Boosting the Bottom Line through Improved Trade Promotion

By Tim Blansett,Tom Casey, Hans Van DeldenEd Landry

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For most companies, trade spend constitutes 10-20 percent of sales and is the second largest item on the P&L behind cost of goods sold. Yet, despite the financial and strategic importance of trade spend, many companies do not fully leverage their investments in trade spend. Trade promotion spend can be optimized to turn it from a drain on ROI into a significant bottom-line booster, making raising trade promotion effectiveness one of the most significant opportunities for CPG manufacturers today. The key is to integrate analytics, systems, processes and organizational capabilities in order to improve trade promotion efficiency.

Booz Allen Hamilton has helped many CPG manufacturers transform their sales organizations to achieve profitable growth-adding 10-15 percent to the bottom line operating results on an on-going basis-through improved trade promotion efficiency. The rewards are significant. As shown below, a 10-15 percent improvement in ROI (such as, making promotions a little less negative) has a significant impact on the overall profit of the company.

Exhibit 1. The Importance of Trade Promotion Effectiveness. Using this simple formula, a company can estimate the impact that changes in trade promotion effectiveness have on its bottom line. For most CPG companies, it is hard to find a more significant, clear-cut financial opportunity.

Despite these encouraging numbers, however, overall the industry’s return on trade promotions is disappointing. As shown in Exhibit 2, many manufacturers are so focused on generating additional volume that the overall efficiency of their trade spend investment is low.

Exhibit 2. The Industry’s Low Returns on Trade Promotion Investments. (a) Most manufacturers lose nearly one-third of the money they put into trade promotions. (b) Trade promotion effectiveness varies widely by event. Often sales teams “buy” volume at any cost – driving down profitability.

Few companies can accurately and consistently distinguish poorly performing promotions from more profitable ones. However, with the ever-increasing pressures on the bottom-line, more and more companies are looking for ways to make their trade spend more effective. An important first step in doing so is to assess what is driving effective promotions.

Understanding the Issues that Impede Trade Promotion Effectiveness

Implementing an integrated program for trade promotion effectiveness is a complex, sometimes daunting, undertaking. There are many reasons why most companies haven’t reached their full potential.

The first step in transforming trade promotion effectiveness is to understand why the company has not been able to optimize its return on trade spend. There are a number of possible reasons:

• Reliance on top-down rules: Companies try to address the issue with top-down rules. Certainly, well-founded guidelines are better than none at all. Typically, however, guidelines only prevent the most unproductive approaches and will not drive consistent efficiency improvements.
• Inability to predict promotion efficiency: Too often, companies cannot distinguish poorly performing promotions from more profitable ones on a systematic basis. As a result, they are unable to effectively allocate resources among different promotions.
• Systems lack robust analytical planning capabilities: Enterprise systems-especially the major CRM and ERP systems-do not have the analytical capabilities necessary for trade planning and optimization, despite vendor claims. Doing effective planning and optimization is a very complex task. Most existing systems can serve as good control mechanisms, but need to be customized or configured in order to handle true analysis and planning.
• Organization mindset doesn’t change: Despite raising visibility to profitability, the sales and marketing organizations of many manufacturers continue to focus on volume at all costs. But, there is a world of difference between volume and profitable volume. To be truly effective, the profit mindset must be embedded throughout the organization.
• Lack of a comprehensive program: In some cases, companies have developed very strong capabilities in distinct areas (for example, analytics), but these capabilities are not part of a comprehensive and synergistic program. In our experience, the analytics and tools need to be effectively linked to changes in the trade promotion processes including how events are planned, executed and tracked.

Finding a Better Way: Transforming Promotions for Bottom-Line Success

It is possible to change the way an organization designs and implements its trade promotions. The tools and processes exist. Booz Allen pioneered the development of highly accurate predictive models for fast moving consumer goods over 10 years ago. However, we strongly believe that success requires more than just models or tools. True transformation requires the development of a holistic capability for the company; one that is driven by senior management and implemented at all levels in the organization. Success requires a willingness to change the way an organization deploys its trade spend, gathers trade promotion data and uses systems tools to analyze it. Analytics, system, process and organization need to be integrated to achieve a major transformation.

Event performance varies widely&

Booz Allen has conducted in-depth trade promotion diagnostics for over 20 CPG manufacturers. For each manufacturer, we created a database with several hundred promotional events. We have found that the difference in efficiency between the best and the worst events for major manufacturers ranges between 400 percent – 800 percent. Moreover, even at an account-brand level, the difference in efficiency between the best and worst events typically ranges from 100 percent – 500 percent.

Why does event performance vary so widely? The account, promoted products, merchandising vehicles, pricing, timing and financial terms all can and often do have a significant impact on a promotion’s ROI. Consider the following simple example. Everyone knows that displays drive more volume than features. But displays cost much more than features as well, so displays are not necessarily more efficient than features. The efficiency of a potential promotion can only be assessed by weighing the expected consumer response against the expected cost of the promotion.

&Yet event performance is highly predictable.

Even though event performance varies widely, event performance is highly predictable. Reliable and accurate statistical models for predicting the volumes of trade promotions for fast moving consumer goods have been available for years. A good statistical model can usually predict the volume of an event with an average accuracy of 5-10 percent. At this level of accuracy, the ROI for a single event can be predicted with an average accuracy of ±3 percent. Compared to the observed variability in event efficiency of ±200 percent, these statistical models are highly accurate.

These two insights lead us to an important conclusion. Trade promotion investments can be optimized reliably by predicting performance for each individual event and selectively running more efficient events.

Efficient events are a win-win proposition.

Running more efficient events is almost always a win-win proposition for the manufacturer and the retailer. More efficient events tend to drive more volume, which creates more funds for the retailer under an accrual system, which allows the manufacturer to run more events with the retailer.

Trade promotion efficiency is a capability.

Capturing the benefits of efficiency improvements requires building a capability to optimize trade promotion efficiency. Many companies fall short of their potential because they have put some of these building blocks in place, but not all of them. For example, it is not uncommon to find sophisticated predictive models that have not been deployed in a usable tool to the field. Recently, we have found expensive systems that are deployed with limited analytical capabilities or poor alignment to the process of optimizing event level decisions.

Being able to effectively invest several hundred million to several billion in trade promotion dollars is a critical capability. This capability should be built on a foundation of the right analytics, processes, systems and organization.

Exhibit 3. The Building Blocks of a Trade Promotion Effectiveness Capability. The ability to maximize return on trade promotion investments requires building capabilities in four areas: business processes, analytics, systems and organization. Building this competency often requires a transformation of the sales and marketing organization.

Building this capability often requires a transformation of the sales and marketing organizations.

For many organizations, event-level optimization is a capability well beyond their current capabilities. These organizations typically require a transformation of their sales and marketing organizations to instill the proper skills, processes, tools and incentives. As with any transformation, executive leadership is key to the success of these efforts.

Every organization must determine how best to build its trade promotion management capability.

When it comes to trade promotion effectiveness capabilities, one size does not fit all. Each company must customize the capability to its specific business situation. The good news is, tested approaches exist, and they have proved remarkably accurate for many manufacturers. For those who make the commitment, the rewards are significant, tangible and timely.

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