According to the Promotion Optimization Institute, consumer packaged goods (CPG) companies spend today 11%-27% of their annual revenues on trade promotions, representing the second-largest cost item in the P&L. However, many brands struggle to execute and measure their trade promotion strategies: 40% of CPG trade promotion spending doesn’t drive the desired results (Nielsen) and 55% of all trade promotion fail to develop brand recognition in any meaningful way (Repsly). What are the reasons behind this paradox? Why do CPG companies not harmonize their sales data or collect competition data? What is the reason why they are not tracking promotional costs and make assumptions in their calculations jeopardizing their P&L?
Trade Promotion Optimization (TPO) is the process of utilizing integrated goals, factoring in promotion (e.g., price, duration) and supply constraints and predictive analytics to create continuously improving trade promotion strategies and results (according to the Promotion Optimization Institute). At WITSIDE we tackle this challenge in a 2-phased approach, consisting of 6 steps in total, as shown below:
Each step of the process is the prerequisite for the next step. As in every other analytics project, before you optimize you need to measure. Therefore, the first step is to execute the current promo plan and put the appropriate mechanisms in place in order to collect and harmonize the relevant data. Doing this, you will then be able to calculate the ROI of each promo activity for each single SKU and its impact on the quantities sold and revenue. It is important to stress out that this process involves the calculation of the impact of cannibalization effects (the impact on the demand of not promoted SKUs) and halo effects (the impact of the competitors’ promotional activities on demand).
In the second phase the objective is to adjust the promo activities (i.e., the promo mechanics) in a way that optimizes ROI (revenue, etc.). The question here is at what price (i.e., discount levels) should we promote which SKUs, and at which time intervals to maximize our revenue and other ROI metrics. Tough challenge but the insights we will have gained from the “awareness” phase will help us give the appropriate answers.
It is a paradox that TPO is often underestimated by CPG companies, despite its impact on the bottom-line results. The path to operational excellence is to maximize the benefits from your current spend before you decide on any other investments. I very well understand that there are quite some challenges (such as poor data quality, discontinued SKUs, large SKU number that are hard to analyze and link to competition, etc.) and I also realize that there are certain approaches to tackle those challenges: SKU clustering, demand forecasting, regression analysis, price elasticities, machine learning, optimization, etc.
TPO is at the core of digital transformation. It is about learning how to gradually improve the effectiveness of your trade promotions. It requires good measurement, the openness to reflect on how you have been doing things and the willingness to change it.
Konstantinos Pazalos, Director, Innovation & Analytics