Trade Promotion Management (TPM) is often used to refer to multiple disciplines that span the planning, management and execution phases of collaborative Promotional activity that Consumer Goods (CG) companies perform with their retail partners.
Interestingly, these CG companies typically spend anywhere up to a staggering 23% of revenue on Trade Promotions. Let's stop and think about that for a moment. The combined sales revenue of the top 50 CG companies worldwide is more than one trillion US dollars. A 20% spend on Promotion activity at that level represents very serious business indeed.
Why do they do it? CG companies use this approach as a tactic to boost revenue, increase coverage and defend market share in the face of rising competition or new entrants.
All of us at some point will have been exposed to such tactics as an end consumer. Those hard to resist buy-one-get-one-free (BOGOF) offers that seem to pervade every supermarket. Or those meal deals that attract a lower cost if multiple items are purchased together at the same time.
In recent times, the TPM terminology has been expanded to explicitly call out the phases that need to be considered. This has resulted in TPM being joined by TPO (Trade Promotion Optimisation) and TPX (Trade Promotion Execution). However, TPM is often used as the collective term to refer to the entirety of the process.
As mentioned above, most of us will have seen Promotions in our daily lives. Typically, at supermarkets where they cover a vast array of products. They can be loss-leaders designed to entice us into the store. Or designed to boost sales of adjacent and complementary products such as alcohol and snacks. They might use sporting events or national holiday times as the incentive for us to participate. Summer BBQs, Beers and Briquettes spring to mind.
And it’s not just supermarkets where this activity takes place. Nor is it confined to just the food & beverage category of products. Increasingly it’s becoming an omni-channel experience. It doesn’t matter if I shop local in a convenience store, shop in a large retail outlet or shop online, retailers (and manufacturers and their distribution partners) are all facing huge competition for your loyalty and spending power.
To start with there are usually several stakeholders involved in the process. Finance must agree to the budget that is to be allocated for TPM. Planners spend countless hours planning, modelling and optimising Promotions that they think will meet the desired outcomes. Field Sales are responsible for selling the products and Promotions to the Retailers they work with. And finally, the Retailer needs to conform to the Promotion rules such as shelf placement, number and type of products included in the orders. What is immediately clear is the complexity involved. And it’s here that the issues begin.
In 2019, McKinsey & Company reported that over 70% of Promotions are unprofitable. If you flip that statement on its head and say that less than 30% of Trade Promotions are profitable, then it starts to look like an eye-wateringly large and expensive problem.
Some 3rd party reports even suggest that 70% is too low and that >80% is a more realistic figure. Whatever the real figure, the wasted spend and lack of ROI is painfully apparent.
Unconvinced by these independent reports, we thought we would put it to the test. Surely this level of wastage wouldn’t be tolerated. We recently ran a series of virtual round table events for senior executives from large CG companies. These events covered Western Europe and the US and here is a smattering of the responses we heard when we raised this issue:
Let’s go back to the stakeholders for a moment. When you shine a spotlight on the TPM process, it’s easy to see where the problems are. Inefficiencies are built in throughout the journey:
Finance allocate and approve the budget but can’t see the results of the spend.
Planners design the Promotion tactics but can’t impact in-field execution.
Sales struggle to convey the Promotion and ensure compliance to its rules.
Retailers struggle to understand the value of the Promotion and in-store execution and compliance is weak as a result.
When you add this to the fact that most CG companies perform customer segmentation (the process of defining which customers should be eligible for which promotions at what prices) at best on an annual basis and often-times once every two years, it’s easy to see that poor targeting also contributes to the problem.
Consumers habits change on a dime these days and Retailers must respond accordingly. Manufacturers and Distributors that plan Promotions for segments that are 12-months to 2-years old are simply throwing money away.
If you then consider the sheer volume of Promotions that are run it becomes glaringly obvious that the problem is somewhat out of control. Planners will often operate on an annual cycle. Typically taking last year’s Promotions (with little visibility of the actual outcome), tweak them and run them again. A process often referred to as SALY (same-as-last-year). Using this as a starting point, they then layer on top some additional Promotions that feel relevant for the coming year. Imagine what happens in next year’s Planning cycle? It's the same again.
The challenges above exist because each of the stakeholders currently operates in isolation using different siloed technologies. Finance has the ERP system. Planners are often stuck in Excel. Field Sales have their Retail Execution system. And guess what? None of these systems communicate with each other.
More and more companies are leaving behind this siloed approach in favour of a single connected system that connects to the ERP system and brings finance, planners, and field sales together in one place, allowing:
Finance to see Promotion impact and performance in real-time against baseline, predicted and actual figures.
Planners can rapidly plan new Promotions armed with the knowledge of what works and what does not.
Planners can tune and optimise underperforming Promotions whilst in-flight, increasing the chances of a successful outcome.
Field sales can articulate the value of the Promotions and ensure orders are compliant with Promotion rules, increasing order value and reducing returns.
It’s imperative that such a connected system must also cater for real-time customer segmentation to enable fine-grained targeting to ensure a high degree of Promotion relevance.
According to McKinsey & Company, the companies that do this can expect a five-fold increase in their Promotion performance. And given the dollars at stake, these systems need to deliver value in weeks not years.
If this sounds familiar to you, why not watch our recent webinar on how to Solve Your Promotion ROI Challenge through the link below.