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. This has the ability to completely change the dynamics of the manufacturer/retailer relationship.”
What is Trade Promotion Optimization (TPO)? TPO is a way for CPG companies to apply more effective trade promotion strategies through optimization system’s functionality.
A TPO application is an analytics and predictive planning tool used to perform comprehensive post-event analysis that includes baseline visualizations, quantifiable KPIs and brings together POS, shipment and spending data to measure the ROI of a promotion.
“Always build trade promotion optimization into your trade promotion management approach”
[Gartner Market Guide to Trade Promotion Management and Optimization]
What is Trade Promotion Management (TPM)? A TPM application is best used to manage the execution of trade events and finances. In this way, it can help manage the transactional activity of an event by settling claims, clearing deductions and creating accruals.
TPM provides tactical management for retail events and TPO provides an analytical approach to trade investment.
While many manufacturers worry adopting trade promotion optimization will replace their investment in TPM software, a bona fide TPO brings out the best in both tools.
Did You Know:
- 55% of trade promotion dollars fail to grow the brand and the category
- Globally, 59% of trade promotions don’t break even
- 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
Trade Promotion Optimization: System Functionality
A TPO system is a foundation to enable your people and processes. The tool is an intelligence center for data management.
90% of surveyed companies have challenges moving from transactional to analytical trade strategy. 63% still don’t have post-event capabilities. Most CPG companies are trying to know, predict and/or improve their trade investment.
- Data cleansing and harmonization automatically brings together all of your data sources — POS consumption data, shipment data and spending data. Goodbye, error prone spreadsheets!
- Understand and measure the results of specific promotional 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.
Benefits Gained with TPO
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 are considering a more substantial price reduction (maybe moving from 2 for $5 to 2 for $4).
How would you answer these questions?
- Is this change enough to drive the incremental volume you are looking for?
- How would this change impact your 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?
In the chase for elusive profitability, we have over-complicated trade promotion management and optimization with situation-specific spreadsheets, manual intensive processes, costly software customizations, and ongoing consultative relationships.
The result may be incremental progress – if we are lucky – but more often CPG companies never see measurable results from these initiatives and abandon difficult-to-sustain practices in favor of doing what they did the year before with the same, or even worse, results.
With TPO, the organizational benefits far outweigh the financial investment.
Assess how a TPO system can bring to your organization profitability:
- 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.
Regardless of how you answer these questions, 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.
None of the questions above can be addressed initially or continually without the ability to organize, cleanse, and analyze data. Only when you combine RGM processes with data-driven intelligence of TPO that a company can create effective improvements that result in stronger trade investments with higher ROI.
Because trade promotion spending will remain a significant investment for CPG companies, innovation becomes key.
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, while simplifying the process and delivering meaningful returns.