Home » Blog » CPG Trade Spending & Promotions: Ignorance is NOT Acceptable. (we wrote a post on this last year which you can find. The importance of having a well thought out trade promotion architecture cannot be overstated. Trade Promotion Implementation (or TPI, formerly TPM), the standard day-to-day execution of promotion practices. In this environment, trade planning optimization remains a theoretical exercise. Most importantly, after driving up sales with various trade spending programs, can you measure or track new customer retention and brand loyalty over time? (Note: this statement leads to many readers likely saying, “How do we know it goes away entirely? This site uses Akismet to reduce spam. The study evaluated spending activity across the five core components of the modern CPG marketing mix: trade, advertising, consumer promotion, shopper marketing and digital. Stunningly, 59 percent lost money (in the United States, it’s 72 percent). This is probably the single most strategically important measure in trade promotion analytics…and almost nobody uses it! With the right technology solution as a foundation, profitable and sustainable growth is achievable. Now, let’s compute our base units exclusively: 100 base units per week x 10 weeks = 1,000 base units. Focusing on topics from pricing analysis and slotting tactics to spending priorities and retailer performance, this research represents responses from 235 CPG companies across 110 store categories and 55 retailers. of trade promotions globally don’t break even – Nielsen Holdings. Z. This is where things start to get sticky. of the money was lost by most of the manufacturers who invest in trade promotions – Booz Allen Hamilton . Obviously, the tactical side remains: But then we have the following four steps encompassing optimization: This is an iterative process, where we’re constantly executing, measuring results, refining practices, automating them, and on and on. Each successive step builds on the one before it, and they are all critical for managing and optimizing your trade spending. Let’s calculate our total units. Despite growing trade promotion budgets, many companies simply anniversary the prior year’s trade spending practices without identifying ways to optimize these initiatives. But is it the season to celebrate? You’ll recall that our total incremental units were 1,050. Of course, you won’t be able to compute most of these accurately unless you can precisely calculate your base sales. Manufacturers of consumer packaged goods (CPG) can transform their sales systems to drive profitable growth—often adding 10 to 15 percent to the bottom line operating results on an ongoing basis—through improved trade promotion efficiency.Technology facilitates in optimizing trade promotions not just with features to inform, but also to analyze. Many CPG manufacturers start to hyperventilate at the thought of losing market share or sales if their trade spending is stopped or changed. This allows rapid identification of key spending programs that are not driving positive results and the ability to track the outcomes of any changes made in trade activities. Put another way, if the internal margin is greater than 42% (1/2.4), then the event is profitable. If you can help me get to that objective by shaving some of your margin I can go back and get more money from my management.”. Consumer packaged goods companies spend billions annually on trade promotion, and pressure from retailers, competitors, and consumers is increasing. We’ll multiply that by the net wholesale price of $3.50 to get $3,675. The lack of consistency and visibility hurts: on average, 20 percent of CPG revenue is spent on trade promotion, yet more than half of that promotion spend results in a loss. Traditional trade promotion optimization (TPO) solutions are scenario-based and trade promotion management (TPM) tools take into account transactional activity, but the two improve promotion effectiveness within a single retailer alone. But … It also strengthens the trade decisions made among internal operations, marketing, and sales functions. Promotions can range from trying to boost awareness of a product, to taking advantage of times when a given product may be in high demand, to unloading inventory before it is no longer usable. 40% of CPG trade promotion spending doesn’t drive the desired results — Nielsen Holdings. Is an increase in market share worth it if you give away the majority of your margin to achieve it? For more information on cookies, please click here. E: info@salient.com. This is a downstream process. Our break-even Spend Ratio (SR) is the reciprocal of your internal Margin Percentage per unit (1/m). Your email address will not be published. Obviously the actual promotional costs for these active events are not complete. What differentiates best-in-class CPG players from average ones is the structure underpinning this variation. Essentially, trade spending is the amount a company spends to increase demand for its products, including coupons, preferential shelf display locations (slotting) and co … 1 1. In fact, we covered this issue in a recent blog post on ship-to-consumption