Best practices for trade promotion management
Deliver higher margin growth with these three tactics to optimize your CPG or retail trade promotion management strategy.
Trade promotions, an integral strategy for many manufacturers, CPG (consumer packaged goods), and retail organizations, are typically used to drive sales or increase demand for a brand’s products. They usually take the form of discounts, displays, and events to encourage retailers to market items to consumers.
Being able to design and manage effective promotions across brands, channels, outlets, and geographies to target the “right customer” is no small task. Most companies struggle with identifying promising opportunities or introducing new offers without cannibalizing sales or determining the allocation of promotional spend.
But trade promotions are, and always have been, an important sales driver for the CPG industry to drive revenue from existing consumers, but also open new markets or segments. In fact, between 30 and 50 percent of retail sales volume across CPG categories in Europe are based on promotions.
Trade promotions are B2B focused (i.e., marketing activities and incentives offered by brands and wholesalers to their business customers) which differs from consumer promotions which target consumers directly. The benefits are manifold including driving revenue, increasing order size, accelerating order to cash cycles, improved customer loyalty, and improved profitability.
Types of trade promotions
Organizations use trade promotions for many reasons including creating markets for new products, opening new markets, increasing brand awareness, driving repeat purchase, or driving brand trust.
There are several types of promotions available to CPG organizations, and it is not a “one-size fits all” approach. Here are five examples of trade promotions:
- Offer deals or discounts: Pricing promotions or discounts can be used in two ways. Either to entice the retailer to carry the product or passed onto the end consumer to drive purchase or repeat purchase. Temporary price reductions can be tiered or flat, ad hoc, or linked to a specific seasonal event (e.g., “Black Friday” or the festive season).
- Physical displays: Using engaging physical displays in physical stores to attract attention. This includes point of sale displays, product stands, hanging signs/floor decals as well as sample displays and demonstrations to promote specific products. These is particularly useful in large retailers, where there is wide selection of SKUs available.
- Bulk purchasing: A common tactic that encourages retailers to buy in greater quantities by encouraging the purchase of multiple units or quantities in the same transaction. This usually results in a lower unit cost for each item purchased.
- Financial rebates: Retailers can earn part of their payment back, based on them meeting specific financial rebate criteria (e.g., if a certain number of products are purchased). Contrary to discounts which are applied at time of purchase, rebates are given after payment.
- Gamification or competitions: It’s an effective tool, and widely used in certain industries such as the automobile industry, where the seller who gets the highest number of sales gets acknowledged with an award or benefit.
Organizations may choose one or a combination of promotional options depending on the goals they are trying to achieve. This is where trade promotion management comes in. Teams can gauge the impact of a promotional campaign to optimize performance.
Today’s consumers are spoiled for choice, so promotions that worked in the past may not perform in the future. Decision-makers need to evaluate data and respond nimbly to remain relevant in the hyper-competitive, crowded market.
Challenges of trade promotion management
It is a hugely diverse and complex area to manage. Despite massive investment, many CPG organizations struggle to capture the full value of their investment in trade promotions.
It is seemingly impossible to balance products, channels, areas, and SKUs that are optimized for volume, sales, and profit. There are a few reasons for this:
- Visibility into the short- and long-term impact of promotions is surprisingly poor.
- Brand loyalty is no longer a prime factor in driving purchasing decisions, for many consumers price has become one of the key determinants.
- Promotions now need to be managed across multiple channels, both online, other digital channels as well as in retail or physical stores.
- The ability to predict the price elasticity of demand by SKU, by retailer and by region.
- Taking cannibalization and cross elasticities into account during a promotion. Decision makers need to consider the correlation that exists not only between products within the same line or category, but also the rest of the portfolio.
- Optimization of the In & Out volumes, the longer the product spends on the retail shelf, the deeper the price discount will have to be to sell.
Consumer and retail organizations need a sophisticated and nuanced approached to trade promotions to uncover the real impact drivers, design effective offers, and measure performance. Especially, when trade promotion investment can be upwards of 20 to 25 percent of gross revenue and one of the largest items on the profit and loss, after cost of goods sold.
Three tactics to optimize trade promotion management
There are a few fundamentals that organizations need to address to optimize or improve their trade promotions management:
- Update systems and processes: Most organizations still use spreadsheets or disconnected legacy systems as well as siloed teams to fund, plan, manage and track their trade promotion budgets. Inconsistent forecasting methods across teams or geographies make it challenging to track data at an organizational level, making it impossible to identify which promotions are working or which tactics require additional support.
- Balancing digital and traditional channels: To make the most of both channels, organizations need to use internal and syndicated data when planning either trade promotion strategies. Integrated planning will allow brands to develop plans which provide a seamless user experience.
- Optimize business planning: Collaboration with the retailer and developing joint plans with defined account metrics, forecasting and scenario planning will help achieve both short term initiatives and long-term strategies. This approach, supported by planning tools, helps both sides identify issues, make any necessary changes, and measure the outcomes in real time.
Ultimately, it is critical for CPG and retail organizations to optimize their investment in trade promotions, across all three areas.
Trade promotion planning solutions
Planning and analytics tools enable leaders to design and implement promotional activities to deliver growth. Organizations are able to maximize ROI across brands, customer groups, channels and regions, and optimize promotional investment.
There are nine additional benefits of leveraging a planning tool:
- Use advanced analytics to identify baseline models, uplift models or trends that can be shared across the organization.
- Leverage machine learning to quickly spot trends and analyze the effectiveness of promotions to identify areas of under- or overperformance.
- Pinpoint underlying root causes of promotion performance.
- Enable collaborations and predictive planning between individuals and teams.
- Manage accruals as well as claims.
- Use market analysis and real-time data to make informed pricing decisions, accurately set prices to maximize margin and increase profits.
- Leverage standardized management reports to measure and share results across brands, outlets or even regions.
- Optimize and manage retailer specific promotional programs address market and shopper opportunities at a granular level.
- Ensure optimal allocation of spend, based on promotional performance.
Whatever solution the organization chooses, it needs to be integrated into existing systems, with mapped workflows in order for promotions to be effectively managed across the organization and spend effectively managed and allocated across the best performing promotions.
Collaboration is vital
Traditional trade promotion management is a labor-intensive role, with much time spent on designing, implementing, and overseeing promotions. There are clear benefits to trade promotions but getting them right is easier said than done.
Effective trade promotion only happens when there is strong collaboration between departments — including supply chain, finance, sales, and workforce planning — underpinned with a robust analytics tool or system.
Regardless of the process or systems implemented, the most important aspect is the relationship with the retailer. A mutually beneficial relationship builds trust and results in growth for both organizations.
When stakeholders have access to real-time, shared data, they can make adjustments quickly. Decisions based on insights make sure that the right products are stocked in the right places at an optimized price, improving consumer engagement and sales.
By building on a strong foundation, companies can incorporate more sophisticated analysis that will allow them to drive spending effectiveness, cross functional performance, and joint business planning with their retail partners.
This content originally appeared on bedfordconsulting.com.