Exploring the next level of trade spend optimization

There is no shortage of pithy quotes about how we should embrace uncertainty. Just ask Bard or ChatGPT. But inspiring as they are, they don’t offer much practical help to CPG firms striving to optimize trade spend in the short term, while positioning themselves for long-term growth. Trade spend optimization is all about balancing these immediate and future goals.

Commercial teams that simply repeat what they think has worked in the past are liable to get left behind. They might look to establish what return on investment a given activity will deliver. And then use that as a basis for planning. But individual activities happen within a much larger context, not least the long-term contracts between manufacturers and retailers. And even the most carefully constructed plans can be thrown off course. By political volatility, for instance, or supply chain shortages. Or just an unexpected  early loss at the world cup. 

Establishing the true value of trade investments with retailers and channels is already a complex task. However, understanding how these investments contribute to a long-term trade spend strategy focused on sustainable growth is an even greater challenge.

In this article we’ll show that while a focus on ROI is a starting point, there are limits to its utility. However, by moving to a more strategic total contribution model, adopting trade spend optimization, and investing in the tools to support this, CPGs can improve their trade spend management decisions. Consequently, they can set the stage for sustainable growth over the long term.

The ROI challenge in trade spend optimization

If you’re a business and you’re spending up to two fifth of your revenue on something, you’d want to make sure you’re getting value from that investment. So, in the CPG world, sales teams, finance, and senior management, should all be paying attention to the 40 percent of their revenue they typically devote to trade spend. 

But how exactly do you assess whether you’re getting value? 

The starting point for this is return on investment. If a discount scheme with a particular retailer or market is not delivering a benefit, why would you want to throw good money after bad? But if a particular instore activity is helping you increase market share, wouldn’t a switched-on account manager want to extend that promo period? Or roll it out to more stores? It’s a compromise CPGs can be willing to make, depending on context. 

The problem is each single promotion or discount, each SKU or family of brands, exists within a broader context. Each activity is just one aspect of a broader, often long-term, contractual relationship between manufacturer and retailer. This relationship can span multiple investments and activities, which overlap, and potentially impact each other.  

Why we shouldn’t look at ROI in isolation

Looking at the ROI of one isolated promotion might not say much about progress towards fulfilling those broader, longer-term contractual goals. 

And the manufacturer will – or certainly should – have a broader strategy, stretching years beyond any contractual period with any single retailer. This strategy should be designed to ensure sustainable growth, both for individual brands and the company as a whole.  

ROI might be a straightforward indicator when it comes to specific activities. But establishing long-term, growth-oriented ROI is more of a challenge. Profitability, ultimately, will be what underpins a brand, a group, and a company’s success and viability into the future. Taking all this into account, marginal contribution becomes a better measure of success and a sounder basis for analysis. 

Moving beyond ROI: total contribution analysis 

Tracking ROI might appear straightforward. An account manager will plan a particular promotion with a retailer and look to predict a specific measurable return. Invest X amount in instore activity, or offer a given discount, and expect sales or volumes to grow by Y. 

But what if this is at odds with other activities from the same CPG vendor? Or if other factors undermine the offer? Perhaps it overlaps with other activities, such as mainstream marketing or advertising. 

Are there other ways to measure the ongoing success or growth of a brand or line and, by implication, the effectiveness of trade spend optimization? Market share might be a key factor for a CPG, but here, too, it’s hard to single out one investment as a driver. A strategy which increases store visits might please a retailer as well as boosting sales of a given product. But this, too, often consists of multiple, overlapping initiatives, making ROI immeasurable 

When sales professionals and senior executives start considering all these elements, they will inevitably conclude that a more overarching KPI is needed to measure success. What’s needed is a more nuanced view of the effectiveness of trade spend, specifically the marginal contribution to overall growth.

Marginal contribution

This approach creates a platform for deeper analysis of a brand, retailer, or entire channels and their total contribution to growth. Furthermore, it provides a foundation for trade spend optimization, ensuring that the total set of activities and investments contributes to KPIs: profit, revenue, and market share.

This could highlight the need for more strategic decision making. It might become apparent that an individual partner, or an entire channel, is delivering high growth but comparatively low profitability. Left to run on, this could begin to undermine profitability overall. If it becomes clear that a partner is in decline and delivering low profitability, a CPG might decide to maintain or even decrease investment. 

This will be a critical consideration for the sales team, but also for other functions such as demand forecasters or finance. But it’s also important information for more senior leaders looking to discern how tactical, short-term activities translate into the long-term success of the organization. 

Risks in trade spend optimization 

Trade spend optimization goes hand in hand with a strategic approach to sustainable growth. But there are still challenges and traps that can swallow up the unwary. 

