Gary Singer of Accenture on the Challenge of Trade Promotion
Trade promotion funds are a fact in the consumer packaged goods (CPG) industry. Yet, somewhere along the line the concept of trade promotion became so complex that few companies have been able to optimize. Gary Singer, a Partner in Accenture's CRM Practice, takes a look at trade promotion and why it is still an issue today: He also explains how some companies are managing to achieve effective trade promotion management.
How big an issue is trade promotion management to CPG companies?
Singer: The trade promotion challenge continues to be a significant one for CPG companies. Despite their efforts, many still spend substantial amounts of time and money -- 14 percent of revenue according to an AMR Research study -- on promotions with retailers designed to boost revenue or increase and protect market share (or both).1 However, separate figures suggest that 39 percent of promotions do not generate any incremental volume in sales.2
A recent study conducted by Consumer Goods Technology and AMR Research found that 73 percent of the CPG companies surveyed consider improving promotion effectiveness as one of the key drivers behind their investments in sales and marketing technology.3 However, despite these investments, companies still lack a clearly defined method to identify the right promotional opportunities, communicate and manage the impact on their operations or evaluate promotion performance in terms of gross margin, merchandise turn and cannibalization.
As a consequence, CPG companies typically spend more time and money than they want to -- or should -- on promotion activity that generates less than satisfactory return on investment and risks being unable to fulfill consumer demand.
Why does trade promotion management continue to be problematic?
Singer: The fundamental technologies and processes exist today to make effective trade promotion management (TPM) a reality; however, there are still a number of obstacles facing CPG companies.
One major obstacle is the number of different sources -- internal and external -- from which a consumer goods company must pull the data needed to optimize TPM. It creates significant challenges in terms of data format, frequency or availability of data and differences in maturity of data. Collating, cleansing, harmonizing, standardizing and managing that data is critical.
A second obstacle is that many organizations still use the same trade promotion processes they created 10 to15 years ago. This approach ignores the fact that not only has the company and its trade promotion spending grown since then, but the trade promotion arena itself has changed. Against a backdrop of more sophisticated retailers and changing buying habits, there are now more SKUs and fund types than a decade ago. As a result, companies may have systems that are neither efficient nor integrated, making effective TPM difficult.
These and other limitations make it difficult for relevant functions to know what promotions are being planned. For example, sales people often do not have access to the full range of data needed to make the most effective promotion planning and budget allocation decisions and, as such, companies cannot measure results to determine what changes are necessary to improve performance. In addition, the lack of centralized control can make it difficult for finance to maintain financial control or compliance. That said, even armed with the appropriate data, processes, and technology, many companies are short on employees with the analytical skills necessary to evaluate promotion effectiveness and decide on the tactics and actions that will generate incremental sales lift and/or increased market share and profitability.
It's clear that a new approach to TPM is needed. An approach that will help CPG companies break the cycle of spending substantial sums of time and money on promotions and having little return to show for it.
How can CPG companies achieve high performance in TPM?
Singer: While most CPG companies struggle to effectively manage and improve the return on their trade promotion activities, a number of leading companies are making progress toward a vision of effective trade promotion.
Through our research and work with numerous CPG companies, we see five key elements that characterize this vision.
1. Formal, fact-based trade promotion strategy
Successful TPM cannot be approached with a "one size fits all" mindset. We have found that leaders in the field use fact-based analysis to develop a formal strategy that serves to identify both the role of trade promotion in the company's broader marketing and brand strategies, as well as the right type and allocation of trade promotion funds by customer and/or customer segment. The best strategies are also performance-oriented, designed to incentivize and reward retailers to achieve results such as revenue growth, margin increase or ROI improvement.
2. Standardized TPM processes
Many CPG companies take an ad-hoc approach to TPM making it difficult for them to achieve consistency in results. To optimize trade promotion, companies should have standardized processes that are "closed-loop" in nature, in other words, integrating trade promotion planning, execution and analysis activities that are consistently followed across the organization. The processes should be flexible enough to accommodate the tailoring of promotions to customers, further enabling CPG companies to more easily plan, measure and analyze the impact of these events by individual customer and/or customer segment.
3. Integrated trade promotion system
An equally important characteristic is a trade promotion system that is linked seamlessly to the company's other corporate systems, such as finance and supply chain. While point solutions enable sales and marketing professionals to analyze specific aspects of trade promotion, a fully integrated system makes it possible for a company to more precisely identify, plan, execute and fully evaluate its trade promotions. It also enables businesses to more accurately anticipate and manage the financial impact of promotions and the spikes in consumer demand.
4. Comprehensive promotion analysis
You could take the view that the challenges companies face in effectively managing trade promotion are rooted in data and analysis shortcomings and most CPG companies admit that they tend to rely heavily on retailer data. The difference is that leaders in the field of TPM collect comprehensive data from sources both inside and outside the company and implement the appropriate analytical tools to perform pre-event "what-if" modeling to identify the best return on promotion spending across products, customers, and tactics. Comprehensive, accurate data is also critical to determining the post-event impact of specific promotion events -- enabling a CPG company to not only evaluate the performance of every promotion program including how it affected the retailer's sales, but also to identify when promotions are actually undermining business by spurring cannibalization and/or encouraging forward-buying.
5. Organization and human resource enablement
Finally, people are an often overlooked aspect of TPM. In our experience, people are typically the most critical success factor in the equation. It is crucial to have the right people in the right roles with the right skills who are analyzing the data to decide on which promotions to run when and where and, importantly, when to integrate with the other business functions.
Successfully addressing these five characteristics requires an end-to-end approach and this is the thinking behind Accenture's new TPM Solution with SAP. Our view is that a strategic, performance-based approach to TPM is crucial to ensuring companies spend money on the right products, in the right places and at the right time. We believe that this will help them not just to realize effective TPM, but also to take major strides in the journey toward high performance and delivering sustainable and tangible benefits.
1. "What is an Effective Trade Promotion?" Lora Cecere, Fenella Sirkisoon, AMR Research, November 9, 2007.
2. Source: Trade Promotion Management Association
3. "2007 Sales and Marketing Report," Consumer Goods Technology and AMR Research, June 2007.