The Analytics Mindset: Strategic Promotion Investment

Consumer-packaged goods manufacturers are falling short when it comes to trade promotions. After all, more than half of trade promotions don’t break even.

Perhaps the biggest struggle for most consumer-packaged goods companies is quantifying an event’s ROI. Historically, CPGs have been unable to provide concrete proof showing whether a promotion worked. It’s guessing game.

According to PwC, a surprisingly large number of CPG companies do not conduct any post-event analysis. Instead, they tend to focus on volume increases, which can mask inefficiencies.

But a trade promotion optimization (TPO) solution gives you the data needed to prove a promotion’s effectiveness and its affect on business, increasing the return on investment of trade promotion investments by as much as 10%.

In addition to viewing performance metrics, a TPO predicts future KPIs as part of the scenario planning process. Calculate projected revenue, profit or volume using historical or predictive life coefficients. When this information had been unavailable, you couldn’t make informed decisions. But now, build thoughtful annual plans and collaborate with your retail partners by sharing the retailer’s forecasted KPIs, while fostering dialogue around a single version of the truth.

If the Process Changes, What’s the Potential?

It’s important to recognize that turning data from numbers to value comes with day-to-day reshaping.

Many CPGs fail to reach their full trade spend optimization potential due to the way they manage their data. In trade promotion, data lakes (or buckets) isolate in-store activity from financial metrics, leaving you with an incomplete picture of performance. “The problem with data buckets is that they’re siloed and separated from one another. You can learn and harness more potential from your data when departmental barriers are broken down,” says Elle Morgan, marketing expert.

McKinsey says that due to siloed data, manufacturing industries are only capturing 20% – 30% of the value that data and analytics has to offer.

A compartmentalized understanding of the business leads to an unsubstantiated reliance on the previous year’s plans and a resistance to risk – all of which contribute to revenue stagnation. It’s widely accepted that having the ability to pull data from multiple sources into a single report greatly increases productivity.

Data drives successful promotions. CPGs with a TPO can organize, harmonize, analyze, and optimize their intelligence.

Investing in an analytics solution creates a competitive advantage because:

• the tool provides a new, measurable picture of organizational health
• the tool can identify specific factors that drive positive (or negative) results
• its insight is used to influence future decisions that result in a quantifiable return on investment and the organization’s processes are improved

CPG executive teams are asking how the adding a TPO to the company’s suite of tools will tell them something they don’t already know. CPG execs want to improve their 20%+ investment in trade spend, so they ask:

[1] How will implementing an analytics tool empower my employees?

A TPO solution breaks down barriers between sales, marketing and finance by aligning KPIs. The solution puts an emphasis on data and quickly connects trade promotion performance to incremental revenue and profit. A TPO solution will identify unprofitable promotions, and improve customer dialogues with fact-based analysis.

[2] What’s the cost of not having analytical capabilities?

The cost of not implementing an analytics tool is measurable. Blacksmith TPO clients realize at least a serious return on their annual trade investment and a 12x ROI of the software cost.

For a manufacturer that invests $20 million annually in trade, that is potentially turning away $1,000,000 in annual incremental profit. Add to this the gains of competitors who have already rolled out a tool that can optimize their sales planning and promotional profits.

Embrace TPO Functionality

From a functionality perspective, trade promotion optimization lays the foundation for the results-focused approach through predictive capabilities and constraint-based optimization features.

From a strategic standpoint, companies searching for ways to navigate disruption, competition and stagnation can begin building a trade investment strategy with visibility to its future impact (instead of waiting the 6 or 12 months for execution to realize another missed opportunity). More importantly, these planning and analysis capabilities can be part of a company’s business operations in under 10 weeks.

Predictive analytics is a powerful tool. It starts with the ability to compare objectives and budgets to planned activity and empowers users to think more openly about pieces that drive results. The predictive components of a TPO solution allow CPG manufacturers to compare the contribution of an event or plan to corporate objectives.

True optimization can only be achieved with the application of constraint-based modeling that aligns with growth objectives. With constraint-based optimization in a TPO solution, annual plans can be created with budgetary guardrails in place. Approaching trade promotion planning from this optimization mindset is critical to create the focus on growth.

For example, finance professionals can decide that to meet corporate profit expectations all plans must have a 33% profit margin. Plus, your company has an expected volume target. A TPO solution with constraint-based functionality allows you to optimize for volume with the constraint of a 33% profit margin. The solution automatically runs through the plausible promotional mixes to determine which mix fits within the defined constraints.

More TPO functionality:

• Harmonized data sets: Rely on your baselines and post-event analytics.
• Model future baselines to avoid disruption: Even in situations where the disruption is unexpected or comes in the form of a reallocation of spending to trade, making data-driven decisions positions the organization to be agile and best reach objectives.
• Historical and predictive lift-coefficients: Drive scenario and plan development, providing quantifiable KPIs for trade partners.
• Quantify ROI and KPIs: Compare the projected performance from the original plan – showing disruption, anomalies or unexpected market gains – and use it for future planning.

Machine Learning

What is machine learning? Harvard Business Review defines machine learning as “any data-driven approach to explanations, classifications, and predictions that uses automation to construct a model.” In short, machine learning automates analytics.

Trade promotion remains an area where the need to automate using machine learning is important because many CPG companies are only analyzing their top few customers only one or two times annually. With data automation, you can analyze all your customers as frequently as the new data comes into the system. This means a more complete understanding of the business and the ability to identify where making individual adjustments for one customer will impact the overall organizational performance.

Automated analytics processes large amounts of data so that you can spend more time gathering insights that will push your company forward to improved revenue management practices and sustainable growth.

Customer Management

In a similar vein, forecasting becomes more accurate with a TPO solution. This is because decisions and information are based on more than just last year’s plans and results. Instead, there is an additional, widespread historical view of the year before last. This view helps with customer management; it allows finance to partner with sales to examine retail execution and optimize sales plans and promotional events based on the past information.

A TPO solution provides a comparison of multiple plans for retailers, so retailers meet their performance objectives. You can essentially tell the retailer “if we make this change, this is the result” with complete confidence and proof.

The Analytics Mindset

Accurate predictions at the event level are a great start. Once your data is synchronized through a TPO, you can see how one change to one promotion might affect an outcome. To optimize your strategy, consider how consumer marketing and competitive events are affecting promotional performance. Then, bring your insights to your retail partners to have conversations about promotion execution, category management and collaborative opportunity.

Adopting an analytics mindset means giving your organization a clear understanding of trade promotion effectiveness. You’ll improve the precision, timeliness, and value in your organization to create a common revenue management strategy. Leveraging a TPO tool enables you to create promotional plans that optimize spend and fuel your volume, revenue and profit goals, resulting in greater ROI and an reliable approach to profitable promotions.