analysis. The first actionable step toward change is for management to recognize the absolute need for more effective trade spending and be prepared to establish the right data-focused technology solution to track all programs, and support the planning and communication processes. In a world where CPG companies have weathered unparalleled transformation in a very short period of time, and where competitive pressures are at their most intense, adjusting trade spending and creating any vulnerability at retail is not a lever to be pulled. Some of this spending is given automatically as off-invoice allowances. The holidays represent a major source of revenue for almost every CPG manufacturer and the season is quickly approaching. Now is the time for CPGs to reevaluate trade promotion funding and spending strategies, and align their systems roadmap to fit new priorities and opportunities. Consumer-packaged-goods (CPG) companies worldwide invest about 20 percent of their revenue annually in trade promotions. It is hard to celebrate when huge sums of money are spent on various trade promotions and discounts during the busy holiday season. For one, CPG companies will strive to become more efficient in trade spend. So, here’s the equation: $3,675 (IR) / $1,500 (IS) = 2.4 Spend Ratio. His focus is aligning technical solutions with sales, marketing, and organizational needs to drive long-term profitable growth. Most CPG firms struggle to track, measure, and confirm whether the spending produced positive, incremental results. Each new post will cover just one of these elements. Trade promotion remains the industry's biggest marketing line items, accounting for 46.2% of spending, according to about 100 manufacturer respondents. This set of best practice information is unique in the consumer packaged goods (CPG) industry. If you want to be consumer-centric, then you need to measure the same way that the consumer buys. Won’t it just be made up on other brands or in future weeks?” The answer is no. Before we get into specifics about correct metrics, let us first take a moment to clear up current thinking about trade promotion, and how we propose to revise it. Trade Promotion Best Practices (TPB), where we take that knowledge and refine it into a set of theoretical best practices. Other critical issues that are negatively impacting trade spending are forward buying by the retailers, off-invoice spending that isn’t tracked, inventory carrying costs, POS materials, promotional intervals, SKU proliferation by manufacturers, and the cost burden to manage all promotion activities. Dr. Kurt Jetta, CEO and founder of the TABS Analytics, has refined this process over a period of many years, in his comprehensive study of trade promotion of packaged goods companies in nearly every category and mass market retailer. CPG Trade Spending & Promotions: Ignorance is NOT Acceptable. After reviewing the innovative and fastest-growing brands reports from 2019, it got us thinking about what’s to come in 2020. of CPG trade promotion spending doesn’t drive the desired results – Nielsen Holdings. Gather meaningful answers from integrated data sources quickly. Incremental Factor effectively answers the question, “What percentage of my business goes away if I stop promoting entirely?”. CPG Trade Spending & Promotions: Ignorance is NOT Acceptable, Vice President, Salient Management Company. When sitting down with new clients, TABS guides them through the six essential elements of managing trade promotion. Some efforts have been made to more effectively align the interests of all parties in the CPG supply chain. CPG is even more dependent upon trade spending than ever before. Later on, we'll also dive into the world of data harmonization, where you’ll learn to improve the accuracy of results by standardizing on core units of measurement and integrating different sources of information. This can include customized software design and new general processes. Yet another study by Booz Allen Hamilton reveals that most manufacturers lose nearly one-third of the money they put into trade promotions. Trade promotion spending for a typical consumer brand can be 15 percent to 20 percent of sales revenue, depending upon the category. You’ll need to adjust your year-end trade spending calculation based on planned spending for these active promotions. Each successive step builds on the one before it, and they are all critical for managing and optimizing your trade spending. In other words, their trade promotions architecture. This should tell you what you’ve earned to date. Required fields are marked *. With the right information available to all levels of management in seconds, CPG companies can begin to focus more on trade program profitability rather than solely using sales volume for measures of effectiveness. Rather our Revenue definition is the shipment value of the consumer units sold at retail. There is no reason to dismiss volume as a core element of effective trade spend management. The company offers TPE (trade promotion effectiveness) Community, an online platform that brings like-minded CPGs together to help address common trade issues; a SaaS TPM product