According to a Gartner report, trade promotion optimization focuses on “the incremental revenue and margin that the promotion will drive, as opposed to the trade funds that a retailer will receive to bolster its margins.”
➠ So… Are your trade promotions effective?
If you aren’t sure – you’re not alone. Many CPGs struggle to find insights from their data …
- 90% of surveyed companies have challenges moving from transactional to analytical trade strategy.
- 63% still don’t have post-event capabilities.
- 76% find it difficult to get aligned on in-store promotion execution.
… but those that implement trade promotion optimization software create more profitable trade events.
Trade promotion optimization software (referred to as TPO) is a way for CPG companies to gain insights on effective promotional strategies.
“Always build trade promotion optimization into your trade promotion management approach.”
[Gartner Market Guide to Trade Promotion Management and Optimization]
Promotion Optimization System Functionality
Optimize your promotional plans to drive more sales. The foundation of trade optimization is to improve strategy and results. Think of TPO software is an intelligence center for data.
✦ Bring together all of your data sources via data harmonization — POS consumption data, shipment data and spending data. Goodbye, error prone spreadsheets!
✦ Understand and measure the results of your events through post-event analysis. Leverage accurate baseline calculation.
✦ Build plans with the powerful what-if scenario and customer planning utilizing constraint-based modeling. See roll-ups by customer, category or product.
✦ Hover over individual events to see predicted performance KPIs in the calendar.
✦ Fuel your investment effectiveness with multi-dimensional insights.
What is Trade Promotion Management?
Ok, now that we’ve talked about the importance of TPO, let’s dive into trade promotion management.
A trade promotion management (TPM) application is used to manage the execution, tracking, and reconciliation of trade events and finances. It stores the transactional activity of an event by settling claims, clearing deductions, and creating accruals.
To compare TPM and TPO, think of them like this:
- TPM software provides tactical management for retail promotional events.
- TPO software provides an analytical approach to trade investment.
While some CPGs worry that adopting TPO will replace their investment in TPM software, a bona fide optimization solution brings out the best in both tools.
Challenges to Effective Promotion Optimization
It’s not uncommon to face challenges with trade promotion optimization, including:
- 55% of trade promotion dollars fail to grow the brand and the category
- You have to measure more than shipment data – you should leverage weekly retail POS data
- Globally, 59% of trade promotions don’t break even
- Companies need help with organizational changes
- There’s no way of accurately forecasting a new strategy (without a ‘what-if’ analysis)
- 15% improvement on trade promotion ROI will improve the top line by 10% and operating margins by 3-5%
- Less than half of all displays are implemented by retailers according to the agreed strategy
- Increasing brand assortments and pricing pressure for competition
A primary characteristic of a TPO solution is the ability to quantify and optimize the annual return on your company’s trade promotion investment.
Test Yourself. Situation & Challenge:
You are in the process of reviewing your customer plan to try to increase the incremental volume sold during a specific promotional period. You’re considering a substantial price reduction (maybe moving from 2 for $5 to 2 for $4).
Answer These Questions:
- Is this change enough to drive the incremental volume you are looking for?
- How would this change impact net unit cost?
- If the net unit cost is too low, how can you identify the price point that helps you achieve your incremental volume objective while maintaining an acceptable net unit cost?
- How does this price change impact your other KPIs (incremental revenue, profit) and your budget?
- How will explain the impact that this pricing change will have on your retail customer?
TPO Key Benefits
Promotional optimization gives organizations benefits that far outweigh the financial investment.
- Minimize spending through a data-driven approach
- Measure and analyze KPIs to improve performance
- Conduct in-depth post-event analysis
- Understand consumer responses to your product and brand
- Report on just-in-time user inputs
- Increase ROI on trade investments
- Enhance “tactical” TPM with “predictive” capabilities
- Build stronger relationships with retailers
- Promote your product… in the right place, at the right time
- Ensure effective retail promotional strategies
Will TPO Create Profitability?
Regardless of how you answer the questions below, it’s important to recognize what you want to achieve and determine which people, process and technology resources you need to build on for a sustainable, growth-focused revenue growth management initiative for your organization.
- Does poor data quality or disparate data limit your understanding of your trade spend effectiveness?
- How do you mass pull the data? How do you mine the data to see trends in your events?
- What historical and predictive KPIs define your pricing guidelines?
- Who is performs your post-event analysis? How many customers? How often?
- How do post-event analysis insights inform your continuous improvement plan?
- Do you review and approve incremental funding requests?
- Do you have a pricing plan for your customers?
There is no doubt that these questions challenge an organization to think differently about their promotional processes.
None of the questions above can be addressed initially or continually without the ability to organize, cleanse, and analyze data.
It’s only when you combine revenue growth management (RGM) processes with data-driven intelligence of TPO software that you can create effective improvements that result in more profitable trade investments.
This process-efficient, revenue-generation focused innovation needs to be built on 4 key principles:
✦ Simplicity. Make the complex, simple. Easy to implement, easy to use.
✦ Sustainability. Evolve with the company and industry. Address today’s challenges with an eye toward tomorrow.
✦ Repeatability. Remove manual, mundane work for integrated, automated systems with predictable outcomes.
✦ Measurability. Know what you did, how it performed and what you’d change for next time.
Companies continue to struggle with making their trade investment the revenue- growth contributor it needs to be.
To address this, we must be careful that we do not over-complicate the potential for change to a point where actions with quantifiable impact are perceived as too good to be true, leaving companies to fill gaps with unnecessary customizations and costly status quo thinking.
TPM and TPO solutions support a complete understanding of spend, smart solutions for future planning… all while simplifying the process and delivering meaningful returns.