To promote, or not to promote? That is the question.

5 September 2014

Peter Wardle

Peter Wardle

Consultant

Whether ‘tis more profitable in the Annual Plan to suffer
The slings and arrows of outrageous competitor promotions,
Or to take arms against the competition,
And by promoting end them?”

Ok, so Prince Hamlet might not have been fretting over 21st Century Trade Investment challenges when contemplating life and death in his famous soliloquy, but with a little creativity (ok, maybe a lot) we can draw a few parallels to the modern day experiences of a National Account Manager (NAM). 

Hamlet starts by bemoaning the pains and unfairness of life (does this sound reminiscent of NAMs at the start of the Annual Planning & target setting process?) and he agonises over a choice between the pain of life and the uncertainty of death.  Thankfully, NAMs don’t face such a mortal dilemma, but it is fair to say that bad promotional decisions in the Joint Business Plan can ring the death knell of their chances of hitting budget.

Finally, Hamlet asks ‘who would continue to tolerate the pains of this world if it were not for a fear of the unknown?’ Similarly, many NAMs will adhere faithfully to painful planning processes and tried and tested promotional methods that have served them well in the past, largely out of fear of not knowing what would happen if they tried something different.  Unfortunately for NAMs, in the fast moving world of consumer goods sticking to what has worked well in the past is often no guarantee of future success.

Fortunately, that is where the similarity ends, because unlike the tragic end which befell Hamlet, NAMs can now look to modern technologies to help ensure a happier (and more profitable) outcome.

Optimising trade promotions

There are various tools available in the predictive analytics space to help companies optimise their promotional investments. I recently led a SAP Trade Promotions Optimisation 1.0 implementation for a global alcoholic drinks company, and I emerged with the scars and hard fought learnings that inevitably accompany an early adoption of an emerging technology. 

I don’t propose to describe my experiences here in detail (but if you do have any questions, feel free to ask!) but rather I want to focus on an exploration of the type of approach required to truly optimise trade promotion investments holistically.

Knowing where to start?

When it comes to creating promotion plans in order to achieve their commercial objectives NAM’s can be forgiven for not really knowing where to start. Usually they default to last year’s trade fund budget and promotion plan as a base.  Next, they embark on building up the promotional plan sku by sku , considering some key imponderables (or are they?) such as gauging the effects of seasonality on anticipated volumes, the extent of cannibalisation on other owned skus, and which combination of promotional feature and display to invest behind in order to generate the required volume uplift and/or Return On Investment (ROI) to hit their plan.

The problem is that this is only half of the story, and it is not the half that retailers are most interested in.

The other half of the story

The starting point should be a consideration of the customer’s objectives, not your own. The best plans are those which hit the ‘sweet spot’, that is to say they deliver for the customer, the supplier, and also the category.  Therefore, NAMs should consider key financial and volume metrics from both the retailer and supplier perspective, whilst considering the broader category impact. For example:

  • What impact on retailer revenue will your planned promotion have, and will it deliver volume uplift above base in line with your volume plan? 
  • What margin will the retailer make at your anticipated level of redemption, and will the ROI be sufficient to gain approval internally? 
  • What is the likely cannibalisation impact on competitor skus, as well as skus within your own portfolio, and is this good for the category?
  • What on and off promotion Profit On Return (POR) targets did the buyer set at the start of the year, and do your promotion plans address these expectations?

Finding answers to these questions is not an exact science. However, it is possible to estimate likely promotional outcomes with a high degree of statistical confidence.  The ability to do so depends upon a couple of key factors:

The availability and quality of data

  • Shipment (sales to retail) and product cost data is required to assess internal profitability
  • Point of Sale data (Retailer EPOS or Syndicated data) is necessary to calculate the retailer & category view
  • In-store Feature and Display data is required in order to distinguish between the varying causal factors influencing consumer demand e.g. Tesco Goal Posts versus a Gondola End display.

A calculation engine with the capability to predict and simulate sales volumes for a given combination of price and promotional vehicle

  • Prediction – the ability to analyse past promotions and predict an outcome in line with prior trends along with an indicator of forecast confidence
  • Simulation – the ability to simulate and then compare different promotion mechanics on the same sku, as well as modelling the effect of varying constraints

A significant investment of time and effort is required to collect, cleanse and harmonise this amount of data but the insights generated offer NAMs the ability to engage retailers in exactly the types of conversations they like to have, namely how to achieve their commercial objectives and maximise category potential. By so doing it is far more likely that your buyer will come to view you as a trusted advisor, and that your promotion proposals will be accepted.

With that in mind, can you afford not to optimise your promotional investments?  That is the question.

 

 

 

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