to help plan, control, and analyze trade promotion spending; and trade promotion activation services to help users with analysis, planning, and TPM solution administration support. Learn how your comment data is processed. Presently, the conventional wisdom in the CPG industry separates trade promotion practices into two distinct branches: We propose that splitting TPO actions into four different tiers is a more effective and comprehensible approach. Posted on December 21, 2017 July 24, 2019 by Karl Edmunds. In our client relationships, we’ve seen various companies attempting to measure different aspects of their business, from retail dollars, to shipment dollars, to equivalized volume (rolls/sheets for paper, pounds for candy etc.). How to Make Trade Spending Drive Enterprise Value and Profitable Growth. Because not only is it possible, in today’s operating environment, it is essential to long term success. Your email address will not be published. An outdated CPG trade promotion spending mindset. Companies cannot overlook or underestimate the impact their spend has on the bottom line. The full findings include more than 750 unique responses and represent more than $5 billion in trade promotion and shopper marketing spending. Only marginal success was achieved. As an example, if the net cost was $3.50, and we sold 600 units, our Revenue would be $2,100 (3.50 x 600). We’ve got seven weeks without any appreciable spikes: We then add the three weeks of promotional activity: 700 + 400 + 350 + 600 = 2,050 total units. Trade promotion evaluation is one of the primary reasons CPG companies buy IRI and Nielsen data. Trade Promotion is a marketing technique aimed at increasing demand for products in retail stores based on special pricing, display fixtures, demonstrations, value-added bonuses, no-obligation gifts, and more. It’s lost entirely, and we will address that question in more detail in later blog posts. For now you can review the actual academic research that proves the incrementality of these sales here.). In Europe, where we’re experiencing a broadly deflationary environment, decent returns on trade promotion spend are increasingly hard to generate. F: +1 607-739-4045 But the most important thing is to convert those consumer units to pounds, cases, rolls, whatever. is a nationally recognized business leader and author with more than 20 years of experience working with suppliers, distributors, and retailers in the CPG industry. For example, ECR (Efficient Consumer Response) was an informal program implemented to identify and eliminate inefficiencies in the supply chain and drive those inefficiencies out of the system. We’re a technology-enabled analytics firm that’s been serving the consumer packaged goods industry since 1998. Consider: manufacturers know what they spend on trade promotion. Trade promotion spending is typically the second largest cost line item after COGS for a FMCG company and according to a recent BCG study, trade … 2 Corporate Drive, Suite 254 Shelton, CT 06484 (203) 925-9162 info@tabsanalytics.com. Even Prego, the brand with the lowest Incremental Factor of the top five brands, still depends on incremental sales for nearly half of their business. Save for later; Introduction. Clearly, our incremental units constitute total units minus the base: Remember, our incremental factor is comprised of the incremental units divided by the total units: The result is clear. However, implementing a trade promotion successfully requires a significant investment of time and money. 203 Colonial Drive And even companies that don’t have direct-to-consumer marketing will still often have retailer driven in-store merchandising. This is going to serve as the foundation of how we evaluate our incremental (promotional) sales vs. our base sales. The average consumer packaged goods (CPG) company allocates 14% of its total revenue to trade promotion activities 1, which underlines the importance of these programs. It includes promotional events, such as price discounts, displays, demonstrations, and the like, conducted in conjunction with retail merchants. If you start by measuring the wrong things, all analysis falls apart. Why the resistance? The Incremental Factor is the incremental Revenue divided by the total Revenue. This not Revenue in the way it is typically used, which is total Net Sales shipped. The four metrics you need are: Consumer Units, Revenue, The Incremental Factor and Spend Ratio. In a sense, CPG companies are just beginning to thaw out after the storm called the Great Recession. Over the years, we have seen CPG clients experience a number of challenges, including tracking ongoing trade activity and clearly understanding ROI on trade spend and how it compares to projected lift in sales. By continuing to visit our site without changing your settings, you are accepting our use of cookies. Horseheads, NY 14845 US, P: +1 607-739-4511 Our goal is to simplify here, so we’re not going to mess around with manufacturing costs, logistical costs and other variable costs. 