When it comes to a CPG company’s evaluation of trade spend effectiveness, there are key performance indicators (KPIs) that are used as a barometer of success besides return on investment (ROI). However, getting an accurate ROI number during post-event analysis or setting ROI targets as part of the sales planning process has proven problematic for many CPGs.
Nonetheless, in the justifiable quest of maximizing outcomes, consumer goods leaders continue to set ROI benchmarks for trade investments – leaving finance, sales and marketing teams searching for reliable metrics to reach corporate expectations.
Resolving ROI Resentment
Before you can have serious conversations about ROI, first decide whether you believe that the baselines are accurate since all incremental lift, revenue and profit – and therefore ROI – are measured from this baseline.
Syndicated data providers offer a consumption baseline which depicts what a loyal customer would buy. While the consumption baseline is a great starting point, it often overstates base volume and leads to many CPG companies with inaccurate calculations on promotional ROI.
A true baseline indicates the volume sold in the absence of a promotion. For an accurate depiction of base volume, consumption, spending and shipment data are harmonized, as is customary with a comprehensive trade promotion optimization solution. An exact baseline can be used to calculate incremental lift, profit, revenue and ROI. Furthermore, the specific historical analysis builds a foundation for the predictive lift curves used during planning and optimization.
Reconciling ROI Ramifications
After setting ROI benchmarks, the ability to predict ROI as part of future event and customer planning must be a standard practice.
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.
However, many are surprised that promotions have negative ROIs during post-event analysis. 😲
A negative ROI does not necessarily equate to a bad promotion.
It’s important to recognize that even with a negative ROI, the 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 companies need to balance ROI against the objective they are trying to achieve.
- What is the promotion’s goal?
- Is the promotion accepted by your retail partner?
Consider these questions, in addition to ROI, to bring together the sales team’s experience with the organization’s financial guardrails, and you will optimize the promotional outcomes.
In this way, organizations start conversations about how to strategically improve the ROI of their trade investment in ways that align with business objectives. Unlike companies who take a wait-and-see approach to their trade planning, companies that use predictive, what-if and constraint-based modeling capabilities of a TPO solution can explore, compare and optimize the promotions during planning to facilitate dialogue about new opportunities.
With TPO, a single version of trade metrics becomes available, providing quantifiable ROI and performance KPIs.
Redirecting ROI Realities
Optimizing promotional ROI is the number one priority according to a survey we conducted with CPG finance, trade marketing and sales professionals.
This, in comparison to improving post-event analytics, better collaboration with retailers, and cleansing of data.
To make promotional optimization an impactful part of your strategy means understanding how improving ROI translates to accurately measuring and predicting what factors help achieve the desired outcome.
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.