What is Trade Promotion Optimization (TPO) & why your business needs it

Get the lowdown on trade promotion optimization and find out why it's essential for boosting sales and brand performance in our latest post.

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Are you looking to maximize your trade promotions and drive substantial growth for your business? If so, then you need to pay close attention to the concept of trade promotion optimization (TPO)

According to the Promotion Optimization Institute's 2022 State of the Industry Report, Consumer Packaged Goods (CPG) companies are spending between 20% to 27+%, while 6% are spending over 27% of their revenues on trade promotions. With this level of investment, there are substantial opportunities for improving ROI.

Trade promotion optimization (TPO) along with trade promotion management (TPM) is a key component of trade promotion execution (TPx) strategy for CPG companies. The main goal of TPO is to maximize the sales and profit received for the trade investment spent on the promotion plans of retail customers.

For CPG businesses, trade promotion optimization (TPO) holds immense significance. In an industry where competition is fierce and profit margins are often razor-thin, effectively managing trade promotions can make or break your success. 

Traditional approaches to trade promotions often rely on outdated practices and gut instincts, leading to suboptimal outcomes and missed opportunities. However, by embracing trade promotion optimization (TPO), CPG companies can gain a competitive edge by making data-driven decisions and aligning their promotional activities with their overall business goals. Now that you have a glimpse of what TPO is and why it is vital for CPG businesses, let's dive deeper into the key components and benefits of this game-changing approach.

What is trade promotion optimization (TPO)?

TPO is a strategic approach aimed at maximizing the effectiveness and efficiency of trade promotions. This process involves analyzing vast amounts of data, utilizing advanced analytics, and leveraging artificial intelligence (AI) driven predictive models to uncover valuable insights and trends. By doing so, businesses can identify patterns, forecast outcomes, and make informed decisions that yield the highest return on investment (ROI) on trade spend.

TPO (trade promotion optimization) encompasses various components, including promotion planning, forecasting, execution, and evaluation. Through meticulous planning and forecasting, companies can set realistic goals and design strategies that align with their overall business objectives.

The evolution of TPO

TPO has made significant progress over the years. Previously, we relied on analyzing syndicated point-of-sale (POS) data from sources like Nielsen, IRI, and Spins to establish a correlation between in-store merchandising and increased sales. Determining the appropriate costs for these events was done manually. However, the introduction of TPM systems brought about a more systematic approach to post-event analytics, provided the data was clean.

The advent of TPO software, powered by predictive analytics and AI, has been a game changer. This software empowers users to forecast the impact of future promotional plans on sales, revenue, expenditure, and profit. By running parallel scenarios and engaging in interactive collaboration with AI-generated suggestions, both the RGM and sales teams wield a powerful tool.

How trade promotion optimization (TPO) can improve your overall promotion strategy

When TPO becomes an integral part of the business process, CPG companies can establish a perpetual cycle of enhancement. With the assistance of AI, which leverages diverse historical data to anticipate future outcomes, and the appropriate software, this can evolve into a potent and outcome-focused endeavor, generating advantages that persist year after year.

What are the components of trade promotion optimization (TPO)?

TPO is comprised of several key components aimed at optimizing trade promotions. These components include:

  • Accurate historical data: This data includes information on sales volume, price, velocity, distribution, promotion type, and duration from sell-out (POS) sources, as well as sell-in (shipments) and sell-through (distributor spin) data. The availability of abundant and accurate data sets enables TPO software to perform advanced analyses.

  • Real-time visibility: TPO software consolidates disparate data sources into a single, reliable information hub, providing real-time visibility of revenue growth, trade marketing, and sales planning professionals.

  • Machine learning and artificial intelligence: These intelligent models analyze data sets, detect patterns, and simulate outcomes to predict the most effective promotion strategies for specific products or markets.

  • Promotion optimization tools: TPO software is designed to optimize trade promotions by offering various functionalities. It conducts pre- and post-event analyses, predictive scenario planning, and accurate forecasting, and leverages advanced analytics to optimize trade spend. The software's ability to rapidly consolidate sales, profit, and spending data across planning scenarios enables quick speed to action.

  • Robust reporting tools: Comprehensive tools allow users to generate concise, visual, and interactive reports, aiding in decision-making and gaining support from stakeholders across the organization.

  • Built-in scalability: A winning TPO model requires scalability to accommodate expanding trade promotions for new products and customers. It also facilitates collaboration and teamwork as the organization grows.

  • Executive support and buy-in: To ensure long-term success, effective training, and well-defined processes must accompany the implementation of TPO software, demonstrating the importance of executive involvement.

  • Easy and effective communication and collaboration: Seamless communication and collaboration are essential components of a successful TPO model. TPO software eliminates silos by providing a single source of truth for RGM, sales planning and operations, field sales, finance, supply chain, and logistics teams.

What are the KPIs to measure the success of a trade promotion optimization (TPO) strategy?

When designing a TPO strategy, it is important to measure its success by tracking certain KPIs. KPIs will not only provide you with important insights into the effectiveness and impact of your trade promotion optimization (TPO) efforts but they should help you to refine and improve your strategy.

Let's take a look at some of the most important KPIs to keep an eye on when evaluating your TPO strategy.

  • Lift: Measures the effectiveness of a promotion by comparing the increase in sales or revenue generated during the event. It can be expressed as a percentage or in monetary terms (dollars or units). A low lift indicates that the promotion may not have been successful, potentially resulting in wasted resources.