2020: CPG Trends . The right data in the hands of management can begin to measure the specific volume driven by specific trade promotions that yield profitable results. Everyone can admit that trade spending is a critical element of the CPG supply chain, but isn’t it time to quit surrendering to the notion that tracking trade promotion dollars is not possible? In this example, let’s say our base sales constitute 100 units per week. Its solutions include RapidDraft that … hbspt.cta._relativeUrls=true;hbspt.cta.load(544043, '63281776-e31a-43b8-9d94-a5af7324ccc8', {}); TABS Analytics gives you a competitive advantage by simplifying the way you deal with your CPG data and giving you the power to easily extract competitive insights. Quality trade promotion analysis is impossible without the correct metrics. Another key hindrance to effective management of trade spending is aggregating or summarizing various trade spend initiatives to a point that managers can’t clearly identify the effectiveness of a trade event by account type, channel, display activities at store level, or even down to the shelf set. Trade spends accounts for up to 25 percent of gross sales for a CPG company, second only to the cost of goods sold. There are other tactics used in an attempt to deliver more precise trade spend results such as targeted rewards from manufacturers based on allocated shelf space or bonus structures based only on incremental sales resulting from a specific promotion. We use cookies to ensure that we give you the best experience on our site. Profit focused trade spending programs can be duplicated while waste and unproductive programs can be quickly identified and eliminated. Trade Promotion Optimization (TPO), where we work to create an optimization model, and actually automate those new processes as best we can. Trade Promotion Planning (TPP), where we take those best practices and incorporate them into our workflow. It has come from analyzing twenty-plus years’ worth of trade promotions, over 200,000 of them in all. If I stop promoting tomorrow, slightly more than half my total business disappears. According to Kantar Retail’s Trade Promotion Study, despite trade promotion activity and spending quickly migrating to digital, just 13% of manufacturers have separate brick-and-mortar and e-commerce budgets and 24% have no e-commerce budget at all. CPG Trade Spending & Promotions: Ignorance is NOT Acceptable. It can be easily communicated: “Look Mr./Ms. Trade promotions are an essential part of consumer-packaged goods (“CPG”) sales. But how are they to determine what they make on it? Trade spending is a common practice amongst consumer-packaged goods (CPG) and retail companies. This type of decision framework also enables more fact-based communication and planning among all parties to the supply chain including manufacturer, distributor, broker and retailer. As an example, let’s say that the total cost of three events is $1,500. Notify me of follow-up comments by email. Trade Promotion Measurement (the “new” TPM, if you will) is the periodic testing of those practices, and figuring out what works vs. what doesn’t. Our next blog post takes you into the specifics of correct measurement, where you’ll be able to establish an accurate baseline. Yet, trade promotion productivity underperforms, while users have to navigate multiple legacy systems with incomplete or imprecise data. Spend Ratio is computed by taking your Incremental Revenue and dividing by total Spend. This can be done for a single event or any aggregated period, such as a quarter or year. This is the only approach that can lead to a long-term continuous improvement process in trade spending. Over the next few weeks, we’ll be visiting these elements in detail. We have also seen CPG companies fail to hold adequate reserves to deal with deductions accruing from the prior year. From the survey results, five key findings emerged that every consumer goods marketer should consider as they begin to build their 2019 budget: Digital & Shopper Marketing Spend Grows – Without Clear Results. The final metric that’s vital to assess is your profit, which we will measure using Spend Ratio. It can also be calculated as Incremental Units divided by Total Units. At 10-20% of gross sales, trade funds are a big investment for most manufacturers. From TPM to AI-driven Business Intelligence, our trade spend solutions are easy to learn, quick to implement and simple to use so the benefits are seen quickly. Many also experience difficulty keeping up with large … It is typically the second-largest line item on their P&Ls (behind the cost of goods sold), and it consumes about 20 percent of their … The first question to confront is WHY? When you look at all aspects of the trade spend issue, the most important missing factor is getting real time information related to all trade spend activities so changes can be made and measurable results can be viewed and tracked. Here’s an example of ten weeks’ worth of weekly POS data: In the three weeks where there’s obvious promotional activity, we’ll concentrate on Week 9, the one that shows the largest spike. hbspt.cta._relativeUrls=true;hbspt.cta.load(544043, '32689147-4b49-4725-b74f-cd747397e842', {}); hbspt.cta._relativeUrls=true;hbspt.cta.load(544043, '2e9efe59-608f-456c-b6ac-e0166e5624c7', {}); To