Trade promotion optimization - marketelligent

Confidential & proprietary information. Property of Ashley Marketelligent Pvt Ltd.

MANAGING TRADE PROMOTION

STRATEGIES BETTER

A white-paper on how to use fact based business intelligence to increase ROI on trade spends

Kakul Paul CPG Practice Head

http://www.marketelligent.com/home/





Confidential & proprietary information. Property of Ashley Marketelligent Pvt Ltd.

Contents

Fast changing retail landscape 3

How does TPO help manufacturers and retailers? 4

How trade promotion strategy varies by brands 6

Trade promotion management process 8

Confidential & proprietary information. Property of Ashley Marketelligent Pvt Ltd. 3

CPG companies spend nearly 15-20%1 of their annual revenue on trade promotions; this is fast nearing a $700 billion2

figure world-wide. Trade spending is now the second largest expense item on most consumer manufacturers’ P&L's.

In-spite of this significant investment, only 30%1 of trade promotions are estimated to be profitable.

Most companies are unable to improve the ROI of their spends due to lack of a structured internal mechanism that:

collates market information in a timely manner, leverages insights from historical promotions, uses these insights to

collaborate better with retailers and does a post-event evaluation through a built-in performance management

system.

As of date a large number of CPG manufacturers have complex, conditional discount structures that they find difficult

to implement & negotiate with retailers and expensive to audit & measure. The current economic recession and

accompanied growth of private labels adds to the existing woes. Making a mistake in planning the right trade strategy

can result in lost sales, declining market share and damaged retailer relationship.

This white paper highlights the need to improve trade promotion performance and explains how leading consumer

products companies are leveraging predictive analytics to significantly improve the return on their trade spend

investments. It includes an overview of the industry wide best practices to deliver superior performance.

1 AMR Research 2 Hand promotion management

Companies spend

nearly 15-20% of their

annual revenue on

trade promotions. This

is fast nearing a $700B

figure world-wide Only 30% of these

trade promotions are

estimated to be

profitable

“

“

“

“

Fast changing retail landscape


Trade Promotion Optimization (TPO) uses advanced econometric modelling techniques to help manufacturers refine

their promotion strategies, identify the right price & discount point that maximizes sales lift and ROI, meets their

volume and profit targets and eventually help retailers and manufacturers increase consumer penetration and build

bigger consumer baskets that have a long-term sustained impact on baseline sales.

Sustained long-term lift for baseline sales

Companies successfully implementing TPO achieve significant benefits as they:

o Have a structured process for collecting and collating data. The time saved is utilized for more value-added planning and analysis

TPO uses econometric

modelling to help

identify the right price

& discount points that

maximizes sales lift &

ROI and meets volume

& profit targets

“

“

How does TPO help manufacturers and retailers?


o Are more scientific in planning their trade promotion calendars (with the right budgets allocated across months/seasons) rather than

using their instincts and gut-feel

o Make better use of their trade budgets by allocating more against promotion sensitive brands that not only increases top line sales but

also bottom line profits (hence higher ROI)

o Are able to build a more fact based compelling sell-in proposition to collaborate with the retailers for restructuring their trade programs

o Able to design unique trade promotions specific to a retailer/channel instead of following “one-size fits all”

To highlight the savings, let’s take an example:

For a $2B CPG manufacturer who invests say 15% of its sales (~$300MM) on trade promotions, a mere 2% improvement in returns can yield

$6MM incremental revenues which can be ploughed back to the business!!!

2% improvement in ROI can translate to $6MM for a $300MM investment


Trade promotions will vary based on:

A. Type of brand - Brands can be categorized as: High power and Low power brands.

High power brands

A high power brand has a strong consumer pull and delivers value proposition around functional as well as

emotional benefits.

These brands have high levels of base or non-promoted volume as compared to others; most of their volume is

sold at everyday (base) price to the consumer.

