Today’s financial challenges with trade promotion

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The crux of the issue of trade promotion is money – always has been, always will be. But how does the modern CFO look at trade promotion and what is his/her point of view in today’s environment?

The dictionary definition of “crux” is, “The most important point at issue,” or, “a particular point of difficulty.”

For trade promotion, money is clearly the challenge, and as for the definitions of “crux,” both clearly apply. For most trade promotion management professionals over the years, it’s been an obvious response to anyone who asks the question about how trade promotion impacts the business of trade channel success and corporate focus.

Trade spending, as a percentage of gross revenue, can run as high as 28% for large, tier-one CPG companies. So, the numbers are certainly a concern among the financial executives, CEO, and even the board of directors. Over the past ten years, spending increases have remained rather flat, even though most sales and marketing executives expect them to continue increasing in the future.

I have spoken with several CFOs over the past month about how they see trade promotion these days and where do they believe their company’s investment should be focused. Their points of view are different and telling.

“I am seeing little in the way of real tangible ROI, frankly,” says the CFO of a cosmetics manufacturer that sells more than 200 products across the world. “My accounting teams tell me that we continue to support promotions that fail to generate the returns that were expected, yet we seem unable to impact a change for the better.” He went on to say that he was part of a massive transformation of their financial accounting systems over the past five years, and that he had hoped that a major upgrade in their trade promotion planning and analytical platform two years ago would have had more success improving trade promotion payback. “I’m not so ready to blame the trade promotion software, but I do blame our inability to make strides in our field sales organization’s ability to effectively leverage the new platform to improve promotion performance.”

There was a singularly bitter tone in his statements, and especially around the massive change in the trade promotion technology. “Our analytics tools seem to be much better – they are very pretty, for sure; but my sales accounting teams believe that all they have are prettier graphics depicting minimal if no change in promotion ROI.”

With the advancements in artificial intelligence and cognitive computing technology, especially in promotion planning, the number of vendors offering this capability is growing. The reasons for this CFO’s company missing the mark after such a large cost and time expenditure to change financial systems are hard to pin down to one or two issues. Moreover, implementing a tier-one TPM system is not the panacea for all trade promotion problems.

We drilled into the reasons for making the change in TPM systems. “I have to say that what we were seeing from promotions executed after planning on our new system was no different than we saw before with multiple legacy systems, spreadsheets, and one-off niche developed applications,” he pointed out. “Our payments and deductions were processed quicker, and we seemed to have fewer overall deductions; but I attribute that more to our new order management and shipping systems where we have far fewer errors in invoicing to our customers.”

That is not an unusual observation, but it did not answer the bell for this CFO’s promises of higher ROI. “No one was able to give me precise figures on what to expect, and frankly, I didn’t think they could pinpoint the numbers accurately, but at least I needed an idea of where to look,” he pointed out.  Much of the problem stems from the quality of data and how it is used. If you go to the extreme of replacing your entire trade promotion management and planning systems without an overhaul of the data feeding the new technology, you are asking for a very expensive status quo in financial value.

I have had several discussions with my friend and colleague, Jeff Beckett, CEO of Retail Velocity about the “ROI on data,” and how modern CPG companies can and should measure the value they get from the quality and usage all data, specifically downstream POS and syndicated consumer data. Retail Velocity provides POS data daily from over 430 major retailers globally. When you think of overall return on investment in trade promotion, you must consider that the very nature of the functionality and business processes covered focuses on efficiency and effectiveness of trade spend. This begins with determining the right mix of promotion funding, optimizing the promotion plans to deliver the highest possible value (depending upon what the criteria and objectives are) and of course, being able to settle and pay deductions and claims respectively with full financial accounting integrity.

What that metric is has been a bone of contention for several CFOs. Another CFO with one of the world’s leading snack brands had a commonly held opinion. “We are in the process of selecting a new trade promotion software application, and our number-one priority is to ensure that the high costs are paid back within the first year of its full operation.” While some may believe that to be an unrealistic payback timing (especially the vendors themselves), the truth is that the size and expense of current tier one TPx implementations demand almost immediate ROI and a short-term period for recovering costs.

As unrealistic as that payback might seem, the fact is that the immensity of trade spend, especially among the tier one CPG companies, can and should accommodate it. Says the EVP of Trade Finance of a top packaged meats company, “We were able to review our historical trade promotion plans and eliminate all of the plans that failed to produce a positive return for us. We were then able to run only the highly successful plans through our optimization tools to generate predictive ROIs that did not have the failed plans as part of the historical inputs. This not only gave us higher average plan ROI, but the actual performance was more accurate, as a factor of higher percentages of promotions that met specific ROI projections.”

This is an excellent use case to consider. So many trade promotion optimization solutions are highly dependent upon historical trade promotion data, but how many implementations have, as part of their blueprinting, the need to cleanse the TPM history and eliminate promotions that did not work? The fear is that this is a time-consuming task, and that would be a correct assumption. Conversely, many TPM domain experts believe that you must have the failed promotions in place to balance the mix and provide a more realistic sampling base. Promotions fail. They fail all the time for many reasons. But without a categorization of causal factors that can be integrated into the logic and intelligence that generates the “what-if” scenario planning routines, you may be muddying the waters.

So yes, money is the crux of trade promotion – high return on investment of trade spending, savings in cost to manage global trade promotion, and the expense of good, reliable and timely data.

Therefore, the “crux” of the monetary factors of trade promotion is the data – understanding how, where, and when to clean, harmonize, and align. Modern TPx systems are highly dependent upon precise and trustworthy predictive analytics and projected ROI. The key is making sure that the integration with all data sources that drive effective planning – baselines, lift coefficients, POS and downstream data, historical trade promotion, marketing, and even unstructured data like weather and social sentiment is addressed and prepared in advance of taking on a TPx transformation.

There are several organizations across the domain of trade promotion where you can be more involved in working through the issues, problems, and concerns around measuring the true value of data. If you are a financial executive, or you want to get your financial and data science leads more involved, check with Consumer Goods Technology here, Promotion Optimization Institute here, and Consumer Goods Forum here, to name a few.

Getting to the ‘crux of the matter of trade promotion? Timely. Smart

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