summarize, we’ve outlined the more most useful metrics to collect in the trade promotion process, namely: The 4 Most Useful Metrics In CPG Trade Promotion | TABS Analytics, ©2021 - TABS Analytics All Rights Reserved |, Trade Promotion Management (or TPM), the day-to-day implementation of trade promotion practices, and, Trade Promotion Optimization (or TPO), which is the process of refining those practices. The holidays represent a major source of revenue for almost every CPG manufacturer and the season is quickly approaching. In addition to simplicity, this measure also has the benefit of being able to be shared with retailers because no sensitive internal costing information is being revealed. Z. The ROI for the effort is substantial. But is it worth it? But this time, rather than returning to the same streets and sidewalks that dominated the landscape before, they’re considering new approaches. Streamline the settlements process and improve speed to cash. Let’s return to our example (here we are using Units): Those spikes of 400, 350, 600 represent the number of units we sold over and above our day-to-day base sales. It is hard to celebrate when huge sums of money are spent on various trade promotions and discounts during the … In addition to cutting the costs associated with promotions, retailers and CPG companies must adjust prices faster than ever to keep up with an ever-changing global market. The key to keeping measurement simple and accurate is to measure exclusively in Consumer Units. In short, Incremental Factor is the simplest way to tell just how dependent your business is on promotion. If we need to equivalize later on to analyze certain things, then we do it later on. The data on what is sold to consumers during a promotion must come from outside the company. Spend more than a few minutes in a conversation with someone in the CPG (consumer packaged goods) industry and you will almost inevitably find yourself discussing the spiraling cost of trade promotion. Buyer, I need to generate $x for every dollar I spend, and the current deal structure isn’t doing that. This approach ensures profitable promotions are repeated and waste is eliminated. Trade Promotion refers to marketing activities that are executed in retail between these two partners. Company executives tend to recognize its importance. Correct Metrics; Correct Measurement; Correct Data Harmonization; Tactics; Planning ; Execution; This set of best practice information is unique in the consumer packaged goods (CPG) industry. COUPON (6 days ago) Most CPG firms struggle to track, measure, and confirm whether the spending produced positive, incremental results. Trade Promotions can offer several benefits to businesses. Trade Promotion Accruals? We’ll come back to Revenue in just a few moments, but first, let’s talk about another important metric, the Incremental Factor. You get ZERO credit for loading inventory at your customers. Let’s look at pasta sauce as an example. You may have high confidence based on past results that sales will increase with promotional spending. Of course, CPG companies can get access to retail sales data. CPGToolBox Is Transforming How Consumer Goods Manage Trade Spend with a Complete TPx Solution Suite. Because this storm has significantly altered the landscape – especially when it comes to trade promotions. How do you measure the value of that customer if you had to give most of your margin to get a one-time purchase knowing they will chase the next discount regardless of the brand? Consumer packaged goods (CPG) and retail companies have invested heavily in technology solutions to boost their trade promotion performance, but many lack the talent or business processes to capitalize on these investments. Some consumers will always buy if the price is discounted enough but their brand loyalty is solely driven by price. We then take that unit count and create a measurement called Revenue. Revenue is better to use because it reflects differences in Net Pricing across a brand’s product portfolio. A report by Nielsen Holdings confirms that 40% of CPG trade promotion spending doesn’t drive the desired results while 59% of trade promotions globally don’t break even. Others try to simplify the trade spend approach by tracking fewer promotions during the year to avoid complexity and reduce the peaks and valleys in the promotion cycle. To truly achieve effectiveness in trade spending, management needs to be able to see real market transaction level results by store. As you can see, the entire category is highly dependent on their promotional activities. In the U.S. alone, CPG trade spending exceeds $200 billion annually. Tell just how dependent your business is on promotion retailer driven in-store merchandising impossible without the correct.... Elements in detail 2017 July 24, 2019 by Karl Edmunds a measurement called Revenue thinking! Revenue and dividing by total units on trade promotion architecture can not be overstated spending than before! Are a big investment for most manufacturers events are not Complete use cookies to ensure that we give you best. Than 750 unique responses and represent more than 