For consumer packaged goods (CPG) companies, it’s no secret that managing trade spend is a number one priority when it comes to controlling costs. In fact, given that trade spend for most CPGs is somewhere between 20 to 25 percent of annual gross company revenue, you could say that ensuring those dollars are well spent could be priorities one, two and three. Even small improvements in trade spend performance will have a significant impact on earnings.
But so many CPGs are still in the dark when it comes to evaluating the ROI of their trade promotions. Without sufficient analytical tools many companies still rely on a combination of Excel spreadsheets, gut feelings and generalized expectations to plan their trade spend.
Bandwidth is so limited that most companies only have ROI insight to less than 10% of promotions. Our TradeSmart solution fixes that. There are several areas that CPGs need to pay close attention to when evaluating trade spend ROI. Here are five tips that can help get you closer to true ROI:
There are a lot of variables that go into calculating trade spend ROI. Consumption is one, but not the only one. For example, if you forward ship for a promotion, how do you measure internal ROI using only consumption data? Bottom line is, you can’t. Also, what happens when consumption doesn’t meet the original planned volume timeframe? For this to be accurate, we must also include shipments.
It’s common to move incremental consumption that’s not associated with a promotion into a time frame that has a promotion. The assumption is that anytime there is lift, it has to be due to a promotion. This is overriding the facts. You may need to increase or decrease the promotional time period because of early or late shipments. You may see a post-promotion halo effect. But, you should never shift revenue from one day to another.
Actual retail events often include multiple promotional tactics all running at the same time. A single retail promotional event may have a display, an in-store coupon and a circular. Typically, planning systems treat them as individual events that are assigned specific budget allocations. However, the retail event is all three tactics combined. To capture true ROI at retail, you need to roll up the tactics so that you can see how all three performed together as a single event.
EDLP is an ambiguous term. We’ve had several companies ask, “How do you calculate EDLP base and incremental volume for EDLP?” – as if there is some magical answer. Some solutions will ignore EDLP altogether because they view it as the standard price if it’s in effect for longer than 15 to 20 weeks. The only true way to calculate EDLP base and incremental volume is to go back in history to where EDLP was not in effect, and compare it to EDLP trends. Otherwise, you will need to take a moving average, and use a tool that lets you input adjustments.
CPG manufactures find themselves in spreadsheet hell when trying to gather, collate and analyze all the data points required to understand trade spend ROI. This is a complex, resource-intensive and highly manual process prone to human error and inconsistencies. As a result, there are not enough human resources or time to calculate ROI and lift for all promoted product groups, at all retail accounts. Most companies only manage to cover 10% to 25% of all trade spend events. In addition, you can be certain that such a manual process will be riddled with various versions and interpretations of event-level calculations. This process needs to be automated with consistent, agreed-upon business rules and KPI calculations.
Bottom line: Measuring trade spend ROI for both the retailer as well as the CPG company, is not to be taken lightly. The pitfalls and complexities that prevent an accurate picture of trade spend performance are everywhere. But with Mindtree and Relational Solutions now banded together, we have this problem surrounded. If you feel your company is falling short on any of the five tips above, write to us at firstname.lastname@example.org and let us show you how we’ve raised the bar for our CPG clients.