Overcoming the Barriers to Superior Trade Promotion Effectiveness

Every year, an enormous amount of ink is spilt to greater or lesser effect on advertising: how to make it more effective, how to tie it more clearly to brand and sales lift outcomes, and so on. Much less is devoted to trade spending. And yet trade spending represents more than twice as much of the average consumer packaged goods (CPG) company’s expenditures—19 percent of revenue compared with advertising’s 7.5 percent—and sits second only to cost of goods sold as an expense item in the ledger (advertising is fourth).

As a result, the management of trade promotion, or revenue management as it is often called, remains in a relatively immature state. Exhibit 1, which maps incremental sales revenue against return on investment (ROI) for a typical CPG manufacturer, shows that the results are all over the map, with an average ROI of just 11.2 percent. Fully 43 percent of promotions lose money, and the average ROI in the bottom quintile is an eye-popping 75 percent.

No wonder fewer than one in four of our clients is happy with their promotional program.

How can this be fixed? Based on our work with a large number of CPG manufacturers, we believe that there are four fundamental issues:

Measurement Challenges: Why is it so difficult to measure promotional effectiveness? Consider: manufacturers know what they spend on trade promotion. But how are they to determine what they make on it? The data on what is sold to consumers during a promotion must come from outside the company. Of course, CPG companies can get access to retail sales data. However, manufacturers must cope with a different set of product identifiers from each retail data source, and differences in the unit of measure (such as case vs. consumer unit). Compound this problem with aligning the dates of the promotion between the manufacturer and the retailers across the tens of thousands of promotions a big CPG company runs each year, and you get some sense of the scale of the challenge.  Further, manufacturers have to separate out sales that would have occurred anyway, if the product had not been promoted, from the incremental sales driven by the promotion, as well as adjusting for other drivers (including the weather).

Fortunately, much progress has been made in this area, and the best promotional optimization and management tools help CPG manufacturers measure promotional effects reliably in the retailer environment and combine them with internal cost data for materially better visibility into the ROI of individual promotional activities.

Strategic Planning vs. Tactical Reality: It’s not just about data and metrics. It’s also about the difference between a CPG company’s plan … and what happens on the ground. Most CPG companies conduct strategic planning for price and promotion once or twice a year. Many use sophisticated predictive analytic tools to figure out how alternative promotional programs would do in the market and decide on the “best” course of action. The decisions are then relayed to the account teams, who work directly with the retailers. At that point, a thousand negotiations begin—at which point the link between the view at the strategic level and the key account level has already been broken. As the year progresses, the sum of the thousand negotiations is likely to be very different from the strategic plan sent down from headquarters at the beginning of the year.

Manufacturers need to integrate strategic planning tools at headquarters with tactical negotiation processes at the key account level—so that each retailer negotiation can be optimized while also remaining aligned with the overarching intent of the strategic plan.

Promotional Plan Management and Execution: Given the large number of promotional programs that a manufacturer executes across categories, retailers and geographies, a consistent approach to promotional management is needed to ensure the right product is in the right store at the right time, even if the retailer changes its mind at the last minute and chooses to change the time, scope and support of the promotion. Over half of out-of-stocks are caused by poor price and promotion management.

If this is to work, promotional optimization and management tools have to link reliably into the supply chain and financial management systems of the manufacturer.

Management Process: Today’s CPG manufacturers need to adopt the mindset that optimizing and managing promotional activity is not just an ad hoc matter to be dealt with at certain times of the year by a small group of analysts. Otherwise, nothing will improve. Companies need powerful, integrated software applications that enable a wide range of managers to optimize and execute promotional activities on an end-to-end basis so that a consistent process is used pervasively throughout the organization, for all categories, retailers and geographies.

Is it a big task? It is. But, given that trade spend has nearly doubled over the last ten years, and that more than a fifth of consumer packaged goods in the U.S. are sold under one kind of promotion or another, spending less time thinking about trade promotion than about advertising has become a problem companies can no longer afford not to solve.

By Uta Werner, EVP, Performance Management, and Rick Hall, SVP, Revenue Management and Optimization