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The Best Way to Manage Trade Promotion Spending
Trade promotion spending continues to rise and now averages nearly 17% of net revenue. This investment pays off if the bottom line is a worthwhile return per trade dollar spent, while meeting volume and share objectives. Unfortunately, many CPG manufacturers run the risk of robbing the equity of their brands by not managing their trade promotion dollars properly and over-allocating their marketing mix to trade promotion.
Too often, trade spending increases have come at the expense of other brand-building and consumer-driven marketing efforts. According to the recent IRI Trends Report, 30% of volume is sold through merchandising. But while merchandising is increasing, the overall effectiveness of that merchandising has been decreasing over time. For example, the study indicates that two-thirds of product categories have increased merchandising and 60% have seen a declining volume lift.
Merchandising is certainly effective at driving short term-volume and satisfying many strategic needs for both the brand and the retailer. But CPG manufacturers must define the role of trade within the context of the overall marketing mix better. How? By linking the trade promotion strategy to consumer behavior that benefits both the brand and the retailer.
Let’s look a little closer at this process. First, decide on the optimal trade spending relative to the other elements of the marketing mix. Many manufacturers discover that they have severely over-allocated trade promotion spending at the expense of the other equity-building opportunities. Second, figure out the best way to reallocate without damaging the brand. Third, understand how consumption is generated via trade promotion, whether it is an elastic- or inelastic- driven category, and how important seasonality plays relative to consumption.
Within the framework of volume building, the brand must determine channel sensitivities or channel importance and the merchandising philosophies of individual retailers (EDLP, Hi-Lo, etc.). Channel/customer importance or growth helps drive spending allocation. Within the context of the merchandising philosophy, you must begin to understand merchandising tactics and price points that are consistent with the brand personality. Some questions to ponder:
- What is the right frequency of promotion?
- What percent discount and tactics drive the best volume lift?
- What is the best timing or seasonal week for promotions and how does that promotion affect the other brands in the portfolio?
- Are there promotional bundling opportunities that can create menu cost efficiencies or align promotions with consumer purchase behavior?
- What are the critical price points to reach in promotion and what is the impact of not achieving them?
The role of promotion for an inelastic brand may be to get a fair share of brand switching. We have gathered the insights to understand that consumers are not necessarily going to buy more product just because it is on promotion, but promotion may cause them to switch between brands instead. Pricing and promotion are inextricably linked, so it is critical to understand the relationship. If the brand has the right everyday price, you must understand the impact of price gaps to other national brands or private label and decide if they are important.
The goal is driving better return per trade dollar spent, while meeting volume and share objectives. All of this analysis cannot be done without understanding the retail environment and the key driver for the retailer. When making promotion strategy changes, you must understand how the changes affect the margin and revenue of retailers. They are starved for better insights about trade promotion. Many times they may have established a role for the category that nobody can afford to live with from a profitability perspective. Most often retailers want to understand the role of trade promotion within the context of the category, as well as how important deals are to the shopper and who is buying on promotion. They want to understand the impact of merchandising on the overall category? It is more important for them to grow incremental volume than to trade market share between brands.
The larger challenge for many CPG manufacturers is changing the historical mindset both internally with the sales organization and externally with the retailer. Many sales organizations are still incented on volume or revenue rather than profitability. So executives are skeptical for many reasons. Will it affect a competitive response that could be detrimental and will the retailer react negatively to the proposed change?
The key to driving change is to share shopper insights with the retailer relative to promotion and then build a financial case for action.
Paul Thompson is a partner in the Dallas office of Henry Rak Consulting Partners, a Chicago-based consultancy. We invite you to learn more about the HRCP partner team.
To learn more about HRCP and its services, visit www.hrcpinsights.com.
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