Gaining visibility of trade promotion spend at a granular level markedly improves forecasting and reduces nasty surprises.
According to the Promotion Optimization Institute, 45% of CPG companies spend more than 20% of revenues on trade spend, yet 31% of companies are dissatisfied with their ability to manage promotions, even if they are typically one of the largest outlays for manufacturers.
Inaccurate forecasting leads to surprise spending and/or shorted orders due to lack of supply, and that was before the supply chain headaches of the past two years.
What does a nasty surprise look like? Well, if you only focus on the trade budget and sales lift you may miss that a promotion significantly overran on costs due to multiple shipping times and locations, or from overtime in the manufacturing plant to meet demand. Which means a promotion may not have been as profitable as previously thought.
To be built well, trade promotions planning requires engagement during the annual planning process of multiple teams in a company: sales team, finance, supply chain, marketing. During annual planning are determined sales, volume and contribution objectives and which slate of promotions will best fulfill this. That is, which promotions and deals are to be run ‘as is’ or ‘same as last year’, which are new and untested, and which have the discretion to get the best combinations of sales and profitability yet remain in budget.
Building the trade promotions plan requires data from multiple internal and external sources including historical sales figures, performance data, costs associated with promotions, and post-event analysis reports. From a scenario planning standpoint current and future events need to be reviewed to estimate and predict future market conditions with consumers and the company’s retail partners. For each product the company produces, there needs to be a baseline set of data around its demand level. Integrated Business Planning (IBP) aspects are overlaid, such as ‘external factors planned and unforeseen’, pantry filling and forward buying, and omnichannel instore KPI compliance.
This also requires overlaying the varying roles of the company’s categories. Are they staples, routine purchases, occasional or entertaining mission, destination or emergency categories? How seasonal are they? Beyond sales, objectives – execution, retail, financial, brand – need to be set for the year against which trade spend is allocated. Further, P&Ls need to be built at the customer level.
Using a system which incorporates historical data including actuals shipped and consumed, seasonality trends and predictive analytics means you can measure and track trade spend levels, pre and post promotion performance, and best performing promotion mechanics.
As the year progresses, you can see live planning actualization of year-to-date and year-to-go forecasts and employ dynamic scenario planning to predict future promotions’ Lift and Margin, and supply visibility through up-to-date Latest Estimate reporting to anyone involved in the S&OP (sales and operating procedure) process.
How can a Trade Promotion Management solution help?
Ultimately, including trade promotions strategy in the cross departmental annual business planning process, and then tracking at a granular level using a Trade Promotion Management system, removes the Pandora’s box element of trade spend, reducing the nasty surprise elements and replacing them with trackable transparency.