Trade spending has soared to $200 billion worldwide and averages between 15 and 20% of revenue for consumer packaged goods companies, according to a recent report by Accenture and the Promotion Optimization Institute.
As more and more companies begin to allocate huge amounts of their budget to improving their promotional outcomes, Keen has focused on tackling the trade challenge for our clients. In the process, we believe there are 5 keys to successful trade promotion optimization (TPO):
1. Trade promotion management (TPM) is not TPO. First off, there is confusion in the market that TPM is in some way going to make you smarter at your trade funding decisions. The reality is that TPM is a must-have when managing trade but, by itself, only helps you see and report your activity. TPO takes a new skill-set which combines statistical analysis, forecasting and operations research in order to build a scalable solution and improve decision making.
2. Design your TPO solution to the decisions being made, not for analytical insight. Probably the most important learning to pass on to others is that a TPO solution should be designed for the decisions being made and not strictly for measuring lift and ROI. If it does not result in a better decision it will not drive performance. The two main decisions most CPGs need to make are 1) what is the price we, as the manufacturer, are going to charge to a given retailer, and 2) what should we be willing to give up in price to support a specific retailer merchandising event? Remember, not all retailers are created equally.
3. The data you likely have today is only telling you about merchandising, not EDLP. Even with the greatest point of sale and trade activity data, the impact of EDLP is hidden. EDLP, which is a long-run tactic, gets lost in base price measures and not captured in syndicated lift measures. This requires statistical and analytical techniques that measure EDLP impact and capture it in the trade mix.
4. Trade and price optimization are flip sides of the same coin. We’ve found many firms executing trade promotion and pricing as separate activities with different people making these decisions. We also see many firms take a price increase only to buy it back with increased trade funding. The thinking that drives all this is that they “pay” for a trade event like they pay for advertising. Nothing could be further from the truth. Trade dollars are opportunity costs (reduced pricing) as opposed to cash expenses. So, pricing and trade optimization need to be considered together and by the same people.
5. Don’t forget that you will need to “sell” your plan to your customers (retailers). We find a lot of energy and excitement out of helping our clients understand how they can cut $50 million or even $100 MM in trade dollars. The key is to remember that realizing this desired outcome needs to be met with an entirely different approach. You now have to sell the solution to the sales force and retailers who only see the dramatic cuts rather than the opportunity. The key question in this relationship is whether the retailer makes more money as a result of doing business with you. This takes time and necessitates a solution that enables your sales force to illustrate in dollars and cents what is in it for the retailer.
Trade funding is really just a negotiation between a retailer and a manufacturer. The goal with TPO is to pay the right amount necessary to create the win-win scenario whereby the retailer and manufacturer thrive.
We hope these insights help and would love to hear your thoughts or answer any questions.