaul. Instead, the path to trade promotion optimization is paved with small changes that can have a significant and sustainable impact.
Resolving ROI Resentment
Metrics like incremental lift, revenue, and profit are measured from your baseline. Before you can have serious conversations about the return on investment, you first must decide whether you believe that your baselines are accurate.
Syndicated data providers offer a consumption baseline which depict what a loyal customer would buy. While the consumption baseline is a great starting point, it often overstates base volume and leads CPG companies with incomplete calculations on promotional ROI.
Do you trust your baselines?
A true baseline indicates the volume sold in the absence of a promotion. For an actual depiction of base volume, your consumption, spending, and shipment data should be harmonized (as is customary with a trade promotion optimization solution). If you trust your baseline, then it can be used to calculate incremental lift, profit, revenue, and ROI.
Reconciling ROI Ramifications
After setting ROI benchmarks, you’ll be able to predict ROI for future event and customer planning.
If we agree that:
ROI = (Incremental Profit/ Total Promotional Spend)
Then it stands to reason that effective promotions should have an ROI greater than zero. You might be surprised to find out during post-event analysis that you have promotions with a negative ROI. 😲
A negative ROI does not necessarily equate to a bad promotion. Even with a negative ROI, your company may still have been profitable.
Negative ROI indicates that the promotion did not result in incremental profit greater to what would have been seen if the product was not on promotion.
As most finance, trade and sales people know, promotions are often used to lure in new buyers or push incremental volume. Of course, setting the precedent that negative ROI promotions are the norm is equally as dangerous as not calculating ROI at all.
Instead, CPG companies need to balance ROI against the objective they’re trying to achieve.
- What is the promotion’s goal?
- Is the promotion accepted by your retail partner?
With TPO, a single version of trade metrics becomes available, providing quantifiable ROI and performance KPIs.
Redirecting ROI Realities
In a world where companies are investing millions of dollars in ineffective promotions, even a small percentage improvement will add significantly to the bottom line. Optimizing promotional ROI is the number one priority according to a survey we conducted with CPG finance, trade marketing and sales professionals.
To make promotional optimization an impactful part of your strategy means to understand how improving ROI translates to accurately measuring and predicting what factors help achieve the desired outcome.
One of the greatest obstacles to improve trade marketing is combatting the we’ve always done it this way mentality. Even the smallest shifts to processes in the name of improvement have the potential to be difficult (and even threatening) when they are not clearly aligned with organizational and personal objectives.
CPG companies are, and should be, demanding more than just a sunken cost from their trade investment. As such, it falls on the shoulders of finance, sales, and trade marketing leaders to encourage their organizations to apply the trade promotion tools that manage ROI – as both a metric of past success and as a shifting variable – to optimize and protect trade investments in the future.