  • Incremental sales: This quantifies the additional sales volume generated as a direct result of the promotion. It is beneficial to evaluate incremental sales in terms of manufacturer revenue dollars, rather than retail dollars, for internal analysis.

  • Event spends: Assesses the total trade spend allocated to an individual promotion as a proportion of the total revenue generated. This KPI serves as a guardrail to monitor and analyze events when there is no clear distinction between base and incremental sales (for non-point-of-sale accounts).

  • Cost per incremental dollar (CID): CID is a straightforward and effective metric that holds salespeople accountable for their spending and its impact on generating incremental sales. It is calculated by dividing trade spend by the incremental revenue dollars achieved.

  • ROI: This takes the evaluation process one step further by assessing the profitability of a promotion from a financial perspective and considering the credit for generating incremental sales. When analyzing trade event ROI, it is essential to recognize that it may incentivize higher trade spend on items with greater profit margins, which may or may not align with the company's objectives.

How to get started with TPO

If you are ready to take your trade promotions to the next level, then TPO is exactly what you are looking for, however, getting started may seem a bit of a daunting task. Fear not! By following these steps, you can kick-start your journey toward successful TPO implementation:

  1. Assess your data: Do you have syndicated POS with casuals, retailer POS with reliable promotion history and actual spend by event?

  2. Assess your team: Do your team members, either at the headquarters level or within the sales team, possess the necessary skillset to effectively employ optimization techniques?

  3. Select the right partner: Select the ideal TPO software vendor by thoroughly considering their comprehension of your business, their ability to aid in data harmonization, their provision of suitable predictive analytics, and their offering of an intuitive and robust TPO software solution. You should do your research and read the following prior to purchase:

  4. Set internal goals: Begin by establishing a logical set of criteria to prioritize customers. 
    Consider the following factors: 
    • Customer represents a significant sales volume
    • Customer represents significant promotional spending (not EDLP)
    • Reliable and accurate data on consumption sales, promotions and spending is available
    • Customer team has skillset and enthusiasm (and perhaps the right incentive) for the project.

How can trade promotion optimization software help CPG businesses improve their TPO strategies?

The very best TPO software harnesses data science to unlock powerful capabilities for businesses. With the combination of CPGvision TPO and AOP, the following benefits are achieved:

  • Enhanced visibility and traceability: All stakeholders are aligned to a single number, and changes are easily visible and traceable in one centralized location.

  • Streamlined data management: The system automates the process of pushing data to the granular level, reducing manual effort. However, users always have the flexibility to override the system's recommendations.

  • In-app, cross-functional collaboration: The solution facilitates collaboration among different teams within the application.
  • Reliable AI-generated promotion plans: These plans are more reliable, leading to greater accuracy in planned spend and accruals.

  • Guardrails for practical promotion plans: The system enforces guardrails to ensure that promotion plans are practical and acceptable.

  • Control for sales teams: Sales teams retain control over their plans and can incorporate their local knowledge into the process.

  • Business focus: The entire team can concentrate on growing the business instead of spending valuable time and effort on number crunching.

  • Integration with TPM implementation: When implemented alongside TPM, optimized plans are achieved right from the go-live stage.

  • CRM analytics advantages: The solution leverages CRM analytics for generating reports, visualizations, knowledge sharing, alerts, and maintaining records, providing additional benefits to the users.

CPGvision is a great example of a leading provider of TPO software that offers these advantages and more. With its user-friendly interface, powerful analytics capabilities, and customizable features, CPGvision empowers businesses to optimize their trade promotions with ease.

Features to look for in a TPO software solution

Choosing a TPO software solution to support your business's TPO initiatives isn’t easy. Even if you are a CPG expert it can be difficult knowing what key features you are going to need. With that being said, here are a few of the top features you should look for in a TPO solution.

  • Advanced analytics
    • Data visualization
    • Predictive modeling
    • AI-driven insights
  • Accurate forecasting
    • Sophisticated forecasting and planning tools
    • Historical data analysis
    • Consideration of market trends and external factors
  • Integration with existing systems
    • Seamless integration with ERP and CRM systems as well as demand planning and retail execution systems
    • Smooth data flow
    • Elimination of manual data entry
  • Scalability
    • Ability to grow and adapt to changing business needs
    • No limitations on expansion
  • Compatibility with TPM solutions

What are the most common challenges when adopting a trade promotion optimization (TPO) solution?

A TPO solution can greatly benefit businesses by maximizing the effectiveness of their trade promotions. However, successfully adopting a TPO is not without its challenges. Some of the most common hurdles businesses face include:

  • Limited data visibility: Inadequate access to accurate and timely data is a significant challenge in TPO.

  • Change management and user adoption: Even if you successfully implement a TPO system, the management and communication of the change to stakeholders and team members can be difficult. 

  • Inadequate training and support: Insufficient training in the operation of the TPO system, coupled with inadequate support during troubleshooting, can prevent employees from fully utilizing the system's full potential.

  • Lack of integration: The TPO solution should seamlessly integrate with other essential business systems.

  • Resource allocation: Optimally allocating resources, including budget, manpower, and promotional activities, is another challenge in TPO.

Achieving successful TPO requires a diverse range of tools, expertise, and collaboration. By embracing this winning recipe, you can elevate your trade promotion to new heights, improve your company's competitive edge, and make a positive impact on your long-term financial performance.

Are you ready to take your trade promotions to the next level? CPGvision takes great pride in offering a committed customer service team comprised of experts from the CPG industry to take you through your TPO journey. We ensure that you are equipped with the necessary solutions to succeed.

Contact us today to learn how our TPO solutions can help you achieve your goals.

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