High power brands will therefore gain little from trade promotions since incremental sales from trade

promotions will be a small percentage of their overall sales. However, given the absolute size of the brand, the

savings can be significant. They are usually promoted to:

1. Maintain good relationship with retailers (push new line extensions and smaller brands)

2. Achieve profit and volume targets

3. Recover market share lost to competition

High power brands have

strong consumer pull and

hence high levels of base

volume

“

“

How trade promotion strategy varies by brands


Low power brands

These are brands with relatively little consumer loyalty, less pull in the market and hence less

negotiating power with the retailers. Retailers will give preference to brands with better margins and

discounts since they know that replacing less incentivizing brands will not negatively impact their

overall category sales. These brands therefore have the most to gain from better trade promotion

management.

B. Market situation of the brand – Is the brand facing an issue with low penetration or with low consumption?

Low consumption will entail designing trade promotions that incentivizes trade and hence consumers to stock more. Low penetration on

the other hand will entail trade promotions that entice consumers to try the product.

Designing trade promotion strategy based on the brand’s market situation

Low power brands have

relatively less consumer loyalty

& hence less negotiating power

with retailers. They therefore

have the most to gain from

better TPO

“

“


Organizations where Finance, Sales and Trade marketing teams work collaboratively in supporting & funding their goals have a higher success

rate. They need to have an information-rich process for budgeting, planning, executing, and evaluating trade promotion spending

Collaborative working across teams needed for a successful trade promotion execution

Below is a 6 step cycle for an effective trade promotion management:

1. Collate market information

Create an automated process that integrates and synchronizes data from multiple sources (like shipment data, competition data,

syndicated market data) onto a single platform.

Trade promotion management process


2. Predictive modelling

Distil historical performance to identify all the drivers that impact sales, like: price, internal cannibalization, cross-category affinity,

competitive action. Translate this to develop baseline models to quantify incremental volume and profit for each brand and trade

promotion activity.

Decomposing brand sales to arrive at base sales & incremental impact from other drivers

The periodicity of this exercise depends on how frequently the market dynamics change (typically it’s an annual exercise).


3. Budget planning & allocation

Using the statistical models, create a scenario planner that the sales, trade-marketing and finance team can use to build various “what if”

scenarios. The scenario planner will calculate ROI not only for the brand but for the entire portfolio.

It will help answer the following questions:

o What brands/SKUs to promote?

o When to promote and how often to promote?

o What trade promotions work best for the brand/SKU?

o How much promotional discount to offer?

o What is the expected sales lift from the promoted SKU during the promotional period?

o Has the promotion resulted in a sustained long-term increase in base-line sales?

o Are specific promotions cannibalising sales of other brands/SKUs in the portfolio?

o What is the expected volume and ROI for the product from the trade promotion?

o What is the expected volume and ROI for the entire portfolio (after accounting for cannibalization) from the trade promotion?

Based on the results the team can allocate their budgets to achieve the desired volume and profit targets.

4. In-market execution

Collaborative working with retailers for seamless in-market execution and settlement


5. Post-event analysis

Create Key Performance Indicators (KPIs) to help sales management measure and benchmark the trade event’s market performance

against a set of pre-determined quantifiable objectives. Some of the KPIs are: incremental volume, cannibalization rate, returns on

promotion spending, incremental profit, remaining inventory on hand.

6. Incorporate learnings onto the next cycle

Evaluate success and failures from above – this will then go in as the first step in the planning process for next year. Eliminate poor events

based upon numbers.

6-step cycle for an effective trade promotion management


Marketelligent provides data analytics-based consulting and outsourcing services that help you make smarter business decisions. The firm is

backed by senior professionals with rich experience across Consumer focused industries - Consumer Finance, Consumer Packaged Goods,

Consumer Retail, Payments, Telecom and Media. At Marketelligent, we believe in leveraging analytics to provide intelligent marketing

solutions through a highly talented team comprising of both domain and analytic experts. This ensures that analytical insights are converted to

actionable recommendations that help our clients make smarter business decisions.

For more information, please contact us at:

[email protected]

www.marketelligent.com

Bangalore, India Kakul Paul CPG Practice Head [email protected]

New Delhi, India Roy K Cherian

CEO [email protected]

New York, USA Buck Chintamani EVP, Strategic Initiatives & Business development [email protected]

About Marketelligent

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