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The battle to optimize trade terms spend

Jon Bradbury

Every year consumer packaged goods (CPG) organizations spend huge sums on trade spend (TTS, or Trade Terms Spend), with some statistics putting this figure at over 20% of total revenue. Trade spend describes the money that CPGs pay to their customers, the retailers, to incentivize them to increase consumer demand for their products. Most of this amount relates to promotional activities.

Unfortunately, there are several factors already eroding CPGs power in customer negotiations that are likely to increase this percentage in the future. These include new channels dominated by highly competitive customers such as internet retailers and discounters, and pressure now being exerted by some traditional customers combining their bargaining power into buying groups.

However, the outlook is not all doom and gloom; there are several strategies that CPG organizations can adopt to either combat or even exploit these evolving market conditions. These include implementing net revenue management (see our separate article ‘Secure Good Growth with Net Revenue Management’) and investing in modern technology and analytics tooling to provide real insight to optimize trade spend. 

In this article, we discuss how CPG organizations can use technology to help optimize their trade spend and the factors that need to be considered to ensure that such tooling is implemented effectively.”


Technology as an enabler for growth

‘Digital’ is a buzzword for the CPG sector, as it is for many others. Many CPG organizations are asking the question of what ‘digital’ means for them and specifically, how it can be used to improve their sales capabilities across all areas (such as category management, retail execution, customer planning and, perhaps most importantly, trade promotions management). 

Many CPGs struggle to decide where and how to invest in the ‘building blocks’ of this landscape, and in what order. The sales capability tooling choices available include category management tooling that provides data driven store and shelf analysis, and retail execution tooling that provides the field force with mobile driven data to optimize in-store sales and merchandising. 

However, CPGs' primary focus is often on the promotions management area, and here the tooling choices break down further:


A simplified view of the overall data and technology landscape that most CPGs are driving towards

 

Trade promotions management systems

Recognizing the importance and complexity of promotion planning, execution and monitoring, CPG organizations are increasingly looking to digitize these processes, moving away from bespoke Microsoft Excel models and towards workflow-based tooling. 

CPGs are looking for these tools to enable sophisticated analytics offering real actionable insights, including sales forecasting, post event analysis and – ultimately – predictive and prescriptive trade promotions optimization (powered by artificial intelligence techniques including machine learning). 

They are also looking to drive process efficiency through increased automation (including robotics process automation) and/or offshoring – whether insourced or outsourced – to exploit wage arbitrage opportunities.

There are a number of suppliers offering these types of TPM tooling solutions, from industry giants such as SAP and Accenture through to smaller, entrepreneurial organizations such as Anaplan and VisualFabriq.

However, regardless of the supplier they select, CPG firms have often found these tools very expensive and difficult to implement. 

The common industry theme seems to be that these TPM implementations are amongst the most challenging (and most often failing) programs that they attempt.”


This begs the question – why? In our experience there are a range of key challenges, including:

Net Revenue Management

Many CPG organizations are already exploring how analytics tooling can support strategic decision making. One use case is the automation of NRM calculations, fed directly from ERP systems and market share information providers. The ability to automate the highly detailed analysis required to develop meaningful NRM insights is a true ‘force multiplier’ for CPG organizations. 

However, there are some constraints that should give decision makers pause for thought before they make the decision to invest in tooling, including:

  1. The challenge of making any tooling cost effective given the complexity of the CPG product hierarchies, and
  2. The availability of the good quality market share data needed to make the analysis credible.

For more detailed insights on Net Revenue Management and related tooling please see our previous article ‘Secure Good Growth with Net Revenue Management’.

Exploiting data to create actionable insights

The implementation of standardized TPM software provides the data standardization rigor required to merge TPM information with data from other internal and external sources. There are several ways that this data can be exploited to create actionable insights.

POST EVENT ANALYSIS

PEA tooling automates the process of assessing the effectiveness of promotions against plan, allowing organizations to continually improve their promotion strategies. This capability can already be purchased off the shelf, either as an integral part of some TPM products or as a stand-alone module.

