For many years, trade promotional effectiveness has been measured by the return on investment (ROI) that is derived from running the promotion. This measure gives an extremely useful sense check on whether a promotion should be run or whether the investment would be better deployed with a different customer or brand.
With pressure on margins on the increase, a structured approach to determine how to measure the business value of your trade promotion is a must for any FMCG company.
I have provided eight useful tips you may want to consider when setting-up and running an ROI-focused trade promotion programme - and, if you're watching the needle closely, you will be able to get more return out of your investment faster!
1) A solid foundation for ROI calculations
Having a strong understanding of your base sales (the sales and profit you would have made without running trade promotions) and the historical and causal data that can predict the uplift the promotion will give you is fundamental. Equally, having a common systemised approach to this will ensure that the same assumptions are made across the business.
2) Be clear what is included in your ROI calculation
How will you measure profit and what investments are you attributing to the promotion. Having defined this, ensure that you are equally clear what is not included (such as factory fixed costs, overheads, logistics and higher over-rider bands) and factor these in to the ROI targets you set for the business.
3) Consider the whole plan not individual promotions
The return on investment of an annual promotional plan will often make sense whereas some of the promotions within it do not. For example, a KAM negotiates a plan which improves his ROI over the year by 5% but in order to achieve this, he needs to offer two deep cut promotions which have a negative ROI. If these deals don't undermine your commercial strategy, it makes sense to approve them in the context of the wider plan.
4) External impact of your promotions
Your promotions don't exist in your promotional system, they are realised in the real world. Your customers and competition will react to your deals so these impacts should be considered in your ROI. Simulating your customers' margins and factoring competitive steal and cannibalisation of other products in your own range will enlighten your view of ROI.
5) One size doesn't fit all when it comes to ROI
Having one target for the whole company is easy for the Sales team to remember but will often lead to a reduction in ROI as the more profitable promotions will gradually reduce their returns over time without the pressure of continuous improvement. Set targets by customer by brand in line with your Commercial strategy.
6) ROI is only one measure
ROI is a very useful measure of whether to run a promotion but it isn't the only one. A shallow cut deal on a low margin product can give a better ROI % than a deeper cut deal on a more profitable one. However, the second deal is likely to give the business more profit at a higher margin than the first one. Other measures such as total profit on promotion, profit margin on promotion and the efficiency of the promotion will ensure that the promotional plan doesn't become unprofitable.
Ways of working
7) Train your sales people
Your sales teams aren't trained accountants and may not understand how they can improve ROIs. Help them understand the levers they can pull to improve their returns, e.g. getting the most out of the fixed costs they pay for promotions, measuring and paying for displays and performance or changing the product mix on display.
8) Continuous improvement
ROI is about continuous improvement - radical changes rarely come without trade or competitor reactions. A sustained long-term focus on ROI improvement including making ROI a Sales KPI will uncover new ways of improving the return you get from your trade investment.