But the most important thing is to convert those consumer units to pounds, cases, rolls, whatever. We’ll multiply that by the net wholesale price of $3.50 to get $3,675. 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. Revenue is better to use because it reflects differences in Net Pricing across a brand’s product portfolio. As you can see, the entire category is highly dependent on their promotional activities. This is going to serve as the foundation of how we evaluate our incremental (promotional) sales vs. our base sales. This can include customized software design and new general processes. Because this storm has significantly altered the landscape – especially when it comes to trade promotions. This is a downstream process. You get ZERO credit for loading inventory at your customers. Incremental Factor effectively answers the question, “What percentage of my business goes away if I stop promoting entirely?”. Trade Promotions can offer several benefits to businesses. 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.). Of course, you won’t be able to compute most of these accurately unless you can precisely calculate your base sales. 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. 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. 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. 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. Now, let’s compute our base units exclusively: 100 base units per week x 10 weeks = 1,000 base units. Over the next few weeks, we’ll be visiting these elements in detail. His focus is aligning technical solutions with sales, marketing, and organizational needs to drive long-term profitable growth. The key to keeping measurement simple and accurate is to measure exclusively in Consumer Units. Only marginal success was achieved. Some consumers will always buy if the price is discounted enough but their brand loyalty is solely driven by price. So, here’s the equation: $3,675 (IR) / $1,500 (IS) = 2.4 Spend Ratio. The holidays represent a major source of revenue for almost every CPG manufacturer and the season is quickly approaching. And even companies that don’t have direct-to-consumer marketing will still often have retailer driven in-store merchandising. Save for later; Introduction. We have also seen CPG companies fail to hold adequate reserves to deal with deductions accruing from the prior year. 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. 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. This not Revenue in the way it is typically used, which is total Net Sales shipped. When sitting down with new clients, TABS guides them through the six essential elements of managing trade promotion. By continuing to visit our site without changing your settings, you are accepting our use of cookies. In a sense, CPG companies are just beginning to thaw out after the storm called the Great Recession. 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. This site uses Akismet to reduce spam. We then take that unit count and create a measurement called Revenue. The study evaluated spending activity across the five core components of the modern CPG marketing mix: trade, advertising, consumer promotion, shopper marketing and digital. After reviewing the innovative and fastest-growing brands reports from 2019, it got us thinking about what’s to come in 2020. Most CPG firms struggle to track, measure, and confirm whether the spending produced positive, incremental results. Horseheads, NY 14845 US, P: +1 607-739-4511 It is hard to celebrate when huge sums of money are spent on various trade promotions and discounts during the busy holiday season. (Note:  this statement leads to many readers likely saying, “How do we know it goes away entirely? 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. Our goal is to simplify here, so we’re not going to mess around with manufacturing costs, logistical costs and other variable costs. CPGToolBox Is Transforming How Consumer Goods Manage Trade Spend with a Complete TPx Solution Suite. It’s lost entirely, and we will address that question in more detail in later blog posts. 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. If I stop promoting tomorrow, slightly more than half my total business disappears. 40% of CPG trade promotion spending doesn’t drive the desired results — Nielsen Holdings. CPG Trade Spending & Promotions: Ignorance is NOT Acceptable. Company executives tend to recognize its importance. Trade Promotion Planning (TPP), where we take those best practices and incorporate them into our workflow. 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. As an example, let’s say that the total cost of three events is $1,500. Your email address will not be published. of the money was lost by most of the manufacturers who invest in trade promotions – Booz Allen Hamilton . It includes promotional events, such as price discounts, displays, demonstrations, and the like, conducted in conjunction with retail merchants. Put another way, if the internal margin is greater than 42% (1/2.4), then the event is profitable. Consumer-packaged-goods (CPG) companies worldwide invest about 20 percent of their revenue annually in trade promotions. In Europe, where we’re experiencing a broadly deflationary environment, decent returns on trade promotion spend are increasingly hard to generate. This can be done for a single event or any aggregated period, such as a quarter or year. CPG Trade Spending & Promotions: Ignorance is NOT Acceptable. Rather our Revenue definition is the shipment value of the consumer units sold at retail. At 10-20% of gross sales, trade funds are a big investment for most manufacturers. 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. 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. Obviously the actual promotional costs for these active events are not complete. 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. 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. The Incremental Factor is the incremental Revenue divided by the total Revenue. This is the only approach that can lead to a long-term continuous improvement process in trade spending. To truly achieve effectiveness in trade spending, management needs to be able to see real market transaction level results by store. However, implementing a trade promotion successfully requires a significant investment of time and money. 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? Your email address will not be published. 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? 203 Colonial Drive In fact, we covered this issue in a recent blog post on ship-to-consumption analysis. 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. The full findings include more than 750 unique responses and represent more than $5 billion in trade promotion and shopper marketing spending. Of course, CPG companies can get access to retail sales data. Let’s calculate our total units. Yet, trade promotion productivity underperforms, while users have to navigate multiple legacy systems with incomplete or imprecise data. Trade promotion spending for a typical consumer brand can be 15 percent to 20 percent of sales revenue, depending upon the category. This is where things start to get sticky. Required fields are marked *. It can also be calculated as Incremental Units divided by Total Units. F: +1 607-739-4045 Our break-even Spend Ratio (SR) is the reciprocal of your internal Margin Percentage per unit (1/m). of trade promotions globally don’t break even – Nielsen Holdings. Won’t it just be made up on other brands or in future weeks?”  The answer is no. 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. 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. You’ll need to adjust your year-end trade spending calculation based on planned spending for these active promotions. The first question to confront is WHY? It can be easily communicated: “Look Mr./Ms. , Karl EdmundsVice President, Salient Management Company. Trade promotions are an essential part of consumer-packaged goods (“CPG”) sales. Let’s look at pasta sauce as an example. Companies cannot overlook or underestimate the impact their spend has on the bottom line. An outdated CPG trade promotion spending mindset. If we need to equivalize later on to analyze certain things, then we do it later on. We’ll come back to Revenue in just a few moments, but first, let’s talk about another important metric, the Incremental Factor. Trade promotion evaluation is one of the primary reasons CPG companies buy IRI and Nielsen data. Spend Ratio is computed by taking your Incremental Revenue and dividing by total Spend. The final metric that’s vital to assess is your profit, which we will measure using Spend Ratio. 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. Trade spends accounts for up to 25 percent of gross sales for a CPG company, second only to the cost of goods sold. Trade Promotion Best Practices (TPB), where we take that knowledge and refine it into a set of theoretical best practices. Trade spending is a common practice amongst consumer-packaged goods (CPG) and retail companies. We use cookies to ensure that we give you the best experience on our site. But is it worth it? It has come from analyzing twenty-plus years’ worth of trade promotions, over 200,000 of them in all. This is probably the single most strategically important measure in trade promotion analytics…and almost nobody uses it! (we wrote a post on this last year which you can find. If you want to be consumer-centric, then you need to measure the same way that the consumer buys. 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. Because not only is it possible, in today’s operating environment, it is essential to long term success. What differentiates best-in-class CPG players from average ones is the structure underpinning this variation. Consumer packaged goods companies spend billions annually on trade promotion, and pressure from retailers, competitors, and consumers is increasing. 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