What's the priority in trade spend - Effectiveness or Efficiency?

29 June 2012

Dan Hawker

Dan Hawker

Former Head of Tobacco, Wholesale & Retail

This is a question I was recently asked by a customer and given the current climate, it's certainly an interesting one. Before I share my response, it's worth clarifying the terminology.

Trade spend effectiveness - this can be defined as achieving more with the same trade spend

Trade spend efficiency - achieving the same with less trade spend

Process efficiency - enabling your sales team to go home on time, rather than having to do overtime!

If we run through some calculations, we'll see that the effectiveness or efficiency of trade spend for most companies will vastly outweigh any process efficiency gains.

Illustrating the point with example numbers

Trade spend - $1bn
Return on trade spend - $300m / 30%
Process costs - $100m

If you can improve your return on trade spend from 30% to 35%, or reduce trade spend by 5% whilst achieving the same $300m return, the numbers are measured in tens of millions of dollars.

To get that same impact from process efficiencies, you'll need to take up to 50% off your process costs, which is a big cutback in any company's books.

Having said that, driving trade spend efficiency or effectiveness relies on tackling process efficiency anyway. Why? To free up the minds of your sales team from admin, bureaucracy and niggles associated with poor systems and tools, so they can figure out exactly…

  • HOW to turn that $300m return into $350m return. Or…
  • HOW to reduce that $1bn spend to $950m spend without impacting the $300m return.

How is this figured out? 

In the below chart I've created a simplified spectrum of the $ return from a fictional CPG company by the different promotions it ran during a period of time. Because the width of the bar is the amount of spend invested, and the height is the % return, then the area of the bar is the $ return that promotion put through to the bottom line.

TradeSpend-EffectivenessOrEfficiency

Chart: example simplified spectrum of return by promotion

In this example, the blue bars represent linked promotions where, overall, the company has taken a small hit to generate a big return. These loss-making promotions will stay.

The red bar represents promotions that shouldn't have been run in the first place, and can therefore go.

What you do with the cash is then up to you. You could try and move it to the left of the chart to increase your return, or you eliminate it altogether to save money.

However, if it really was as straightforward as moving bars around on a chart, then it would have been done already! And this is why process efficiency is so important - because you want your best brains thinking about the difficult questions, and not just filling in forms.

If you have to get rid of heads to back up the process efficiency case, then make sure you don't lose the good ones!

 

 

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