Trade spend is a crucial aspect of the consumer-packaged goods (CPG) industry. In this blog article, we’ll discuss how trade spend works, why it is critical for CPG success, and how to enhance its effectiveness. We’ll cover the operational aspects and delve into trade spend strategy, tracking, and optimization.
What is trade spend in CPG?
Trade spend refers to the funds that consumer-packaged goods (CPG) manufacturers allocate to promote their products through retail distribution channels. These expenditures are paid directly to retailers or distributors and include activities such as discounts, slotting fees, and promotional allowances, with a significant portion of the spend dedicated to promotions. The primary goal of trade spend is to incentivize retailers to sell the manufacturer’s products, secure additional distribution, and increase product visibility and consumer demand.
Trade spend should be viewed as a strategic investment in driving top-line growth, not just a cost of doing business. Unsurprisingly, trade spend is a significant component of a CPG company's budget—often the second largest after costs of goods sold (COGS). This is because it is a key lever for revenue growth in consumer goods markets. In fact, according to the Promotion Optimization Institute’s Consumer Goods State of the Industry 2025 Report, trade terms & spend optimization is the RGM lever that provides the single greatest impact on the profit and loss (P&L) statement for CPG companies.
Why do CPG manufacturers invest in trade spend?
Consumer goods companies invest in trade spend for several reasons. Firstly, it helps drive incremental volumes, revenues, and profits. By allocating funds to promotions and shelf presence, manufacturers can attract more consumers and win share of wallet. This investment also fosters stronger retailer relationships, leading to more favorable negotiations and long-term collaborations. Effective trade spend management ensures that the funds are used efficiently, directly contributing to increased sales and profits.
Additionally, trade investments might support new product introductions or aim at maintaining or increasing market share, even if profitability suffers in the short term. By securing better shelf positions and enhanced visibility, manufacturers can ensure their products remain competitive and top-of-mind for consumers. This strategic approach helps CPG companies achieve their business objectives and stay ahead in a competitive industry, even if it means accepting lower profitability temporarily to strengthen their market position.
Types of trade spend
Trade spend can be categorized into two main types, contractual spend and promotional/event spend:
- Contractual spend refers to fixed costs that CPG manufacturers agree upon with retailers. These costs are typically negotiated and set in advance and include expenses such as slotting fees, pay-to-stay fees, discounts, and other allowances to retailers. The primary purpose of contractual spend is to secure shelf space, ensure product availability, and maintain a presence in retail stores.
- Promotional/event spend, on the other hand, covers variable costs associated with promotional activities and events aimed at boosting sales and increasing product visibility. This includes promotional offers, in-store displays, sampling activities, and other events. Promotional spend is more dynamic and can vary based on the specific promotional campaigns and activities undertaken by the manufacturer. It can also be adjusted based on market conditions and the results of promotional campaigns.
Another way to look at trade spending is to differentiate between working vs non-working trade spend:
- Working trade spend refers to expenditures that result in an offer that is visible to end consumers. These are activities designed to directly influence consumer behavior and drive sales. Examples of working trade include discounts and rebates, preferential shelf placement, and retailer media advertising support. The primary goal of working trade is to increase product visibility, incentivize purchases, and boost sales.
- Non-working trade spend, on the other hand, refers to expenditures that do not directly encourage shoppers to buy. These can be payments made without a tangible return (often termed non-performing or goodwill payments), but they also include deductions for damaged goods, data sharing fees, and other payments that do not have a direct impact on shopper behavior. While non-working trade may not directly drive sales, it still plays a role in maintaining relationships with retailers and ensuring smooth business operations.
The challenge of managing trade spending
Managing trade spending activities can be a complex task, involving multiple product lines, channels, and outlets across various geographies. This results in numerous deals, supporting activities, and promotions that need to be set up, funded, planned, forecast, optimized, approved (internally), negotiated (with the retail partner), executed, tracked, settled, and evaluated.
The sheer volume of promotions in CPG makes managing trade spend particularly challenging for manufacturers, especially when relying on time-consuming manual processes, spreadsheets and outdated tools. And that’s just the operational side of running promotions. The more strategic aspects, such as understanding performance drivers and optimizing spending based on advanced analytics and AI-enhanced promotion optimization, add another layer of complexity.
Although trade promotion management (TPM) and optimization (TPO) are increasingly being integrated, TPM is mainly transactional, focusing on improving operational efficiency, whereas TPO emphasizes maximizing the effectiveness of trade investments. For more insights on the difference between TPM and TPO, and how they can—and should— work in tandem, read our blog post: Understanding TPM vs TPO: How is Trade Promotion Optimization different from Trade Promotion Management?
