All Promotions are Not Created Equal: Measuring the Effectiveness of Trade Promotion Spend

Spend Matters welcomes a guest post from Nancy Hwang, Manager at Archstone Consulting.

In a recent web seminar hosted by Consumer Goods Technology, Amjad Malik, stated, "Trade promotions are the second biggest line item on our P&L right behind COGS." This comment made by Kellogg Company's Vice President of Business Analytics could easily apply to the majority of CPG manufacturers that exist today.

Trade promotion dollars are those dollars spent by manufacturers on retailers to execute consumer-facing incentive programs (e.g., ad features ads, temporary price reduction, etc.); in return, these incentive programs are expected to generate greater volume and consumer sales. Therefore, as Malik emphasizes, "If we are spending that much money on trade, it becomes extremely important for us to [also] spend on tools, processes and analytics to improve the effectiveness of our trade funds."

As you may have guessed, this article is about the importance of analyzing and measuring the effectiveness of trade promotion spend. Among other things, good promotional analytics allows an organization to:

  • Identify what is working and what is not
  • Provide insights on relative trends in performance
  • Identify differences in relative customer and relative category performance
  • Recommend action plans that result in continuous ROI/effectiveness improvement

Okay, you have convinced me that understanding trade promotion effectiveness is important. Where should I start?
One of the first steps in promotional analysis is calculating event ROI. In other words, let's understand the overall profitability of promotional events at an event level.

The inputs to the ROI equation are straightforward:

What can make ROI calculation difficult, however, can be (1) the quality of the data inputs and (2) the assumptions (e.g., decision rules) behind the ROI methodology. We often hear the phrase "garbage in, garbage out." For many CPG companies, having accurate inputs at an event level can be difficult due to the amount of effort and coordination required to track this information. Have you accounted for all costs associated with an event (e.g., ad costs, display costs, free product)? Do you have the right start and stop dates for the event? Have you tied incremental volume back to the right event?

Additionally, companies are often reliant upon 3rd party providers, such as Nielsen or IRI Symphony, and/or POS data for determining incremental volume. Therefore, understanding the data source and how you want to use the data is important. During a recent client experience, we found that the client was looking at the data differently than the third-party provider, leading to different interpretations of the results. The quality of and the decisions made around data can make all the difference in an ROI calculation.

I have calculated my event ROIs. Now what?
In the end, an ROI is just a number. What makes it valuable are the subsequent insights and comparisons that you can draw from event ROIs as well as the metrics that can be built from the base ROI methodology.

Key questions to ask when developing insights and understanding behind an event ROI number include:

  • How did this event perform relative to similar types of events for the same customer? How did it perform relative to similar types of events for a different customer? How did it perform relative to other types of events for the same customer?
  • What was the impact of external factors? What were my competitors doing? Were their significant out-of-stock or seasonality issues that impacted my results?
  • How did timing, duration, and frequency impact performance?

In addition to ROI, other metrics that can provide a broader understanding of promotional effectiveness include Cost per Incremental Volume, Profit per Incremental Volume, Spending Efficiency and % Lift.

By beginning to understand the drivers behind event ROIs and other related performance metrics, an organization can then begin to make the strategic and tactical changes required to improve trade spend effectiveness.

What are your final recommendations?
The first recommendation is to communicate and share insights across business functions as well as retail partners. Trade promotions are a joint effort between manufacturing and retail partners. Therefore, sharing best practices or ideas on how to improve effectiveness of events (e.g., fewer events, different product mix) would benefit both parties.

The second recommendation is to "use" the insights developed. Promotional event analysis can easily become just another analytical exercise. Therefore, it important that an organization leverages its earnings and develops specific actions plans and measurable goals for trade promotion improvement.

We have found that critical success factors for trade promotion improvement include (1) strong executive support and (2) accountability and discipline around both the analytics and action plans.

For CPG manufacturers, trade promotion spend will continue to be a cost of doing business. However, as stated above, not all promotions are created equal. Therefore, understanding how to maximize the effectiveness of trade promotion dollars should be a prioritized activity for any CPG manufacturing company.

- Nancy Hwang, Manager, Archstone Consulting

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