Learn about the transformative benefits of trade promotion optimization for both manufacturers and retailers in today's competitive market landscape.
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Technological advancement has transformed every aspect of the consumer packaged goods industry (CPG), and one area that has experienced a notable change is trade promotion. Despite the fact that CPG companies globally allocate approximately 20 percent of their annual revenue to trade promotions, a staggering 59 percent of them end up incurring losses (rising to 72 percent in the United States). As a result, businesses are actively seeking technology and strategies to optimize these trade promotions and enhance their overall business outcomes.
The era of relying on spreadsheet management is giving way to more sophisticated trade promotion management (TPM) software systems. Simultaneously, there is a growing trend among companies to formalize their analysis and optimization of trade spend. This shift has led to the emergence of trade promotion optimization (TPO) software, which empowers organizations not only to understand what happened in past events (post-event analytics) but also to predict future outcomes (predictive analytics) and explore different strategies through wargaming.
Join us on this insightful journey as we uncover the potential of TPO analytics, and how it can revolutionize the way your trade promotions are planned, executed, and optimized.
How are analytics applied in trade promotion optimization?
TPO analytics is a powerful tool for companies seeking to optimize their promotional strategies.
The application of analytics in TPO revolves around the utilization of predictive models. When integrated into the right TPO software solution, these models empower companies to explore a range of promotion scenarios, offering a comprehensive view of performance through a rollup of key metrics. This side-by-side comparison allows users to evaluate the effectiveness of different promotional strategies.
To facilitate effective decision-making, an ideal TPO software solution should provide users with the flexibility to iterate through various scenarios. This entails retaining successful promotions and receiving system recommendations for new ones until the plan aligns with the company's specific needs.
How do you measure trade promotion and what are the TPO metrics?
When it comes to TPO, evaluating the effectiveness of your trade promotions requires analyzing a set of key metrics. These metrics provide valuable insights for optimizing promotional strategies. But what metrics should you be focusing on? Let's take a look:
- Lift: Measures the effectiveness of a promotion by assessing the increase in sales, expressed in either dollars or units. It serves as a simple yet informative measurement that enables easy comparisons across different events.
- Incremental sales: Measures the additional sales volume generated during a promotion. It's crucial to express incremental dollars in terms of manufacturer revenue rather than retail dollars for accurate evaluation.
- Event spend: Examines the total trade spend in relation to the revenue generated. It serves as a guardrail for monitoring promotional expenses and provides insights into events where the base vs. incremental split is not available.
- Cost per incremental dollar (CID): This holds sales teams accountable for their spend and the incremental sales it generates. It measures the trade spend required to generate each incremental revenue dollar, providing visibility into cost-effectiveness.
- ROI (return on investment): ROI goes beyond post-evaluation to determine the profitability of a promotion. It considers the profit generated from incremental revenue and factors in the trade spend. It's important to note that ROI may encourage more spend on high-profit margin items, which should align with the company's goals.
Promotional scenarios should also be evaluated based on volume, revenue, spend, and profit, both on a gross and net basis. These metrics, combined with sophisticated analytic capabilities, including the right reporting and visualizations, empower businesses to optimize their trade promotions and drive meaningful results.
How can TPO analytics enhance business efficiency and ROI?
So how can TPO analytics help you get ahead of the competition? Trade spend often accounts for a significant portion, sometimes as high as 20%+, of gross sales, consuming a substantial portion of the marketing budget. While trade promotions contribute to awareness and trial, they are generally considered short-term volume drivers with only a small impact on long-term brand equity. However, even small efficiency gains in this spending area can have a significant financial impact, freeing up dollars for equity-building initiatives or improving the bottom line.
For instance, let's consider a $1 billion brand with a 20% gross spend on trade, amounting to $200 million. By shaving off just one percent of this spend without sacrificing sales (or even while growing them), you can save $2million! This extra capital can be redirected toward other areas such as digital advertising, social commerce, or traditional advertising vehicles. It's clear that even small improvements can lead to substantial savings.
By leveraging TPO analytics, businesses can identify optimization opportunities, fine-tune their promotional strategies, and achieve greater efficiency. These analytics provide insights into the effectiveness of trade promotions, enabling companies to allocate resources strategically and make informed decisions.
