Insights

View full profileLuke Griffiths

Delivery Director
Bluefin Solutions

Trade Promotions: do I need to 'manage' before I can 'optimise'?

Trade Promotions spend is massive. For most consumer packaged goods companies it's second only to cost of goods sold on the P&L. When you are spending between 15 and 20 percent of your total revenue on something it deserves to be managed well and scrutinised for outcomes that don't live up to expectations.

The percentage of revenue spent has doubled in the last two decades, with vendors throwing ever increasing funds at promotions in attempts to increase brand awareness and grow market share. As Seb Jones observes, the level of discounting we commonly see these days is quite probably damaging brands but, rather ironically, the trend is for promotions to run for longer, across more products, with greater investment from vendor and retailer.

So, trade promotion at today's levels seems to be somewhat out of control, struggling to give the mutual benefit to consumer packaged goods company and key retailer that it promises.

I've got a closed-loop TPM system, I'll be ok won't I?

As trade promotions increased in scale and complexity, many consumer products companies invested in next generation TPM systems that moved them away from their data silos and spreadsheets, to a more integrated world where real-time shipment data could be combined with financial rebates and off-invoice discounts, syndicated data from AC Neilson and POS for sell-in vs sell-through analysis, and so on. These closed-looped systems have allowed better planning of promotions, based on actual historical uplift from ERP data (see Sue Kirby's blog on alternative promotion planning) and allowed post-event analysis of promotion profitability across promotion group, brand and product hierarchy.

So that's a job well done then? It's not the final chapter by any means. At this point you've greatly improved your ability to see whether your promotions have been worthwhile and can manage the execution of promotions more consistently. Why then are there still a great many promotions that make absolutely no money for either the vendor or the retailer? Shouldn't this expensive integrated technology help me strategically drive growth and profitability?

Optimising promotions for a vendor and retailer win-win

Trade Promotion Optimisation is not a brand new concept and many consumer products companies have initiatives underway to strategically optimise trade spend across their whole product portfolio.
What they are doing is trying to build on the control and accountability of funds and payments offered by TPM, with improved business planning, promotion analysis (before and after) and predictive models to deliver better promotion forecast accuracy and…you guessed it…increased profit.

If you can predict the outcome of a promotion in revenue and profit terms, based on the broad integrated data collected as part of TPM, that's a massive step towards increasing profits at a time when margins are being squeezed from every angle.

The idea is that users can model the optimum set of promotions to run across the calendar, based on product availability, season, store, cannibalisation and other business rules and constraints. Being able to quickly run this powerful 'what-if' analysis means more accurate revenue and profit forecasting and the ability to simulate a mix of scenarios and conditions in a short time period. It also helps build better relations with key retailers as you can ask strategic questions about which mix of discount, rebate or premium meets the profit goals of both vendor and retailer, but still stays within the trade budget.

I'm not running TPM yet so it's way too early for TPO…isn't it?

Well, tradition suggests that you try to walk before you can run, and in implementing something with such broad people, process and technology integration requirements as TPM, that sounds like good advice. Except that we need to remember the business case for TPM is always based on cold hard profit. The side benefits may include the breaking down of long-standing cross-functional barriers and integration improvements across billing, financial and reporting data and processes, but an ongoing ROI based on sustainable, profitable promotion uplift is how you justify doing it in the first place.

Let's say a three percent improvement in the profitability of trade promotions is a conservative estimate of the prize at stake from optimising trade promotion management. For a £1bn turnover company spending 15% on promotions the profit improvement is likely to be an attractively large carrot.

I'm willing to accept that it is probably the capability brought about by TPO processes, tools and well-trained, motivated users that provides the real strategic edge to profitable promotions across the portfolio. If that's what's going to make the killer difference to the bottom line you really can't afford not to invest in the Optimisation side of the equation when you tackle the Management side of promotions.

As always, it's not just about the tool

Availability of in-memory analytics is about to make real-time predictive analysis such as that required for true collaborative TPO a reality for many consumer products companies. For early adopters of this technology there is real competitive advantage to be gained. However, to get all the benefits it promises, the leadership team will have had to make an unerring commitment to changing the organisation in the way it makes decisions, executes and plans.

The right approach to planning an implementation is one that allows people and processes across functional teams to come together with technology in a collaborative environment. Here they can work through scenarios and visualise the ways TPM combined with TPO could be used to improve the promotional capabilities of their organisation. By doing this, many of the process, data and organisational structure issues that present risk to successful realisation of the benefits case in a full end-to-end implementation can be flushed out.

What should then follow is a thoroughly planned program of transformational work to deliver the changes, mapped back through performance measurement to the business case, supporting ongoing improvement.

You may be looking to get the new TPM processes and technology embedded first, but there's plenty to be gained from keeping an eye on the TPO prize as you do. By treating TPM as the foundation of the improvement programme, but planning to rapidly build on it with what TPO offers, the programme will stay focused on answering the big question: "How do we run the most profitable promotions for us and our retail partners?" As a result it will be much more likely to deliver a fast return on the overall TPM/TPO  benefit case and remain lean and purposeful in every system, role, responsibility and process change it implements.

So, in summary, you may have to get the 'manage' part in first but if you really want to be the best in your markets and get that competitive advantage, just keeping up with what the next guy is doing is not enough…you've really got to be thinking 'optimise' right from the start.