Trade Margin Simulation - A help or hindrance to suppliers?

10 April 2013

David Williams

David Williams

Head of Consumer Products

Do you understand the margin your customers make from selling your products? Do you care? Does it impact the support that you get for your initiatives? Is it impacting your gross margin delivery?

The answer to all of these questions should be "yes."

The buyers for your customers have a number of suppliers, all of whom deliver differing levels of sales and margins to them.  Their job is to work out the best way to balance their portfolio to deliver the best mix of the two.

The normal balance in any category is that big branded lines drive high sales but with low margins whereas smaller brands and own label businesses have lower sales and higher margins. There are a number of reasons for this (i.e. price baskets and key value indicators) but regardless of reason, the situation exists. The typical reaction to this from a buyer is to try to grow the sales of the higher margin lines at the expense of the bigger brands. The big brand initiatives now get less support as they are margin diluting to the buyer.

On the other side of the fence, from a National Account Manager's (NAM) perspective, the job is to invest more wisely such that the same investment gives better returns year on year.  This may seem at odds with the objectives of the buyer but if you understand both halves of the margin equation, you can simulate some win-win scenarios.

Simulating the potential margin your plans will deliver to your customers is hugely valuable information for a number of reasons:

  1. Joint business planning. How will your business plan be received by the customer?
  2. Reduced investment. Can you grow your customer's margin through product mix rather than bigger trade discounts?
  3. Smarter investment. Can you invest in the brands and products that are diluting the category margin?
  4. Promotional planning. Are your proposals enhancing or diluting your customer's margin?
  5. Tipping points. At what point does it become more profitable for your customer to increase your listings and distribution Vs the competition?
  6. Empathy. Can you gain credibility by demonstrating an understanding the challenges your buyer is facing?

With all of these positives, why isn't everybody doing it? 

Hurdles to overcome in order to effectively simulate trade margin include:

  1. Cost: EPOS data, in-store price surveys, analytical tools. These all come with a price tag. However, many companies are already investing in these so the next step is getting the insight from them
  2. Data: Integrating third-party data with internal data is a big initial job. Once this has been done, ongoing maintenance is easier
  3. Training: Trade margin simulation, while extremely powerful, can also be very dangerous. The assumptions you make around pricing, promotions, investment etc need to be very clear. Discussions with customers need to be clearly structured within the rules set out by EU competition law.

In a highly competitive environment, however, companies that overcome these hurdles - and get trade margin simulation right - will have a significant competitive advantage over those that don't.

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