There is a rigorous mandate within the Consumer Goods Industry to control, manage, and evaluate the performance of trade funds, which are generally the second highest line item in the corporate budget, second only to Cost of Goods Sold.
Trade Spend for most Consumer Packaged Goods (CPG) manufacturers is closing in on 20 to 25 percent of annual gross company revenue. In addition, trade spend has become arguably the highest priority for the CPG industry as a whole. Thus, it’s easy to see how even small improvements in trade spend performance will have a significant impact on earnings.
We first want to examine the top 5 mistakes that companies make when evaluating trade spend ROI.
You evaluate trade spend ROI by only looking at consumption data.
Why it’s a mistake: There are many variables that go into calculating trade spend ROI. Consumption is one of them but not the only one. For example, if you forward ship for a promotion how do you measure internal ROI using only consumption data? Bottom line is, you can’t. If someone tells you otherwise, ask them to show you how it’s calculated and what happens when consumption does not meet the original planned volume time frame.
Never restate history.
Why it’s a mistake: A common mistake with some solutions is to move incremental consumption that is not associated with a promotion into time frames that has a promotion. The assumption is that anytime there is lift it has to be due to a promotion. Instead, a more accurate method would allow you to increase or decrease the promotional time period (you may need to because of early/late shipments or a post promotion halo effect) but you should never shift revenue from one day over to another day. This is overriding the facts and it should never be done.
- Can’t easily align tactics with the actual retail event.
Why it’s a mistake: An actual retail event may include multiple promotional tactics all running at the same time. For example, I may have tactics such as a display, an in-store coupon and a circular that make up a single retail promotional event. Typically, planning systems treat them as individual events that are assigned specific budget allocations. However, the retail event is all 3 tactics combined. Thus, you will need to be able to roll up the tactics so that you can see how all 3 performed together as a single event to capture true ROI at retail.
Misrepresenting EDLP base and incremental volume.
Why it’s a mistake: EDLP is an ambiguous term. We have had several companies ask, ‘how do you calculate EDLP base and incremental volume for EDLP as if there is some magical answer. Some solutions will ignore EDLP altogether because they view it as the standard price if it is in effect for longer than 15 to 20 weeks. The only true way to calculate EDLP base and incremental volume is to go back in history where EDLP was not in effect and compare it to EDLP trends. Otherwise, you will need take a moving average and have a tool that allows you to input adjustments into the system.
Lack of coverage and a disciplined approach.
Why it’s a mistake: CPG manufactures find themselves in spreadsheet hell when trying to gather, collate and analyze all the data points required to understand trade spend ROI. It is complex, resource intensive and a highly manual process at most companies. As a result, there is not enough human resources nor enough time in the day to calculate ROI and lift for all promoted product groups at all retail accounts. Most companies cover anywhere from 10% to 25% of all trade spend events. In addition, you can be certain that the manual process is strife with various versions and interpretations of event level calculations. This process needs to be automated with consistent agreed upon business rules and KPI calculations.
Measuring trade spend ROI is not to be taken lightly. As you can see, we’ve outlined several pitfalls and complexities that prevent an accurate picture of trade spend performance. At Relational Solutions, our TradeSmart application is an end-to-end post promotion intelligence solution that automates and harmonizes all data sources required to accurately measure trade spend ROI (consumption, shipments, COGS, TPM and master data) and allow you to eliminate poor performing promotions while moving funds into performance enhancing promotions.