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Exceedra Byte: Trade Promotion Optimization

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Watch Episode 7: Exceedra Portfolio Discovery

This week on Exceedra Byte, Luke Pocock, Exceedra Senior Customer Success Manager, APAC, dives into the world of Trade Promotion Optimization or also referred to as TPO. He explores the best strategies and how to increase your return on investment, or ROI, without increasing your trade spend.

Let us have a quick re-cap on Trade Promotion Management. We have learnt that total expense most consumer goods companies absorb could range from 14-30% for Trade Spend and unfortunately that rate is not going to drop anytime soon. We cannot just cancel all promotions and rebates to remove the trade spend cost. Your competitors would still promote and likely win your business, and because more is sold when on discount – both to retailers and consumers. 

 

No one wants to spend more money, but the company demands to make more money continue. How do we achieve this? Is this even possible? 

Trade Promotion Optimization (TPO) process could be your answer.

So, what is TPO?

“Trade Promotion Optimization (TPO) is the process of utilizing integrated goals, factoring in promotion (e.g. price, duration) and supply constraints, and predictive analytics to create continuously improving trade promotion strategies and results.” – Promotion Optimization Institute (POI)

Before we look at all the benefits of Trade Promotion Optimization, let us first examine the key factors that influence the promotion performance.

  • Product – if you promote specific flavors or a size of product together.
  • Promotion mechanic – what type of deal you are running. Is it a reduction in price, is it buy two, get one free? Is it advertised in a catalogue or are you running a giveaway with loads of prizes?
  • Location – where in the store it is advertised? Is it at the front of an isle or in a display bin?
  • Time of year – is it before a big holiday, ensuring there is no clashes with other retailers or competitor products?
  • Length – is it a one-week promotion, one-month promotion or everyday low-price discount. What affects will that have on pantry filling?
  • Frequency – how many times a year the product is on promotion? Are consumers waiting for the next promotion because they understand how the promotion plan works?

No one strategy fits all products so when performing optimization, you need to understand what has worked and what has not worked with each product. With the use of incremental sales (Total Sales – Baseline Sales), we can use two key metrics to evaluate if a promotion is good or not.

ROI EFFECTIVENESS % = INCREMENTAL NET REVENUE / INCREMENTAL PROMOTIONAL SPEND

Return on Investment or ROI Effectiveness % where we understand what additional sales revenue, we are making vs the additional spend of the promotion. The higher the percentage, the better the cost to return.

ROI EFFICIENCY % = INCREMENTAL PROFIT / INCREMENTAL PROMOTIONAL SPEND

Return on Investment or ROI Efficiency % where we understand what additional profit, we are making vs the additional spend of the promotion. The higher the percentage, the better return on investment to increase profit and negative percentages meaning that you might be better off not running the promotion at all.

So, now that we understand what affects the promotion performance and how to evaluate a good performing promotion, what is Trade Promotion Optimization?

TPO is essentially the process of reviewing your past promotions, deciding what has worked, what has not and then changing your plan in the future.

When doing a post promotion analysis, you want to be finding promotions that are positive in both ROI effectiveness and efficiency start, understand all the mechanics of the promotion and make assessment if this is something we should do again in the future. For pre-promotion analysis, you want to find all promotions with negative ROI to question, should you be doing this as it will prevent you from achieving your numbers for the year.

With Exceedra TPM applications, we can pull out reports that enable this process to analyze and assess what worked, what didn’t, what we haven’t tried and what we should change.

The report includes metrics like:

  • Promotions in the past and future for a product or product group
  • Depth of your discount
  • The promotion mechanic
  • Length of the promotion
  • Forecast and sales actuals (it can be shipment, depletion, or EPOS, depending on what is available)
  • Incremental sales volumes
  • ROI effectiveness
  • ROI efficiency
  • Margin %

From here we can make better decisions to ensuring you get the best return on trade spend. You will be surprised what you learn, and you may even find promotions where you are losing money or strategies that resonated with consumers that you did not think would.

So, you are now asking – is there a more automated approach?

 

Leveraging Artificial Intelligence or Machine Learning algorithms, Exceedra can make recommendations on the best price points, incremental and what mechanic to run by using the past history for the products and speeding up your decision making.

As Brain Kolubinskyj, Exceedra Director of Sales and Chris Rice, Exceedra SVP Sales & Marketing, Americas discussed in Episode 7: Exceedra Portfolio Discovery, unless you have all the foundations bedded down in your RGM Jenga game, it could result in a very quick collapse.

High quality data, people, well integrated and embedded process are just some of the items that are important. Without good history and accurate data, it is impossible to make good decisions let alone optimize a promotion or program.

If you want to learn more about TPO and what benefits it can bring to your organization, download a copy of our whitepaper “Framework for Trade Promotion Optimization” that goes into more detail about the benefits of TPO, pre and post analysis, and optimization of short, medium, and long promotions. Spoiler, running long promotions may result in lower overall margin due to pantry filling.

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Exceedra Byte is a weekly vlog series where we take complex trade and revenue growth management topics and break them down into byte-sized pieces. Stay tuned every Thursday for new episodes.

Watch the previous episode of Exceedra Byte – Exceedra’s Global Customer Success Team

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