Operational trade spend management: Enhancing efficiency and accuracy
Managing trade spend starts with setting aside budgets (trade funds) that are allocated to key account managers (KAMs) to invest in their accounts. KAMs then create an annual plan and collaborate with their retail customers to negotiate contracts, pricing, discounts, and promotional activities. Volumes are forecast, and promotions are executed, settled, and evaluated to derive valuable insights.
Manufacturers often manage the transactional component of trade spend using spreadsheets, but dedicated software like Visualfabriq offers superior trade spend and trade promotion management and optimization capabilities as part of a comprehensive revenue management system for CPG companies. While spreadsheets are prone to manual errors, data inconsistencies, and outdated information, dedicated trade spend management software offers significant improvements in efficiency, accuracy, and data-driven decision-making.
A capable trade spend management system can handle large data volumes and provide visibility at any level of granularity, whether you need a high-level overview or want to go deep into the data, down to individual SKUs, channels and retailers. It can manage complex contract models across multiple markets and products, offering scalability that spreadsheets cannot match. Real-time collaboration is facilitated through role-based access and updates, eliminating the confusion caused by multiple versions of the same file.
Automated processes for approvals, trade fund allocations, accruals, and claims and deduction management improve speed and accuracy, enforce governance, and ensure compliance. Automatic tracking of changes provides a comprehensive audit trail, while seamless integration with ERP ensures a unified view.
Read more about the importance and challenges of trade spend management: https://visualfabriq.com/knowledge-hub/what-is-trade-spend-management-and-why-does-it-matter/
Trade funds to manage promotional and non-promotional expenditures
In the CPG industry, trade funds are specialized budgets, allocated to manage trade spending. These funds cover both promotional activities and long-term contractual expenditures. Trade funds can be structured as fixed-amount lump sums or dynamic funds that fluctuate based on sales or volume figures.
Trade funds play a crucial role in balancing profitability with the increasing demands of retailers, who often require substantial investments. Effective management of trade funds involves not only determining the amount to allocate across various channels and brands but also strategically timing these expenditures to maximize impact.
By carefully planning and executing trade fund allocations, companies can drive revenue growth while maintaining strong relationships with retail partners.
Trade spend optimization: The total contribution model
Optimizing trade spend is crucial for CPG firms aiming to balance short-term gains with long-term growth. While focusing on ROI is a common starting point, it has its limitations. The ROI of specific activities often fails to capture the broader context of long-term contracts and the complex relationships between manufacturers and retailers. Instead, adopting a total contribution model offers a more strategic approach.
This model considers the overall impact of trade pricing and investments on sustainable growth, rather than isolated activities. By leveraging advanced tools and analytics, CPGs can enhance their trade spend decisions, ensuring that each investment contributes to profit, revenue, and/or market share. This holistic view sets the stage for long-term success and resilience in a volatile market.
Trade spend strategy: Pitfalls to avoid
Crafting a successful trade spend strategy requires careful planning and collaborative partnerships between manufacturer and retailer. However, common mistakes can derail even the best-laid plans. One major pitfall is making decisions based on habits or on intuition rather than data, leading to ineffective strategies. Misallocating the trade spend budget on promotions that don't align with business objectives can waste resources. Additionally, ignoring competitor analysis and market trends can leave a company at a disadvantage.
To avoid these mistakes, CPG companies should use data analytics to inform decision-making. Leveraging historical data for forecasting, predictive modeling, and real-time data integration can significantly boost agility and responsiveness. It's essential to set clear objectives and KPIs, utilizing specific metrics such as incremental sales lift, cannibalization effects, promotional ROI, and market share gains to measure the impact of trade spend initiatives. Regularly monitoring performance metrics and making necessary adjustments will ensure optimal results. By avoiding common pitfalls and adopting a data-driven approach, companies can optimize their trade spend strategy for sustainable growth and market dominance.
Trade spend effectiveness: Top KPIs to track
Trade spend effectiveness is a vital concern for companies in the CPG industry, yet it remains challenging to measure directly. There is no single metric that captures it completely. To gain a clearer understanding of how trade spend impacts overall performance and profitability, we recommend tracking 5 key performance indicators (KPIs).
- Account profitability: this important KPI highlights the net profit generated from each account after deducting trade spend and related expenses. This helps identify which accounts are most beneficial to the company's bottom line.
- Event spend ROI is another vital metric. It measures the return on investment from non-promoted activities like in-store tastings or displays without discounts. This ensures that investments are judicious and financially rewarding.
- Promotion effectiveness is also a key KPI, focusing on the influence of promotional activities on sales and customer engagement. It helps identify which promotions drive sales and are worth replicating.
- Incremental sales, which distinguishes the impact of trade spend from natural sales growth, provides insights into the effectiveness of trade promotions or non-promoted initiatives.
