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 really don’t help CPG firms trying to establish the best way to invest trade spend in the short term, while positioning themselves for growth in the long term.
Commercial teams who 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 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 factors such as political volatility or supply chain shortages. Or just an unexpected early loss at the world cup.
But if establishing the true value of trade investments with retailers and channels is a challenge, teasing out how they contribute to a long-term strategy of sustainable growth might appear impossible.
In this article we’ll show that while a focus on ROI is a starting point, there are limits to its utility. But, by moving to a more strategic total contribution model, adopting trade spend optimization, and investing in the tools to underpin this, CPGs can improve their trade spend decisions and set the stage for sustainable growth over the long term.
The ROI Challenge
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 CPG’s 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.
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? 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 what’s needed is a more overarching KPI to measure success. What’s needed is a
, more nuanced view of the effectiveness of trade spend, and that is marginal contribution to overall growth.
This then creates a platform for deeper analysis of a brand, retailer, or entire channels and their total contribution to growth. And it will provide a base for trade spend optimization, ensuring the total set of activities and investments contributes to the key peformance kpi’s: profit, revenue and marketshare.
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 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 more investment in shelf space, 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 if the opposite happens, you have potentially wasted that investment, and fractured your relationship with at least one of your retail partners.
Likewise, short-term factors – unexpected weather, a glut of products, a supply chain disruption at a rival or across an entire category – can have a significant effect on ROI or contribution. But without visibility for both of your own products, and of the market, it can be easy to be swept away by illusory success – or, indeed, 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 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 hope for and are actually undermining your business outlook.
Truly optimizing trade spend 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 to optimize your trade spend, 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 and 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 allow different teams within an organization to share both raw data and the results thereoff, providing insights and a full, volume to value, forecast. This allows account handlers to see the impact of their activities on other parts of the business, and model and optimize accordingly.
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 purchaser at a retailer with both a plan, and the data to support. Decision making suddenly becomes much easier, and much quicker.
A modern solution allows the organization to optimize trade spend and other activities. But it also enables more personal fulfilment for both account handler and client as they shift from separate, discrete promotions, towards collaboration, knowledge 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 to drive performance.
As a highly configurable, the software as a service (SaaS) gives commercial teams, and their counterparts in finance and senior executives, full visibility across their promotion, pricing and contract strategies, at both a granular and strategic level. Because they are part of Visualfabriq’s broader poffering, 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, meaning more impactful trade spending, and the ability to analyze the contribution of individual activities, retailers, and partners to the overall success of the company.
When it comes trade spend, considering the ROI of individual promotions or activities is 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 the long-term strategic goals of the CPG. This means adopting an integrated approach to trade spend optimization and adopting a total contribution approach to brands, categories, retailers and entire channels. To see how Visualfabriq’s platform can help you optimize trade spend in the immediate term, and position you for sustainable growth long-term, book a demo today.