Trends in Trade Promotion Management
It's a familiar mantra, "Consumer goods companies spend 20 percent of their revenues on trade promotion -- 20 percent!" What might be said following that statement? "Tracking effectiveness and profitability is uncertain;" and "the majority of CG companies are still using spreadsheets as their trade promotion management (TPM) solution."
While a few years ago these budgetary allowances and technical constraints were accepted as the standard, shifts in the marketplace and trends in the industry have brought TPM discussions to the table. Yet, even as additional products become available, and the value of successful TPM becomes more apparent, many CG companies are simply not investing in an outside solution.
Surveys reveal different aspects and statistics relating to the lack of use or prioritization for TPM solutions. In a study commissioned by MEI, Amplitude Research indicates that only 25 percent of companies purchase software from an external vendor. An AMR Research study shows that only 30 percent have a TPM solution in place, but that Excel is the largest TPM provider. Forrester says that 40 percent use a "home grown/Excel" solution. A recent survey by Consumer Goods Technology indicates that 36 percent of the companies responding are currently using a TPM solution, but 22 percent have no plans to evaluate or implement in the next two years.
Ask a few different people why CG companies are not using outside solutions, and you will get a few different answers. At the most basic level, TPM is still too new for businesses to understand what it is all about. Lisa Bradner, a Forrester Research analyst says, "Trade promotion management is still in its infancy. Our survey shows that many consumer products companies are struggling with how to track, report and execute trade promotions effectively internally and that they need to master that before figuring out how to manage it with their channel partners. Adding to that is a fundamental question of 'who owns the money?' That makes TPM an extremely difficult conversation for retailers and manufacturers to have."
So if companies are having internal struggles with the nitty-gritty, perhaps a definition is necessary first. According to AMR Research, "Promotion effectiveness is the measurement of the results of a promotional activity based upon uplift, cost, margin, profit, revenue and account management considerations."
Early on TPM was viewed as a transactional execution process and was often limited to the accounts receivable management process. Then, a few years back, TPM transitioned into a process that involved collaboration with retailers and internal sales and operational planning (S&OP). And recently, there has been a move towards optimization across enterprise, shaping demand through measurement and the execution of promotions. (See Figure 1) Ironically, it may be precisely this move towards optimization, which while providing a greater benefit to companies, has, in effect, added to the complexity of TPM and contributed to the reluctance of adoption.
Gary Adams, solution principal II, consumer products integrated sales and marketing, SAP, explains, "Managing trade promotion dollars and events continues to draw a tremendous amount of attention from most consumer products manufacturers. Despite this trend, many of these same companies continue to struggle with purchasing and implementing a best-practice solution to solve this meaningful, yet complex, business process. Therein lies the dilemma. Understanding the complexity of each process that effects, or are effected by the trade-promotion dollar is crucial."
Jon Van Duyne, chief executive officer, CAS Americas agrees, "This move from transactional trade promotion management, as we have been accustomed to discussing it, to trade promotion optimization -- which also needs to include for this purpose demand side management-- has created the 'perfect storm of a business problem since so many parties, including marketing, sales, operations, finance and even general management are, by necessity, now involved." starting small CG companies need to use a "crawl, walk, run" tactic, starting out with fundamentals. Across functions, organizations have different goals for promotion effectiveness and its meaning depends on each perspective. Understanding this diversity is the first step in TPM assessment.
For example, if marketing tries to solve the problem with an application that tracks spend and sales, but operations uses a tool to understand lift and predict volume, they work independently and therefore, inconsistently.
"Organizational alignment is needed -- at a minimum -- when implementing a TPM solution, and requires coordination between sales, marketing, finance and IT. Given that within most organizations, there is no clear owner of TPM across these functions, it's often challenging to gain agreement to implement a TPM solution and build consensus on how the solution should be configured to support each business functions critical processes," says Mark Osborn, chief solutions and services officer, Gelco Information Network Inc., Trade Management Group.
Adams speaks to this as well. "To truly solve these challenges, a company must fully evaluate how sales, finance and operations (including production and logistics) are impacted by the budgeting, planning, selling, executing, validating, settling and evaluating of their trade promotions. By putting this road map together, companies can clearly identify the type of solution(s) required for implementation as they work toward effectiveness and optimization of trade-promotion dollars."
Van Duyne points out that leaders in this space recognize that the future is more about increasing effectiveness versus simply achieving efficiencies through enabling technology. He says, "In order to make this vision a reality, companies must look at people and processes in addition to systems." Fred Schroeder, chief executive officer MEI, also believes that internal issues play a big part in the slow pace of adoption, particularly internal collaboration and benchmarking. He suggests, "CG executive have to rethink long-standing activities and practices."
One of these practices is the use of Excel to track data. Companies need to jump this hurdle in order to leverage TPM, especially at a level that is more than simply transactional. Because this is the method "they have always used," because Excel is inexpensive and so accessible and already understood, many businesses simply stay with what they know.
Osborn explains, "From our perspective, the ongoing use of spreadsheets remains a significant opportunity for both TPM solution providers and the industry in general. Despite the perceived benefits, spreadsheets are unreliable, subject to frequent and potentially significant errors, and unable to ensure auditable standards and adequate financial controls."
Sarbanes-Oxley, the controls to which he refers, has brought new scrutiny and regulation to the use of spreadsheets. Osborn and many others believe that this tool may fail to meet the requirements of the Act, with its full implications yet unknown.
MEI calls on the vendor community to grow the category mutually. Schroeder says, "When TPM is implemented right, it can have a big impact." He cites a study done by Hand Promotion Management that found an overall improved ROI (from 4 percent to 18 percent) in CG manufacturers that had implement advanced TPM and analytical tools.
The Bottom Line
The bottom line is that CG companies need to change the way they approach promotions. Rather than being overwhelmed at the comprehensive technology available to ensure effectiveness of spend, be brutally honest about what is required today; then consider possibilities for tomorrow.
If a transactional system is needed to track spend, reconcile deductions and manage the financial flow, then start basic. If the basics are already in place, then build on top of that foundation with more advanced planning capabilities, and ultimately move into promotion effectiveness and optimization that leverages more sophisticated analytics. But don't rely on spreadsheets to manage one of the largest and most important budget items most CG companies have.
It has always been challenging to track the ROI for marketing activities, but an enterprise-wide application that manages all aspects of promotions can certainly go a long way to ensuring success at the retail shelf.