How to use Trade Funds for sustainable success in CPG

Trade funds are important in the CPG industry, acting as designated budgets for trade spending. These trade expenditures are essential for enhancing brand visibility and maintaining retailer relationships. However, with increasing margin pressures and growing competition from private label products, managing trade funds cost-effectively is key to ensure CPG profitability. This aspect is particularly crucial given that, in most cases, trade spend is the second-largest expense on a CPG’s profit and loss statement, right after COGS.  

In Integrated Business Planning (IBP), the challenge lies in finding the right balance in trade spending. Companies must support retailer partnerships and grow revenue, while also focusing on profit margins for long-term growth. Various budgeting methods play a role in this process.  

In top-down budgeting, top management sets the overall amount the company can spend on trade investment. It typically starts with last year’s expenditures, providing a simple and quick approach. However, because it looks primarily to the past as a guide, it may not fully align with current objectives.  

Bottom-up budgeting, on the other hand, begins with a clean slate each year. These methods, such as objective-task budgeting, the product lifecycle method, or zero-based budgeting (ZBB) focus on specific brand objectives and allocate funds to meet those goals. Bottom-up budgeting can be more aligned with future goals, but it requires a detailed understanding of the objectives, and the costs involved. 

In this blog post, we will discuss effective strategies for leveraging trade funds in integrated business planning. We’ll focus on optimizing budget allocation and enhancing promotional effectiveness for sustainable growth in the CPG industry. 
 

Understanding CPG trade funds  

In the consumer-packaged goods industry, trade funds are specialized budgets set aside to oversee trade spending. This includes both promotional activities and long-term contractual expenditures. Trade funds in CPG can be fixed-amount lump sum funds, but they can also be dynamic funds. In the latter case they are directly impacted by sales or volume figures.  

These funds are pivotal for managing the fine balance between driving profits and catering to the growing bargaining power of retailers, who often demand more significant investments.  

Both budget allocation and timing are critical aspects of managing trade funds. Companies must not only decide on the amount to spend across channels and brands. They must also determine the optimal timing for these expenditures.  

For some, this means evenly distributing the budget throughout the year, ensuring a consistent presence in the market. Others may choose to focus their spending during specific periods to align with peak shopping seasons or product launches. 

This strategic allocation is essential in navigating the push-and-pull dynamics of profit maximization and retailer demands. By understanding and effectively managing trade funds, companies can better position themselves in the competitive CPG landscape. This will ensure both short-term success and long-term sustainability. 

Challenges with trade funds in CPG 
 

Budget constraints often lead to a routine approach to trade spend rather than a strategic one. Key Account Managers may fall into the habit of replicating the same spending patterns year after year, treating it as an entitlement for the retailer, without considering the actual performance or return on investment.  

This approach can result in a strategic misalignment, where trade spending becomes more about maintaining the status quo rather than aligning with the company’s evolving goals and market dynamics. 

For example, negotiations with retailers might lead to increased trade spending that does not translate into corresponding benefits. This often means that despite the additional investment, there is no improvement in shelf placement or promotional impact. Such an outcome highlights the disconnect between spending and actual returns. 

This scenario not only highlights the strategic misalignment but also reflects a broader issue within many CPG companies—a reluctance to deviate from established “entitlement” retailer programs due to fear of lost sales, comfort with the status quo, and avoidance of difficult conversations with buyers. 

Moreover, the lack of reliable KPIs to track the return on investment for trade spending further complicates the issue. Without accurate metrics, decision-making becomes challenging. Trust in the effectiveness of investments goes down and people are hesitant to explore new investment avenues.  

This aversion to risk can stifle innovation. And it may also prevent companies from adapting to changing market conditions and achieving their latest funding goals. 

To address these challenges, companies need to shift from routine to strategic thinking. They must start focusing on aligning budgeting practices with clear, measurable objectives and outcomes. By integrating strategic planning with reliable data analysis, companies can ensure that their trade spending is not only justified but also contributes meaningfully to their overall success and operational performance. 
 

Strategic trade fund optimization 
 

In the pursuit of optimizing trade funds, it’s imperative to adopt best practices that ensure strategic allocation and integration into the broader scope of Integrated Business Planning (IBP). This approach necessitates a seamless fusion of trade fund management with the IBP processes, thereby aligning budget allocation with the overarching business objectives. 

Effective utilization strategies are central to this integration, focusing on long-term profitability rather than short-term gains. For instance, a strategic allocation might involve channeling funds towards market segments where the brand has a competitive edge or investing in promotional activities that have proven to yield high returns. 

Incorporating these insights into the IBP process can lead to more informed decision-making. By considering the long-term profitability and market trends, companies can avoid the pitfalls of ineffective trade fund use. Leveraging examples from the industry, it’s clear that coordinated strategic planning and a focus on profitability can mitigate the risks associated with ad-hoc or misaligned trade fund expenditure. 

Through this strategic lens, companies can transform their trade fund allocation from a routine budgeting exercise into a dynamic tool for business growth and market leadership. 
 

Maximizing trade fund impact through profitability insights 

In the competitive CPG landscape, it’s crucial to align trade fund planning with insights into product profitability. This strategy aims to understand profit margins to make better trade fund investments. It also ensures that budgets include profitable products. 

For example, it’s strategic to invest more in best-performing products—those that have shown strong responses to promotions or have higher profit margins. This method focuses on maximizing the impact of promotions where it’s most effective. By prioritizing these successful products, companies can leverage their market appeal. It also ensures that the promotional budget is used efficiently, leading to a better Return on Investment (ROI). 

This focused investment approach is key to increasing sales and profits. It allows companies to avoid scenarios where they would neglect profitable products due to budget constraints. Instead, by integrating profit insights into trade fund planning, companies can make informed decisions that bolster their operational performance in the CPG market. 
 

Key takeaways 
 

For CPG manufacturers, strategic trade fund management is crucial, especially in the face of spending constraints. It allows companies to allocate their limited resources in a way that maximizes return on investment and drives business growth.  

By strategically managing trade funds, CPG companies can ensure that every dollar spent is aligned with business objectives and market opportunities. This will lead to more effective promotions, stronger retailer relationships, and ultimately, increased sales and market share. Despite budget limitations, a well-planned trade fund strategy can create competitive advantages and foster long-term profitability. 

Enhancing CPG trade funds management with Visualfabriq 

Visualfabriq stands out as a transformative software solution designed to streamline trade funds management and optimize trade spending in CPG. It offers a suite of tools that empower companies to make data-driven decisions, ensuring that trade funds are allocated efficiently and effectively. 

The software’s advanced data integration capabilities, paired with AI and automation, provide a comprehensive outlook on profit and loss from both volume and value perspectives. This enables commercial teams to optimize their investments and reduce reliance on manual analysis. 

It also allows for the planning of different types of funds at various hierarchical levels on both product and account dimensions. Moreover, it ensures that funds are treated as finite resources, much like money in a bank account. With Visualfabriq, companies can enjoy effortless upgrades, fast deployments, and unlimited data scaling. That makes it a top choice for those seeking to improve their trade fund management and promotional strategies. 

Using Visualfabriq’s award-winning software to manage funds brings several advantages. It provides clear instructions on how to distribute costs. It helps in strategically using funds to get the best results and avoid losses. And it offers both a broad overview and detailed tracking of funds. This ensures that everyone involved has the necessary information. 

Visualfabriq’s capabilities to plan, select, and track funds within the relevant commercial activity (activation, promotion, contracts) make it an invaluable asset for companies looking to leverage their trade funds for growth and sustainability.