Over the last decade, the continued growth of Everyday Low Price players and different online business models has put a lot of pressure on the market position of traditional retailers. Many of them have reviewed their price strategies, often leading to price decreases and increased promotional pressure with limited long term gains and ultimately deteriorating their economics.
Pressure across the full value chain
Given the increasing power of retailers, the above trend is obviously impacting CPG companies as well. On top of intensive price negotiations, retailers aim to impose strong promotions on A brands - often funded by the suppliers - to increase store traffic and enhance their price perception. For CPG's this results in a significant value dilution and out-of-pocket investment, sometimes up to 25% of their gross revenue.
Despite the large & increasing cost of trade promotions, many companies still struggle to manage them properly. While retailers are getting better at leveraging customer data to improve their shopping experiences with relevant content and personalized offers, many CPG companies are still using a variety of non-standard processes combined with a scattered tooling landscape and individual spreadsheets.
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Whilst trade promotion management used to be reserved for CPG companies, it is getting increased attention in other industries as well. Companies are seeking to better track and manage their trade investments to ensure that they are in line with the company or category objectives. Using trade promotion management as a strategic lever is one reason, increasing margins is a second. The potential is significant. TPM implementations which are successfully embedded in an organization yield ROI increases of 8%-15%, with a direct bottom-line impact of 4-30% on the operating profit.
The traditional closed loop
Traditional TPM is a closed loop process with 4 distinctive phases:
The budgeting or strategic phase – promotions become an integral part of the budgeting process. The promotional strategy, which includes the allowed deal depths, focus products and promotions mechanics, for next year is determined;
The planning phase – promotions are planned throughout the year by the individual key account managers. The tactics defined in the strategic phase are used to plan individual promotions for the major accounts. Based on the promo duration, agreed mechanic, promo depth and estimated incremental volume, the total promotional costs as well as the incremental revenue are calculated and compared versus budget;
The execution phase – from preparing your promotion in store to tracking the performance. Depending on the type of promo this includes producing special SKUs, shipping and setting up displays as well as tracking customer orders;
The payment phase – refund the retailer for the volume sold during promotion. Based on information by external parties or directly on information from the retailers, the payment must be processed and actual costs can be compared with the estimate.
Optimize your spending
Whilst trade promotion management is a fundamental first step which allows to have a better overview of promotions and an increased control over budget, it doesn’t fundamentally drive towards running better promotions. The true value of trade promotion management lies in measuring the performance of past promotions and using that information in planning for future spending. This is often referred to as TPO or trade promotion optimization, adding two steps to the traditional closed loop:
Post-event analysis (PEA) – analyze actual performance of promotions. Based on sell-out data, sell-in data and competitor info, the effectiveness of different promotions is analyzed and the return on investment determined;
Optimization – use results of the promo analysis to fine-tune the strategy for the next sales cycle. What-if simulations and predictive analytics based on Artificial Intelligence algorithms are leveraged to further optimize the promotion tactics and execution.
A challenging transformation journey
Implementing a closed loop trade promotion management process is not easy as it requires alignment across different departments with conflicting interests. Many companies have turned to TPM tools to reach the next maturity level. However, despite the fact that some of those tools offer very advanced functionality, the lack of process integration and in-house capability building often results in a return far below the expected value. Trade promotion excellence can not be obtained by just implementing a tool. It is a complex journey which needs to be tackled step-by-step.Â
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When considering to improve your trade promotion management capabilities take following success factors into account:
Do not limit post-event analyses to measuring the ROI of promotions. Start with clear category objectives, define the role of trade promotion within your marketing strategy and measure performance accordingly.
Include trade promotion in a strategy to improve both your net revenue, and the one of your customers.
Your customer teams are best positioned to evaluate promotions, as their insights in the context of the execution is fundamental for qualitative post-event analyses. Find the right partners to build your capabilities in-house or to support your promotion management operations, but stay the owner of your strategy, data & insights.
About the author
Bert Vandewiele is partner in the Gent office. He has successfully designed and implemented TPM/TPO transformations for several Fortune 500 companies.
Roel Vermeulen is managing partner at Chronion. He designed and implemented true profitability models for B2B and B2C companies all over the world. He supported multiple commercial organizations to realize higher profitable growth while increasing customer satisfaction levels.
Do you want to know more about Trade Promotion Optimization, contact us.