Companies spend nearly 15-20% of annual revenue on trade promotions, totaling $700 billion worldwide. However, only 30% of promotions are profitable. TPO uses modeling to identify optimal prices and discounts to maximize sales lift and ROI. It helps high power brands maintain relationships and low power brands gain negotiating power. An effective process includes modeling past performance, budget planning, execution, analysis, and incorporating lessons into future planning.

1. MANAGING TRADE PROMOTION
STRATEGIES BETTER
A white-paper on how to use fact based business
intelligence to increase ROI on trade spends
Kakul Paul
CPG Practice Head
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2. Contents
Fast changing retail landscape 3
How does TPO help manufacturers and retailers? 4
How trade promotion strategy varies by brands 6
Trade promotion management process 8
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3. Fast changing retail landscape
CPG companies spend nearly 15-20%1 of their annual revenue on trade promotions; this is fast nearing a $700 billion2
figure world-wide. Trade spending is now the second largest expense item on most consumer manufacturers’ P&L's. “ Companies spend
In-spite of this significant investment, only 30%1 of trade promotions are estimated to be profitable. nearly 15-20% of their
Most companies are unable to improve the ROI of their spends due to lack of a structured internal mechanism that: annual revenue on
collates market information in a timely manner, leverages insights from historical promotions, uses these insights to
trade promotions. This
collaborate better with retailers and does a post-event evaluation through a built-in performance management
is fast nearing a $700B
system. “
figure world-wide
As of date a large number of CPG manufacturers have complex, conditional discount structures that they find difficult
to implement & negotiate with retailers and expensive to audit & measure. The current economic recession and
accompanied growth of private labels adds to the existing woes. Making a mistake in planning the right trade strategy “ Only 30% of these
can result in lost sales, declining market share and damaged retailer relationship. trade promotions are
This white paper highlights the need to improve trade promotion performance and explains how leading consumer estimated to be“
products companies are leveraging predictive analytics to significantly improve the return on their trade spend
profitable
investments. It includes an overview of the industry wide best practices to deliver superior performance.
1
AMR Research
2
Hand promotion management
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4. How does TPO help manufacturers and retailers?
Trade Promotion Optimization (TPO) uses advanced econometric modelling techniques to help manufacturers refine
their promotion strategies, identify the right price & discount point that maximizes sales lift and ROI, meets their “ TPO uses econometric
modelling to help
volume and profit targets and eventually help retailers and manufacturers increase consumer penetration and build
identify the right price
bigger consumer baskets that have a long-term sustained impact on baseline sales.
& discount points that
maximizes sales lift &
ROI and meets volume “
& profit targets
Sustained long-term lift for baseline sales
Companies successfully implementing TPO achieve significant benefits as they:
o Have a structured process for collecting and collating data. The time saved is utilized for more value-added planning and analysis
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5. o Are more scientific in planning their trade promotion calendars (with the right budgets allocated across months/seasons) rather than
using their instincts and gut-feel
o Make better use of their trade budgets by allocating more against promotion sensitive brands that not only increases top line sales but
also bottom line profits (hence higher ROI)
o Are able to build a more fact based compelling sell-in proposition to collaborate with the retailers for restructuring their trade programs
o Able to design unique trade promotions specific to a retailer/channel instead of following “one-size fits all”
To highlight the savings, let’s take an example:
For a $2B CPG manufacturer who invests say 15% of its sales (~$300MM) on trade promotions, a mere 2% improvement in returns can yield
$6MM incremental revenues which can be ploughed back to the business!!!
2% improvement in ROI can translate to $6MM for a $300MM investment
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6. How trade promotion strategy varies by brands
Trade promotions will vary based on:
A. Type of brand - Brands can be categorized as: High power and Low power brands.
High power brands
A high power brand has a strong consumer pull and delivers value proposition around functional as well as
emotional benefits. “ High power brands have
strong consumer pull and
These brands have high levels of base or non-promoted volume as compared to others; most of their volume is
hence high levels of base
“
sold at everyday (base) price to the consumer.
volume
High power brands will therefore gain little from trade promotions since incremental sales from trade
promotions will be a small percentage of their overall sales. However, given the absolute size of the brand, the
savings can be significant. They are usually promoted to:
1. Maintain good relationship with retailers (push new line extensions and smaller brands)
2. Achieve profit and volume targets
3. Recover market share lost to competition
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7. “
Low power brands
Low power brands have
These are brands with relatively little consumer loyalty, less pull in the market and hence less
relatively less consumer loyalty
negotiating power with the retailers. Retailers will give preference to brands with better margins and
& hence less negotiating power
discounts since they know that replacing less incentivizing brands will not negatively impact their
with retailers. They therefore
overall category sales. These brands therefore have the most to gain from better trade promotion
have the most to gain from
“
management.
better TPO
B. Market situation of the brand – Is the brand facing an issue with low penetration or with low consumption?
Low consumption will entail designing trade promotions that incentivizes trade and hence consumers to stock more. Low penetration on
the other hand will entail trade promotions that entice consumers to try the product.
Designing trade promotion strategy based on the brand’s market situation
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8. Trade promotion management process
Organizations where Finance, Sales and Trade marketing teams work collaboratively in supporting & funding their goals have a higher success
rate. They need to have an information-rich process for budgeting, planning, executing, and evaluating trade promotion spending
Collaborative working across teams needed for a successful trade promotion execution
Below is a 6 step cycle for an effective trade promotion management:
1. Collate market information
Create an automated process that integrates and synchronizes data from multiple sources (like shipment data, competition data,
syndicated market data) onto a single platform.
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9. 2. Predictive modelling
Distil historical performance to identify all the drivers that impact sales, like: price, internal cannibalization, cross-category affinity,
competitive action. Translate this to develop baseline models to quantify incremental volume and profit for each brand and trade
promotion activity.
Decomposing brand sales to arrive at base sales & incremental impact from other drivers
The periodicity of this exercise depends on how frequently the market dynamics change (typically it’s an annual exercise).
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10. 3. Budget planning & allocation
Using the statistical models, create a scenario planner that the sales, trade-marketing and finance team can use to build various “what if”
scenarios. The scenario planner will calculate ROI not only for the brand but for the entire portfolio.
It will help answer the following questions:
o What brands/SKUs to promote?
o When to promote and how often to promote?
o What trade promotions work best for the brand/SKU?
o How much promotional discount to offer?
o What is the expected sales lift from the promoted SKU during the promotional period?
o Has the promotion resulted in a sustained long-term increase in base-line sales?
o Are specific promotions cannibalising sales of other brands/SKUs in the portfolio?
o What is the expected volume and ROI for the product from the trade promotion?
o What is the expected volume and ROI for the entire portfolio (after accounting for cannibalization) from the trade promotion?
Based on the results the team can allocate their budgets to achieve the desired volume and profit targets.
4. In-market execution
Collaborative working with retailers for seamless in-market execution and settlement
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11. 5. Post-event analysis
Create Key Performance Indicators (KPIs) to help sales management measure and benchmark the trade event’s market performance
against a set of pre-determined quantifiable objectives. Some of the KPIs are: incremental volume, cannibalization rate, returns on
promotion spending, incremental profit, remaining inventory on hand.
6. Incorporate learnings onto the next cycle
Evaluate success and failures from above – this will then go in as the first step in the planning process for next year. Eliminate poor events
based upon numbers.
6-step cycle for an effective trade promotion management
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12. About Marketelligent
Marketelligent provides data analytics-based consulting and outsourcing services that help you make smarter business decisions. The firm is
backed by senior professionals with rich experience across Consumer focused industries - Consumer Finance, Consumer Packaged Goods,
Consumer Retail, Payments, Telecom and Media. At Marketelligent, we believe in leveraging analytics to provide intelligent marketing
solutions through a highly talented team comprising of both domain and analytic experts. This ensures that analytical insights are converted to
actionable recommendations that help our clients make smarter business decisions.
For more information, please contact us at:
info@marketelligent.com
www.marketelligent.com
Bangalore, India
Kakul Paul
CPG Practice Head
kakul.paul@marketelligent.com
New Delhi, India
Roy K Cherian
CEO
roy.cherian@marketelligent.com
New York, USA
Buck Chintamani
EVP, Strategic Initiatives & Business development
buck.chintamani@marketelligent.com
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