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A Winning Strategy For Trade Promotion Management
A Winning Strategy For Trade Promotion Management
A Winning Strategy For Trade Promotion Management
Trade promotions - the complex array of deals that manufacturers offer retailers to
feature, display, or offer promotional discounts on their products to consumers -
are at an all time high. Consumer packaged goods (CPG) firms' trade promotion
budgets have escalated to 15% or more of net sales - making this the second
largest P&L item after Cost of Goods Sold. For most CPG manufacturers trade
promotion spend in 2005 accounted for over 60% of the marketing budget and
exceeded the combined spend on advertising and consumer promotions.
Studies suggest that over 90% Yet trade promotions continue to be largely ineffective and unprofitable. Studies
of trade promotions have suggest that over 90% of trade promotions have negative ROI when issues like
negative ROI when issues like cannibalization and execution costs are considered. And here comes the bad
cannibalization and execution news…given the on-going consolidation of retailers, trade promotion spending is
costs are considered. And here expected to grow not decrease.
comes the bad news…given the
on-going consolidation of CPG manufacturers therefore need a carefully considered plan of action to address
retailers, trade promotion promotional spend if they want to stay competitive.
spending is expected to grow
not decrease. Drivers of the Trade Promotion Problem:
Low ROI and Limited Collaboration between Manufacturers and Retailers
analysis…
* Lake Group Staff, ROI from Trade Promotion Management Systems, The Lake Group, January 2003
and retailers are totally out of synch when it comes to trade promotions.
Manufacturers complain - perhaps correctly - that trade spending has gotten
totally out of hand and yet retailers keep negotiating for higher trade funds.
However, when it comes to the consumer, retailers and manufacturers are really
not that far apart :
-- Manufacturers want to attract loyal and profitable consumers to their
brands. To achieve this objective they would like their trade promotion
programs well executed on the retail side and coordinated with other
elements of their marketing spend, like advertising and consumer
promotions
2
Consumer Products and Retail the way we see it
■ Close the loop - implement software solutions that provide enterprise wide
visibility into promotional performance and are integrated into your ERP
systems
Re-design
Based
on Learnings Plan
Promotion
Integrated
Systems
to Close The Loop
Measure
Promotional Manage
Success Execution
more per visit during the promotional period only or if they actually ended up
buying more of your brand over an extended period of time. Pantry loading by
consumers for a deeply promoted brand only ends up creating peaks and valley
across the supply chain. In designing the promotion also consider both potential
substitutes and complements to your product - and the impact on the overall
category sales.
■ When do they buy? Seasonality issues and timing issues drive response to your
promotion as well as how much you should be willing to pay for exclusivity
during a particular promotional period. For example no matter how high the
promotional discount it is unlikely that consumers in Chicago will buy lawn
fertilizer in November. Monitoring sales during the season and planning
promotions to encourage consumer purchases prior to the end of the season is
critical to both manufacturers and retailers.
including end-caps, features, displays and so forth to establish the value and
effectiveness of each element of the program and how much you should be
willing to pay for them
■ Consider your marketing mix and what works for the brand and integrate with
region of country, their customers, their objectives for the category and how
your product fits into the category
■ Finally design the promotion based on value or ROI potential as opposed to
Project Costs Across the Supply Chain by Promotional Program and Element
Broaden your perspective on promotional costs from merely evaluating direct
promotional payments to retailers to include the actual execution costs for the
promotion and include all elements of costs including:
■ Direct Promotion Costs: Cover all allowances paid to retailers for their
promotion
4
Consumer Products and Retail the way we see it
■ Operating Costs: Integrate and track each project and investment across the
supply chain and include increased manufacturing, distribution, and inventory
spoilage costs
■ Overhead Costs: Account for soft costs like increased order entry, sales force,
and marketing department costs and include labor time spent on planning and
executing the promotion
■ Financial Costs: Calculate the added financial costs such as increased inventory
■ Retail sell-in: A key issue for retail sell-in is not just getting buy-in to the
promotion from the retailer - but getting your retail partners to jointly agree to a
set of measures for promotional success. Simply put does the promotion meet
the joint definition of promotional success from a manufacturers and a retailer's
perspective? Questions to consider while setting up your joint evaluation :
Consumers:: Does the promotion attract the right types of consumers to the
brand and the store, increase the overall market basket of purchases, and
increase the stores market share over its competitors?
Store Costs: Were additional store labor, equipment and signage costs
incurred during the promotion accounted for? Who pays for these
additional costs incurred?
planned is critical to evaluating its success. Accounting for both the direct
promotional costs and the soft costs associated with additional inventory held
will provide a much better picture of promotional costs. Finally, associating a
dollar amount with promotional breakdowns like lost sales due to stockouts or
manufacturing overtime and higher distribution costs paid due to un-expected
sales spikes will provide a much better handle on total costs.
■ Revenue Drivers - Since the primary objective of all promotional activity is
2. When we calculated both the hard and the soft costs associated with the
promotion did the incremental sales over baseline justify the investment?
6
Consumer Products and Retail the way we see it
Software used for trade Software used for trade promotions must provide enterprise-wide visibility and be
promotions must provide linked into your enterprise planning systems. Ultimately it must enable you to
enterprise-wide visibility and be plan, manage and measure the effectiveness of your trade promotions spends.
linked into your enterprise Most importantly any system you consider should not only enable you to measure
planning systems. Ultimately it what went well this year but also help you reconfigure your promotional process
must enable you to plan, and plan for next year’s promotional planning cycle.
manage and measure the
effectiveness of your trade Only then can you transform your trade promotion from a necessary expense to
promotions spends. an investment!
North America
Dave Holloman
Leader, North American Consumer
Products Sector
david.holloman@capgemini.com
+1 312.395.5107