One of the biggest dangers is overinvesting in promotions. When a 25 percent price reduction has apparently delivered increases in volumes, there’s a temptation to repeat it more often. Or a sales specialist might even propose to increase the discount rate to 50 percent. If the focus is on volumes, this could make sense. In the short term at least. But it could eat away at baseline profits over time. 

And what is the competition doing? A rival might not be as profitable to a retailer, but could compensate with other activities. More investment in shelf space, for instance, or pricing actions, that ultimately constrain your efforts. So, how do you keep tabs on what is going on in the market, and how do you respond? 

Inaccurate forecasting is a constant worry. Your model might suggest investing in one retailer with the prospect of 10 percent growth, while predicting a decline at a rival. But what if the opposite happens? You’ll have potentially wasted that investment and fractured your relationship with at least one of your retail partners. 

Taking a holistic view

Likewise, short-term factors can have a significant effect on ROI or contribution. Unexpected weather, for instance, a glut of products, a supply chain disruption at a rival or across an entire category. But without visibility of your own products and of the market, it can be easy to be swept away by illusory success. Or, for that matter, by what looks like failure. 

A sales team might pat themselves on the back each quarter if a promotion succeeds. But what are those efforts saying about the long-term trajectory of a product line, or a partner, or even an entire channel? Are they contributing to the company’s success for the future? And are they demonstrating to the retailers that they understand their challenges? 

Specific, discrete actions designed to optimize your trade spend might appear perfectly logical, considered in the short term. But looked at more holistically, it can become clear that they don’t deliver the benefits you hoped for. They might actually even be undermining your business outlook. 

True trade spend optimization requires a holistic view of trade activities, and of the company as a whole. And that requires the right tools. 

Trade spend optimization software 

What tools then will allow you to begin your trade spend optimization, and move to a total contribution analysis model that delivers predictable and sustainable revenue growth? 

A feel for the market is not enough. It’s hard to scale a hunch. Hand-tooled spreadsheets or customized systems suck up time and reduce collaboration.  

However, modern trade spend optimization software can give a team, and an entire organization, a common platform to analyze and optimize their trade spend. 

Innovative software will be able to accommodate data from across the organization, and from partners and third parties. State-of-the-art analytics and artificial intelligence can then produce an accurate baseline over time. They can also provide far more accurate forecasts – taking into account the anomalies and disruptions we’ve discussed. 

But CPG strategy is about more than just volumes and trade promotion spend. An integrated solution should enable different teams within an organization to share both raw data and the resulting insights, providing a comprehensive volume-to-value forecast. This allows account handlers to see the impact of their activities on other parts of the business, and to model and optimize accordingly.  

Volume-to-value forecast

And it should allow sales leaders, finance and senior management to take a bird’s eye or long-term view, and to drill down to specifics when necessary. 

Better forecasting and analytics together with the automation of manual processes means human bias is removed. But that doesn’t mean the human factor is removed altogether. Sales team members are freed up to focus on innovation and relationship building with retail partners. It’s one thing to propose a new pricing scheme or in-store promotion as part of a long-term strategy. It’s another to present a category manager or a retail buyer with both a plan, and the data to support it. Decision making suddenly becomes much easier, and much quicker. 

A modern solution facilitates trade spend optimization and other activities within the organization. Moreover, it enhances personal fulfillment for both account handlers and sales accounts by shifting from separate, discrete promotions to a focus on collaboration, knowledge sharing, and shared goals as the drivers of future category growth.

Visualfabriq’s trade spend optimization software 

Visualfabriq’s Trade Spend Master gives CPG companies the data integration, visibility, and AI-powered smarts they need to optimize their trade spend in the short to medium term and deliver sustainable growth in the long-term. Additionally, the Trade Promotion Master provides the required insights into promotional performance and uses embedded AI to optimize promotions. 

The software as a service (SaaS) solution is highly configurable, providing commercial teams, finance, and senior executives with complete visibility into their promotional, pricing, and contract strategies. This visibility is available at both detailed and strategic levels, enabling informed decision-making. Because they are part of Visualfabriq’s broader offering, with an audit-proof workflow, they allow the entire organization to coordinate actions for maximum efficiency and impact. 

The result is that commercial professionals can optimize as they plan. This results in more impactful trade spending. As well as the ability to analyze the contribution of individual activities, retailers, and partners to the overall company success. 

Takeaways 

When it comes to trade spend optimization, considering the ROI of individual promotions or activities is only the beginning. It’s just the first step in ensuring that your investments contribute to overall growth. Investments – and their results – need to be understood within the broader context of contractual relationships with retail partners. And they must be assessed against the long-term strategic goals of the CPG. This means adopting an integrated approach to trade spend optimization. As well as adopting a total contribution approach to brands, categories, retailers and entire channels. Would you like to see how Visualfabriq’s solution can help you optimize trade spend in the immediate term, and position you for sustainable growth long-term? Book a demo today.