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Carrie O'Brien, Consumer Products Business Analyst, discusses the actions to take now at your organization
Why should consumer products companies implement the industry-recognized Trade Promotion Optimization (TPO) preferred practices?
Effective trade promotion management is not focused on decreasing the funds spent on promotional activities, but instead increasing the efficiency, profitability, and visibility of these investments. Trade promotion is not just a business process improvement or software system — it is a closed-loop, cross-functional strategy. Like most business processes, TPO is not a destination but a journey. It requires continual improvement and collaboration across the firm. Quantifiable optimization of promoted events
needs to become part of every discussion for senior management.
The seven major areas of the trade promotion management lifecycle for consumer products manufacturer are:
- Customer business planning
- Budget allocation
- Promotion development and modeling
- Retail execution and monitoring
- Settlements
- Management reporting and post event analysis
- Category optimization and insight
Many companies try to use technology as the catalyst for business process improvement. Most companies fail with this philosophy. Industry leading companies identify the needed process improvements, write the improvements into their business requirements and then search for the best vendor to meet these requirements.
Today, there isn't one major software vendor or hybrid ERP solution that provides all the necessary functionality to support the entire TPO lifecycle. It remains a pain point for most companies. Industry studies estimate that approximately 65% of organizations still use spreadsheets as their primary promotion planning and analysis tool. The combination of individual spreadsheets within a department and legacy TPM tools, continually sub-optimize quantifiable trade profitability.
What are the benefits of a TPO collaborative process and proactive environment?
Implementation of an effective Trade Promotion strategy provides management with visibility of how, where and when their trade funds are being spent. TPO integrates the demand and supply sides to ensure that the right quantity of the promoted product will be on
the shelf when the consumer makes a purchase. This will reduce stock-outs, lower inventory levels and increase profit for the manufacturer and retailer. It is a win-win situation for all parties.
In addition to the bottom-line benefits, TPO provides insight into the success of a specific promotion. This analysis will allow category managers to 'tweak' current promotions based off past successes. Better controls of trade allowance and customer P&L's will reduce spending on ineffective events. In addition, it will foster collaborative relations between manufacturers and retailers, build brand awareness, decrease deductions, and provide greater invoice accuracy.
For years, TPM has fallen under the sales and marketing departments responsibilities. Now the distinction between demand and supply chain is blurred as the business benefits of their integration is revealed. The demand side analyzes which programs provide the best lift, value and ROI and relay this information to the supply chain. Integrating promotion plans into the supply chain planning generates better forecasting and execution. . This collaboration results in real-time forecasts and ensures the right product is in the right place at the right time. It is estimated that this integration can increase profits by 40%.
What if companies wait to optimize their trade promotion strategies?
Trade Promotion is typically the second largest expense on the income statement averaging about 10-20% of gross sales and 65-75% of marketing spend. In 2005, total trade spend is estimated between $80 and $100 billion, up 33% in the past 5 years. Companies are continuing to spend more and more, yet a recent industry study estimates that more than 80% of consumer products promotions are not measured. According to Dr. Edward Deming, "You can not improve what you do not measure."
Are you able to accurately and quantitatively measure your trade promotion effectiveness event-by-event?
If you know where to look, ROI justification is getting easier to quantify. The key to success is for consumer products companies to compare industry benchmarks against current processes. Clarkston can provide companies a scorecard outlining current state versus the industry best practices and identify specific areas in the trade promotion lifecycle for improvements. Industry studies estimate that a 5% reduction in promotion spending potentially improves net earnings by 10%. With the recent increase in regulation and reporting of promotion spend as a reduction of net sales, visibility of trade promotion expenditures is essential for senior management. ROTI or Return on Trade Investment is the best metric-based analysis to use for leading edge optimization programs. Other key performance indicators may include traditional ROI, category lift, sales lift, profit per incremental case, percentage pass through, trade margin and volume increase. In addition, companies are tracking claims processing time, errors in payment, over-expenditure of funds and deduction of resolution time.
What is trade promotion optimization?
By managing and understanding trade promotion spend, management has the ability to recommend profit maximizing merchandising tactics including TPR, display, ads, and off-invoice across:
- Categories / Brands / Products
- Accounts / Markets / Store Clusters
- Objectives (profit, image, etc)
- Constraints (operational, supply chain, etc)
- Set sales margin targets and ranges
In addition to trade promotion optimization, an effective TPO program can provide pricing guidance on every day shelf and promoted items. Pricing optimization can help determine:
- Cannibalization within the category
- Halo effect
- Cross elasticity effects
- Objectives (profit, image, etc)
- Constraints (operational, supply chain, etc)
- Set sales margin targets and ranges
How can Clarkston help?
Clarkston provides deep subject matter expertise both in the strategy and execution of trade promotion management. Our service offerings include:
- Educate client of entire trade promotion "closed loop" lifecycle
- Identify weaknesses in lifecycle
- Optimize the business processes
- Create knowledge-based business requirements
- Identify and select the best software vendors
- Create quantitative measures for each event
- Provide a holistic view of the event (including syndicated data, POS data and consumer insight for each event)
- Drive towards real-time integration between you and your trading partners
- Plan for future profitable promotions
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