- Customer lifetime value (CLV) reflects the long-term effects of trade spend on customer retention and value, offering a comprehensive view of the total revenue expected from a customer throughout their relationship.
By monitoring these KPIs, CPG companies can optimize their trade spend strategies, ensuring that each investment contributes to overall growth and profitability.
Misaligned trade spend? Reinvest it for revenue growth!
The old retail playbook of on-invoice discounts and broad-brush trade spend is being rewritten. Industry leaders are now adopting more impactful strategies that deliver tangible results. They’re reallocating resources to secure prime shelf space, execute precise promotions, and invest in brand activations that capture consumer interest.
Data guides these decisions, ensuring trade funds generate real growth. Every promotional cent is made to work harder, contributing to both the top and bottom line. Collaboration is also key: When manufacturers and retailers align their efforts, they create a synergy that transcends traditional buyer-seller dynamics, leading to greater success for both parties.
The shift towards strategic reinvestment of non-performing trade spend marks a significant evolution in CPG. It may require account managers to have difficult conversations with buyers to negotiate an end to non-performing ‘entitlement’ programs, in favor of investments with measurable revenue impact. By focusing on data-driven insights, manufacturers can ensure their investments are efficient and effective in driving mutual growth with retailers.
Focus areas for trade spend reinvestment include:
- Collaborative investment with retailers in mutually beneficial deals
- Reallocating non-performing trade spend toward proven impact
- Assess whether on-invoice discounts can be turned into scan promotions
- Avoiding excessive forward buying to ensure consistent sales flow
- Data-driven decision-making to allocate trade spend effectively.
Benefits of trade spend management software
Modern trade spend management software empowers CPG teams to effortlessly gather and manage a comprehensive range of data, including historical records and near-real-time information from external sources and ERP systems. This holistic view enables them to assess the performance of their activities, make informed decisions, track ROI over time, identify trends, and optimize programs.
Additionally, such software eliminates the need for time-consuming manual tasks like pasting data into spreadsheets or setting up data integrations with disparate systems. Instead, teams can configure streamlined, automated workflows that enhance data sharing and collaboration, speed up the approval process, and simplify audit and compliance requirements.
These solutions also help with trade spend accounting by providing accrual calculation and efficient processes for claims settlement. When retailers submit claims for promotional allowances, rebates, or other trade-related expenses, manufacturers need a streamlined process to validate and settle these claims. Effective claims and deduction management involves verifying the legitimacy of claims, ensuring they align with agreed-upon terms, and processing them promptly.
By choosing the right software, teams can leverage advanced analytics and artificial intelligence to gain deeper insights into their activities and generate accurate forecasts for future actions. The time saved allows them to focus on areas where their skills yield the highest dividends and collaborate more closely with retailers, ensuring every campaign results in a win-win outcome.
How does Visualfabriq help?
A competent trade spend software solution must efficiently manage the transactional aspects of trade investments, while continuously optimizing trade spending and increasing predictability. Visualfabriq’s Trade Spend Master, developed by CPG industry insiders; is designed to do just that.
Data integration: the foundation for reliable insights
The software pulls together and harmonizes data from all relevant internal, external, and syndicated data sources, and seamlessly integrates with ERP. This integration ensures that all trade spend data is centralized and up to date, offering a comprehensive and unified view of your operations and performance drivers. It enables you to gain visibility into both manufacturer and account profitability at all levels of the gross-to-net.
Configurable workflows and automation for efficient operations
With automation and configurable workflows, the software eliminates burdensome manual work and duplicative data entry. This saves time, reduces the risk of human errors, provides control, and ensures compliance. You can plan and approve faster, ensuring that everyone is working with the same data and insights. Additionally, you can rapidly compare scenarios, include uncertainties, and leverage pricing elasticity data.
Trade spend accounting: accruals and claims management
With automated accrual management, Visualfabriq also helps with trade spend accounting. Its configurable accrual workflow allows for updates based on data availability. Accruals are calculated and sent to ERP on a daily basis during the shipment period, ensuring planned promotion and contract costs are fully accrued by the end of the period. Furthermore, the software lets you efficiently manage and match claims to contract accruals, so that claims are accurately matched to financial provisions.
Advanced analytics and AI for enhanced trade spend effectiveness
Another area where Visualfabriq shines is the integration of advanced analytics and AI to enhance demand planning, optimize trade pricing and contract terms, and improve promotion planning and forecasting accuracy. Visualfabriq proposes a phased adoption approach allowing CPG companies to gradually integrate AI into their workflows, ensuring a seamless transition from manual processes to fully automated systems.
Curious about how Visualfabriq can help you optimize your trade spend? Request a consultation with one of our experts.
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