As these tools are ‘tried and tested’ some organizations may feel more comfortable in investing here than in newer, more sophisticated tooling, such as those products that claim to deliver trade promotions optimization (TPO) capabilities.

TRADE PROMOTION OPTIMIzATION

TPO tooling is being marketed as a capability that can be used to exploit a range of different datasets and the latest Artificial Intelligence technologies to deliver predictive and prescriptive analysis. There is no doubt that these tools can provide CPG organizations with a competitive edge...

But watch out for...

New technology

The technology is relatively new so there is not currently a wide selection of ‘off the shelf’ products available.

Building rather than buying these tools is likely to be costly both in implementation and in order to fund ongoing maintenance and upgrades.

New datasets

Introducing new datasets makes effectively structuring and merging data even more complex – a challenge that CPGs with diverse product portfolios already face.

‘Proof of concept’ projects may deliver impressive results but may also be based on an unsustainable level of manual data preparation.

High quality data

Reliance on high quality data means that organizations will need to invest in foundational TPM systems that provide the required data labelling.

Micro or macro

The organization needs to decide whether to focus on ‘micro TPO’ – specific use cases such as individual promotions, customers, categories, etc. – or ‘macro TPO’ – looking for big picture trends and opportunities across the whole market. 

But watch out for...

New technology

The technology is relatively new so there is not currently a wide selection of ‘off the shelf’ products available.

Building rather than buying these tools is likely to be costly both in implementation and in order to fund ongoing maintenance and upgrades.

New datasets

Introducing new datasets makes effectively structuring and merging data even more complex – a challenge that CPGs with diverse product portfolios already face.

‘Proof of concept’ projects may deliver impressive results but may also be based on an unsustainable level of manual data preparation.

High quality data

Reliance on high quality data means that organizations will need to invest in foundational TPM systems that provide the required data labelling.

Micro or macro

The organization needs to decide whether to focus on ‘micro TPO’ – specific use cases such as individual promotions, customers, categories, etc. – or ‘macro TPO’ – looking for big picture trends and opportunities across the whole market. 

Deepening customer relationships

CPG organizations can use TPM systems and associated analytics tooling to change the conversation with their customers, in some cases driving a more collaborative approach to customer business planning and even, in other cases, enabling joint business planning.

Current approaches to annual negotiations often use the prior year plan as an initial negotiating position. For customers this approach can provide an opportunity for them to push historical promotion strategies, even though these might be not be optimized for the CPG organization and ultimately the customer themselves. Through investing in advanced analytics CPGs can bring more sophisticated ‘zero based’ strategies (i.e. start afresh, not from last year’s plan) to the negotiating table, ultimately driving better returns for all parties.

True ‘joint business planning’ relies on both parties sharing high quality KPI and sales information. This information sharing builds the level of trust required to change annual negotiations from oppositional to collaborative. The rigor and data labelling achieved through implementing TPM systems is a key enabler for achieving this.

The importance of effective change management

The level of business change required to successfully implement TPM and associated analytics products is substantial. Many salespeople will not have the experience or skills required to effectively use analytics tools to support their decision making.”


Many organizations primarily incentivize their sales staff based on sales growth. The insights provided by the tooling and approaches described here can lead to a more sophisticated set of incentives for sales people, for example including profitability and trade spend optimization targets.

These are significant changes for many salespeople, especially when considered with the enhanced process rigor and databased decision making that come with the introduction of a new TPM system that salespeople may see as restrictive or going against their experience and ‘gut feel’. To be successful, CPG organizations need to invest in a comprehensive change management approach and the resources required to deliver it (for more information on effective change management see our article ‘Business change in an agile world’)

How can Berkeley help?

Organizations need to embrace substantial change to take advantage of the capabilities provided by TPM and associated analytics tooling. At Berkeley we have a wealth of experience helping clients to successfully define their strategies and/or deliver the transformation needed to implement exactly this type of complex change.

The author

Jon Bradbury

Jon Bradbury, Partner