Revenue growth management (RGM) has emerged as a cornerstone strategy for businesses within the consumer packaged goods (CPG) industry. The importance of RGM lies not only in managing and optimizing trade spending but also in its holistic approach to revenue growth - from pricing and promotion strategies to the assortment and optimization of product mix.
In today's CPG industry, the stakes have never been higher. Economic uncertainty, shifting consumer behavior, and rapid technological advancements - including generative AI, are continually reshaping the marketplace. However, amidst these challenges lies immense opportunity for businesses that understand how to leverage RGM.
This guide is designed to demystify the world of RGM, provide insights and strategies, and give you a glimpse into the future of RGM software. This guide will be particularly helpful if you are a newcomer to RGM, but it will also provide a good perspective for more seasoned RGM professionals as well.
What is revenue growth management in CPG?
McKinsey & Company defines RGM as "the discipline of fostering sustainable, profitable expansion from your consumer base through an assortment of strategies encompassing product assortment, promotions, trade management, and pricing."
In essence, RGM is a strategic methodology employed predominantly within the CPG industry. It aids businesses in making data-driven decisions regarding critical aspects such as pricing, product assortment, promotional activities, and distribution strategies.
The importance of effective revenue growth management
While RGM isn't a new concept and has been a part of business strategy for many years, its relevance and scope have evolved significantly.
Traditionally, in an era of predictable organic growth spanning various industries, RGM primarily focused on optimizing pricing. However, this isn't the case any longer; it's about consolidating all commercial planning aspects and route-to-market strategies under one unified approach. This expansion of RGM's scope signifies its increasing importance, meaning effective RGM allows you to stay ahead of the curve. Here's how:
- Understanding consumers: RGM leverages advanced analytics to gain deep insights into consumer behaviors and preferences. This understanding enables you to cater to consumer needs more effectively.
- Maximizing profitability: Through strategic pricing, promotional effectiveness, and trade spend optimization, RGM aims to ensure that every dollar spent yields the maximum return on investment.
- Achieving competitive advantage: A sound RGM strategy allows businesses to differentiate themselves in the market. By understanding consumer behavior and market trends, you can make strategic decisions that set you apart from competitors.
- Supporting innovation: The insights derived from RGM can fuel innovation. By understanding what consumers value, you can develop new products and services that meet unfulfilled needs or create new market segments rather than just cannibalizing your existing business.
- Optimizing product assortment: RGM helps companies determine the optimal product mix for various customer segments, channels, and regions. This ensures that you are offering the right products that cater to consumer needs and preferences.
- Managing market volatility: By continually analyzing sales data, market trends, and consumer behavior, you can make proactive decisions that keep you ahead of changes in the marketplace.
Key results from revenue growth management
Through RGM, companies have realized the power of this dynamic and holistic approach to revenue growth. RGM yields a host of tangible results that significantly enhance your company’s performance. It's an engine for sustainable growth that drives fundamental improvements across multiple areas of a business.
Properly executed, RGM strategies yield significant benefits, such as:
- Improved ROI on trade spend: Through strategic trade spend optimization, you can ensure that every dollar spent on promotions, discounts, etc., delivers the maximum return on investment. Companies implementing comprehensive RGM solutions, such as those provided by CPGvision, are achieving returns ranging from 2% to 5% on their yearly trade spending, which accounts for a substantial 24% increase.
- More accurate forecasting: Effective RGM leverages a range of data to help you make informed decisions around inventory management and financial forecasting, thus reducing costs, enhancing profitability, and strengthening retailer partnerships through strong service rates.
- Better meeting consumer needs: By gaining deep insights into consumer behaviors and preferences, you can better meet consumer needs through optimized product assortment and targeted promotion strategies.
- Stronger retailer collaboration: Effective RGM can lead to more productive relationships with retailers, resulting in better shelf placement, more effective in-store promotions, and increased sales.
- Increased market share: RGM can help businesses differentiate themselves in a crowded marketplace and secure a competitive advantage.
The lifecycle of revenue growth management for CPG brands
What are the levers of revenue growth management?
The definition of the components of RGM varies; "it depends on who you ask!" However, regardless of how RGM activities are grouped into pillars, RGM typically includes many or all of the following components:
- Pricing and Price Pack Architecture: The strategy around how a product is priced in the market. It involves understanding consumer price elasticity, competitor pricing, and achieving the right balance between volume growth and profitability. Price Pack Architecture involves selecting the right product size/packaging and pricing combinations to balance consumer needs with profitability.
