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Maximize the value of your marketing dollars

How to shave up to 2% of trade promotion spending

Author: Brent Houlden and Rajiv Mathur

Trade promotions represent big money—over $3 billion each year in Canada. That’s up to 15% of consumer packaged good (CPG) manufacturers’ gross sales revenues, and their second biggest expense.

Are manufacturers getting good value for this investment? Traditionally, trade promotions have presented CPG manufacturers with an unmatched opportunity to simultaneously increase their revenues, improve gross margins and reduce costs.

But many CPG manufacturers are frustrated with the little control they have over their promotional spending. That’s because retailers are not required to spend all of the trade promotions funds on consumer discounts. Up to 40% of trade promotion funds provided by CPG manufacturers can end up going directly to retailers’ bottom lines, usually to offset advertising costs.

Take control in four steps
By better managing the way in which they handle trade promotions, CPG manufacturers stand to reduce marketing budgets and increase the return on investment. Shaving 1-2% of promotional spending would result in significant savings. Here’s how:

1. Develop a clear and comprehensive trade promotions strategy
Promotional spending should be viewed as a trade investment strategy to guide the way brands are promoted. This strategy should define target objectives, the investment size, the initiatives to be pursued collaboratively with retailers, and the expected short- and long-term paybacks to be achieved by the promotional program.

The most effective programs are ones that:

  • Base marketing decisions on ROI rather than short-term tactical actions
  • Focus on brand/category development and increasing total customer profitability
  • Empower the sales force to be responsible for profitability, and not just sales

2. Collaborate with retailers throughout the process
Driven by more stringent financial reporting requirements and the need for supply chain savings, retailers as well as manufacturers are investigating collaboration in all phases of their trade promotions programs—from jointly developing account-specific programs, to processing existing promotional programs, to assessing their effectiveness. Integrated systems are also required if CPG manufacturers wish to implement a cohesive vendor to distributor process (by providing a seamless closed-loop business and systems process) and to develop programs customized to individual customers.

3. Simplify execution and settlement via communication and technology
Reducing and simplifying trade promotions programs make their management easier for both the manufacturer and the retailer, and also allow the retailer to better comply with the terms of the deal.  Effective communication and working cross-functionally help to identify and simplify the most common processing problem areas, while automated processes make it easier to match deductions and improve clearing procedures.

Trade promotions software solutions are now available to help CPG manufacturers manage the complex processes associated payment, clearing and deduction avoidance, including verification that the CPG manufacturer does not over compensate retailers. It is important that trade promotions software solutions be integrated with the technologies that support other aspects of the demand and supply chains, and with the organization’s ERP processes. These fully-integrated systems may then be used to help achieve benefits such as fewer stock-outs, minimized post-promotion surplus stock, improved demand forecasting, support for payment tracking and deduction resolution, and reduced manual entry of trade deal-related information.

4. Measure and act on the results
Technology—and program simplification improve the readability of a promotion’s performance. A variety of elements can be assessed:

  • ROI for each event
  • Percentage pass through
  • Participation and lift
  • Total “cost to serve” each retailer
  • Account profit and loss statements
  • The usage of promotional materials
  • Number of on-time deliveries
  • Competitor, media, and merchandising activities

After measuring results, CPG manufacturers may adapt some programs, consolidate some, and totally eliminate others, perhaps choosing alternate methods that deliver marketing dollars directly to the consumer. Some are pursuing the Internet as a low cost, measurable method of establishing direct consumer relationships; others are revisiting “low tech” approaches such as direct mail.

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