Trade spend doesn’t have to be a law of diminishing returns for increasing cost, if promotional performance is tracked consistently.
“History doesn’t repeat itself, but it often rhymes,” according to author Mark Twain. But in fast moving consumer goods, many companies repeat their trade promotions calendars. “Same as last year, with adjustments for Easter,” goes the CPG refrain.
This doesn’t mean to say that all, or even most, trade promotions are working. Whilst trade promotion spend is one of the largest line items on a manufacturer’s P&L, with the POI Institute suggesting that 45% of CPG companies spend 20-30% of their revenue on trade spend, as many as two thirds (67%) of trade promotions don’t break even. Unsurprisingly, nearly a third of CPGs are dissatisfied with their ability to manage promotions. As the costs of trade promotions continue to rise, margins continue to fall.
Because many companies manage their trade promotion spend using Excel spreadsheets, it’s difficult to see where the spend is going. Many companies don’t know which promotions work, or how to improve future promotions. A lack of organizational and technological capability to conduct pre and post event analysis means not only ‘overspend’ on many promotions, and revenue being left on the proverbial table, but less leverage with retailers to have them accept new proposals and programs.
So, the chief trade promotions challenges for companies lie in understanding what’s working and what’s not; how to weed out the poorly performing promotions by understanding the drivers of performance and replacing them with something else. This is the essence of Trade Promotion Optimization (TPO).
What’s required is gaining visibility and control of spend. Optimizing ROI – lift, contribution – for future promotion plans. Knowing what’s working and what’s not by completing post-event analysis (PEA) on a consistent and frequent basis. This includes five fundamental questions all CPGs should be able to answer about promotional performance:
- Did the promotion you expected to run, actually run?
- Did you get the promotional ACV you were expecting?
- Were your projected promotional volumes close to the actual volumes?
- Are there competitive products that perform well with us, or vice versa?
- Was the promotion profitable?
This means you need something which enables you to see what works and doesn’t over time, by promotion and by retailer, in order to create ‘norms’. Something that enables visibility of competitor promotional calendar conflicts and performance. Being able to compare your promotional ROI for a single event to other promotional events. For each promotion, being able to see the impact of the mechanic (such as penetration, frequency, AWOP/average weight of purchase); timing/seasonality; duration; promotional frequency; and promotional discount depth, particularly for high/low promotions. You’ll also want to capture true promotional uplifts as increments including pantry loading, forward buying, price elasticity, seasonality and pre and post promotion volume dips; understand cannibalization of your own and competitor products; and map in the ‘store back’ point of purchase attributes including product availability, in-store compliance, regional and geographic considerations, and retailer feedback.
Small wonder spreadsheets don’t cut it when that level of information and detail is required.
Underpinning trade promotions effectiveness analysis is a good TPO software system. Ideally this centralizes and harmonizes data such as shipment, spending and pricing. It allows for baseline modelling to reflect true consumer category and brand consumption – past, present, and future – in the absence of promotions. It enables the PEA discussed above, including external data source integrations, predictive lift coefficients, event-based lift, manufacturer and retailer ROI and margin analysis, and competitive and consumer event overlay. This then feeds into predictive planning and ‘what if’ scenario modelling as well as calendar optimization.
TPO systems can help you very quickly identify where your spend is going and working and why, and what to change for future promotions. You can frame decisions and discussions with retailers based on opportunities for win/win outcomes.
It doesn’t have to be ‘same as last year with adjustments for Easter’.
Ultimately a TPO system means you can ensure that the promotional history you’re repeating, or rhyming with, is more effective in profitability and other measures.
Customer Case Study
Welch’s became a Blacksmith TPO customer in 2017.
The Key Challenges:
- Poor promotional ROI
- Budget adherence
- Non-repeatable practices
- Siloed planning
The Solution: After a 10-week implementation, the Welch’s team was able to:
- Work together to identify ineffective trade spend and create profitable promotions
- Move away from manual planning and analysis to automated post-event analytics and predictive optimized planning
- Trade investment ROI increased 16%+
- Achieved volume objectives
Ready to learn more? Watch the webinar: