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June 19, 2012

Trade Promotion Optimization - How to use fact-based business intelligence to increase ROI on trade spends

CPG companies spend nearly 15-20% of their annual revenue on trade promotions; this is fast nearing a $700 billion figure world-wide. Trade spending is now the second largest expense item on most consumer manufacturers’ P&L's. In-spite of this significant investment, only 30% of trade promotions are estimated to be profitable.

Most companies are unable to improve the ROI of their spends due to lack of a structured internal mechanism that: collates market information in a timely manner, leverages insights from historical promotions, uses these insights to collaborate better with retailers and does a post-event evaluation through a built-in performance management system.

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 can result in lost sales, declining market share and damaged retailer relationship.

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 volume and profit targets and eventually help retailers and manufacturers increase consumer penetration and build bigger consumer baskets that have a long-term sustained impact on baseline sales.  For a deeper look into how TPO's can help you, please refer this whitepaper.

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!!!