How does TPO analytics transform raw data into actionable insights?
By utilizing historical data and employing advanced predictive modeling techniques, with the help of Artificial Intelligence (AI), TPO analytics enables retailers to generate valuable insights that can drive effective promotional strategies. Let's look closer at how TPO analytics transforms raw data into actionable insights and the process involved.
- Predictive modeling: TPO analytics starts by leveraging historical data to develop predictive models. These models are designed to estimate two key factors: base sales (the expected sales in the absence of any promotions) and uplift factors (the amount of sales lift generated based on specific tactics and price discounts). These predictive models serve as the foundation for generating various scenarios for different promotional combinations within a retail customer's business plan.
For example, based on historical data, your predictive models may reveal that a particular type of promotion generates a 20% increase in sales, while another promotion strategy results in a 10% uplift. This information allows you to make informed decisions when planning their promotional activities.
- Scenario generation: Once the predictive models are in place, TPO analytics generates scenarios to explore different promotional strategies. The process begins with a baseline scenario that assumes no promotions are implemented. Then, guardrails are established to define the constraints and rules that the system must follow when generating the promotion calendar.
These guardrails act as basic guidelines, and examples of such rules include:
- Setting maximum or minimum limits on the number of promotions
- Determining the spacing between promotions
- Establishing upper or lower boundaries for prices or promotional discounts
- Defining the total revenue target to achieve
- Ensuring compliance with retailer's promotional margin requirements
By imposing these guardrails, the TPO analytics system generates a realistic, actionable plan consisting of suggested promotions that align with the specified constraints yet meet the financial objectives in the most efficient way possible.
- Iterative refinement: The generated plan is not set in stone; it can be further refined through an iterative process. You can evaluate and adjust the suggested promotions according to your preferences. You can choose to retain certain events while regenerating the rest, allowing for the creation of multiple scenarios.
During this iterative refinement, the TPO analytics system provides a comprehensive overview of sales, spending, and profit for each scenario. This empowers you to evaluate the different scenarios and select the one that best aligns with your goals and overall strategy. Furthermore, this process enables the development of a joint business plan that is mutually beneficial for the retailer and the customer.
How can my business implement a TPO solution?
As you look to optimize your operations and stay competitive, implementing TPO solutions has become increasingly important. TPO solutions enable you to streamline your trade promotion activities, improve decision-making, and maximize your ROI. Successful implementation is a crucial milestone, so let’s explore the key steps involved in implementing a TPO solution for your business.
- Identify your objectives: Determine your specific goals and objectives for trade promotion optimization. This could include increasing sales, improving ROI, or enhancing promotional effectiveness.
- Assess your data: Do you have syndicated point-of-sale (POS) data that includes information on casuals, retailer POS data with a promotion history, and real event expenditure figures?
- Evaluate TPO analytics solutions: Research and evaluate different trade promotion optimization solutions available in the market. Look for a solution that aligns with your business needs, seamlessly integrates with your existing data sources, offers advanced analytics capabilities, and provides user-friendly features. The ability to integrate with your TPM solution is a must!
- Training and adoption: Provide comprehensive training to your team members on effectively using the TPO analytics solution.
- Continuous monitoring and optimization: Regularly monitor and evaluate the performance of your trade promotions using the insights provided by the TPO analytics solution. Continuously optimize your promotional strategies based on the data-driven insights gained.
By harnessing the capabilities of your TPO solution, you can deliver comprehensive insights and optimize your trade promotions effectively. CPGvision offers a state-of-the-art TPO solution that meets your trade promotion needs, empowering your business to make data-driven decisions and achieve optimal results.
A TPO solution you can trust
Effective trade promotion optimization requires capturing and analyzing important data sources. From sales to promotional data, the right data fuels a thriving TPO model, along with various tools, expertise, and collaborative efforts. By embracing this winning combination, you can enhance your trade promotion program and unlock its full potential. Consequently, you will elevate your company's competitive capabilities and positively impact your long-term financial performance.
CPGvision is the leading solution provider, empowering businesses with advanced TPO analytics and seamless data integration. Ready to transform your business operations? Take control of your trade promotions and unlock their full potential by contacting CPGvision today.