750 unique responses and represent more half! T break even – Nielsen Holdings a recent blog post on ship-to-consumption analysis put trade... Results by store reviewing the innovative and fastest-growing brands reports from 2019, it s! The six essential elements of managing trade promotion Implementation ( or TPI, formerly TPM ), the category... Used, which we will measure using spend Ratio is computed by taking your Revenue... The settlements process and improve speed to cash the interests of all parties in the CPG supply chain responses. Firms struggle to track, measure, and organizational needs to drive long-term profitable growth dependent... Multiple legacy systems with incomplete or imprecise data on promotion a trade promotion productivity underperforms, while users to! Of correct measurement, where we ’ ll recall that our total incremental units divided by units... Spending mindset and sustainable growth is achievable a brand ’ s 72 percent ) this the... Our workflow ( in the U.S. alone, CPG companies buy IRI and Nielsen data more dependent upon trade.! Spend management and create a measurement called Revenue huge sums of money are spent on various trade promotions Great... Of CPG trade spending drive Enterprise Value and profitable growth productivity underperforms, users! Ll recall that our total incremental units divided by total spend made to more effectively align the interests of parties. Technical solutions with sales, trade planning optimization remains a theoretical exercise equivalize later on analyze. Per week x 10 weeks = 1,000 base units per week managing trade promotion spending for these promotions! Trade funds are a big investment for most manufacturers lose nearly one-third of the reasons! Money ( in the way it is essential to long term success units to,... Almost every CPG manufacturer and the season is quickly approaching to navigate multiple legacy systems incomplete! Of my business goes away if I stop promoting tomorrow, slightly more than unique! Even companies that don ’ t drive the desired results — Nielsen.. Come from analyzing twenty-plus years ’ worth of trade promotions – Booz Allen Hamilton reveals most... Of three events is $ 1,500 ( is ) = 2.4 spend Ratio is computed by taking incremental. Your base sales to use because it reflects differences in Net Pricing across a ’! Spending, management needs to be consumer-centric, then the event is profitable are our! Spending is a common practice amongst consumer-packaged goods ( CPG ) industry can precisely calculate your base.! Two partners this can include customized software design and new general processes Note: this statement leads to many likely! Visit our site without changing your settings, you are accepting our use of.! Units were 1,050 marketing line items, accounting for 46.2 % of gross sales, trade promotion planning TPP... A sense, CPG companies buy IRI and Nielsen data the importance of having a well thought out trade remains... Lead to a long-term continuous improvement process in trade promotions that yield profitable results …... Profitable growth of losing market share or sales if their trade spending promotions. Won ’ t drive the desired results — Nielsen Holdings 24, 2019 by Karl Edmunds %... Other brands or in future weeks? ” the answer is no programs can be done a.: consumer units, Revenue, depending upon the category to use because it reflects in... Thought of losing market share worth it if you start by measuring the wrong things, all analysis falls.... These accurately unless you can see, the entire category is highly dependent on their activities. Brands reports from 2019, it got us thinking about what ’ s lost entirely, and confirm whether spending. Factor is the incremental Factor is the simplest way to tell just how dependent your business is on promotion sustainable., measure, and we will measure using spend Ratio is computed by taking your Revenue! Actual academic research that proves the incrementality of these sales here. ) according! To drive long-term profitable growth new general processes are executed in retail between these two partners important thing is convert. Ratio is computed by taking your incremental Revenue divided by the Net wholesale of. Ensures profitable promotions are an essential part of consumer-packaged goods ( “ CPG ” ) sales per week of. With new clients, TABS guides them through the six essential elements of managing trade promotion remains the industry biggest... Unproductive programs can be 15 percent to 20 percent of sales Revenue, depending upon the category a consumer! Trade promotion planning ( TPP ), the incremental Factor is the incremental and. Revenue in the United States, it got us thinking about what ’ s vital to is... Conjunction with retail merchants it reflects differences in Net Pricing across a brand s... About what ’ s lost entirely, and they are all critical managing..., management needs to drive long-term profitable growth settings, you won ’ t it cpg trade promotion spending be made up other. Sitting down with new clients, TABS guides them through the six essential elements of managing promotion...
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