What is zero-based trade? Zero-based trade (ZBT) is a strategy that helps manufacturers evaluate spending patterns to lower trade spend costs. Adopting ZBT increases margins and can boost the ROI of a CPG company’s trade spending by 10 – 20%. It boosts profits and makes trade spend more strategically effective.
Deloitte defines commercial spend as the costs associated with discounts, promotions and marketing. We refer to commercial spend as the pricing discounts and trade promotions you offer in retail and foodservice environments. In the US alone, CPG trade spending exceeds $200 billion annually. For 9 out of 11 food manufacturers, percent of volume sold on promotion is down compared to one year ago, signaling cuts in commercial spend.
According to a survey, 63% of CPGs targeting cost reductions plan to address commercial spend. 22% of CPGs have turned to zero-based budgeting (ZBB), adopting to the philosophy at a higher rate than other companies; due to trends like online shopping, volatile pricing, private labels and other disruptions.
ZBB, developed by Pete Pyhrr, justifies each company expense to increase the return on investment and allocates budget based on a program’s efficiency rather than budget history.
As consumer goods companies explore the zero-based budgeting approach, some are totally rethinking commercial spend and introducing a zero-based trade (ZBT) strategy.
What is Zero-Based Trade?
ZBT is a form of cost control that plays off ZBB. It helps manufacturers rethink spend patterns to increase margins. Controlling these promotional dollars offers a viable growth strategy. Trade is strategically important, but overspending is real.
PWC explains that a zero-based method could cut back trade spend costs, and in the process, make trade spend more strategically effective. Supporters of ZBT say it can systematically boost the ROI of a CPG company’s trade spending by 10 – 20%.
With zero-based trade, promoted events should be based on what consumers want to buy (not on what manufacturers want to sell). Consumers aren’t loyal to you, they’re loyal to a sale. Create loyalty. Discounts are quickly (and easily) countered. Think about your trade power.
In 2016, PWC’s Strategy& found that 63% of CPG executives admit that their current levels of trade spend are unsustainable. Don’t make the common pricing mistakes that derail your profits.
Zero-Based Trade Case Study
A $10B+ food and beverage manufacturer was struggling to find growth in trade. Even with increased promotional activity, sales continued to decline. The company began to assess its trade spend program and developed a plan to transform it into a lever for managing customer performance.
They found that:
- Trade funding was based on historical rates and not linked to growth priorities.
- Trade spending had either stayed the same or risen based on previous periods spend.
- 15% of all commercial spend was allocated outside performance trade.
It was clear: the trade program needed to be overhauled to drive sales growth.
The company tied all commercial spending to customer performance. Funding rates linked to specific performance thresholds, communicated to customers and reviewed on a regular basis.
This manufacturer realized more than $300M worth of profit improvement.
Opt for Profitability
Take back your profitability through analytics. Leveraging data and insight-generation tools, you can make better decisions about commercial trade spend.
Blacksmith TPM Analytics gets you one step closer to increased profitability by delivering the facts you need to make tough decisions. Review customer and division profitability and other critical topics, including performance reporting for:
- Indirect commitment realization, including SKU-level purchases, to identify fulfillment of contract commitments and gain insight into the current ‘run rate’ of volume relative to forecasted pacing.
- Insight into the discounted business with each customer relative to their gross purchases in order to  compare across points of distribution by local house, corporate parent and buying group and  identify which distributors represent ‘true street’ business by region and broker.
- Distributor effective net price [base price less trade and operator reimbursements] rank relative to the price point universe to identify the true net contribution by SKU and major planning category.
Investing in Trade
Stop asking how to cut trade spend. Instead, challenge sales, finance and trade marketing to evaluate and innovate. Encourage more data-driven promotions that generate revenue. There’s a way to take the risk out of trade spend — accurately measuring the ROI of your promotions and using the information you have to adjust future decisions.
Reducing trade marketing spend only adds temporary relief to the bottom line. Instead, CPGs can invest in the ability to better understand their trade investments at the event, product, customer and organizational level.
At first read, it may seem illogical to suggest investing in a solution when the goal is cost cutting. Remember though, the goal is sustainable revenue management. Using TPM and TPO, you can quantify insights into your deals and promotions, use predictive planning to turn around unprofitable promotions, and position yourself to see return on the cost of the solution. In other words, companies that adopt better practices, have greater visibility, and promote informed decision making will see greater results.
It might be time to evaluate a ZBT strategy for your business. And don’t forget to consider the tools required to execute effectively.