- Trade spend management and optimization: This refers to managing the funds invested in marketing activities such as promotions and discounts with distributors and retailers. The goal is to ensure that each dollar spent generates the maximum possible increase in sales and profit while simultaneously maintaining and enhancing brand equity and retail partnerships. CPG manufacturers must manage not only promotional trade dollars but also trading terms, contracts, rebates, everyday low pricing, and nuisance fees within the context of trade management.
- Assortment optimization and product portfolio management: Assortment optimization involves selecting the right mix of products to offer in different channels or locations to cater to diverse consumer preferences. It also entails managing the internal product portfolio to maintain the balance between optimal sales and productivity, while minimizing SKU proliferation. Additionally, there is a component of managing innovation, both from an internal brand perspective and for enhancing retail partner category growth and profit.
- Promotion: Managing the consumer promotion activities to drive product demand (pull) - this involves consumer strategy and analysis of the omnichannel journey.
What are some common KPIs used in Revenue Growth Management?
The pursuit of revenue growth is an ongoing challenge that separates thriving companies from those that are stagnating. It's crucial that you assess the effectiveness of your revenue growth strategies and determine how well your organization is adapting to evolving market dynamics. To gauge how well your business is doing in this aspect, there are several Key Performance Indicators (KPIs) you can track:
- Revenue growth: The percentage increase in your company's revenue over a specific period. It's a clear indication of your business's ability to generate sales and a vital metric for assessing the effectiveness of your RGM strategy.
- Profit margin: Measures your company's profitability for each dollar of sales, expressed as a percentage. It's a critical indicator of your pricing strategy and operational efficiency.
- Market share: The percentage of total sales in your industry that your company holds. An increasing market share is usually a good sign that your RGM strategies, including pricing, promotions, and product assortment, are effective (although this measure does not account for the efficiency of these activities - i.e., their ability to generate profitable growth).
- Price elasticity: Measures how sensitive your customers are to changes in price. Understanding price elasticity helps guide your pricing strategy.
- Promotion efficiency/ROI: Evaluate the return on investment for your promotional activities. A high ROI means your promotions are effective - driving sales and contributing to revenue growth.
- Promotion effectiveness - Lift: The increase generated from promotional activity, expressed as a percentage.
- Promotional Effectiveness - Incremental sales: The increase generated from promotional activity, expressed in dollars, units, volume, or profit.
- Household penetration rate: Indicates the percentage of households that purchase your product within a specific period. Growth in household penetration is a strong measure of brand health.
- Household buying rate: Measures the frequency at which households purchase your product and is particularly useful when comparing your brand to similar alternatives. If your buying rate is higher, the consumers you do have are more loyal.
- Net sales: The total revenues minus allowances, discounts, and returns.
- Trade rate: Trade spend as a percentage of gross sales can be calculated for a specific time period (fiscal year) or on an event basis. When a brand can lower its trade rate without sacrificing sales or market share, it is becoming more efficient, which is a key goal in revenue growth management.
- Margin/contribution margin: Measures how much of a product’s sales revenue remains after deducting the variable costs associated with selling it.
- Price realization: The difference between the list price and the actual or expected selling price is strong price realization, which serves as an indicator of a product's market value. In other words, you don’t have to heavily discount to capture sales.
What is the difference between revenue management and net revenue management?
There really isn’t much of a difference. The discipline of RGM is about driving profitable revenue growth. Net Revenue Management simply puts more emphasis on profit. The activities and results from both are the same.
In essence, while revenue management can drive growth, net revenue management ensures that this growth is profitable. Another way to help you ensure revenue growth and profitability is by adopting a comprehensive RGM software like the one we offer here at CPGvision.
How to transform your CPG brand with RGM software
According to a recent survey, more than 80% of consumer packaged goods CEOs aren’t satisfied with their RGM results. However, with the rise of advanced technologies, RGM software has emerged as a transformative solution.
This software is a powerful tool that has the potential to reshape the way you operate, empowering you to optimize pricing, promotions, trade spend, and assortment, all while driving sustainable revenue growth. Here's how you can leverage the power of RGM software to transform your business:
- Data-driven decisions: RGM software, like CPGvision, harnesses the power of data analytics, enabling you to make strategic decisions based on facts, not just intuition.
- Trade spend optimization: It effectively and efficiently helps you optimize your trade spend.
- Improved pricing strategies: You can conduct sophisticated price elasticity analyses to understand how price changes impact demand.
- Assortment optimization: By effectively analyzing sales data and consumer purchase behaviors, RGM software can help you optimize your product assortment.
- Enhanced collaboration with retailers: Provides insights that can be shared with your retail partners, including retailer view of key KPIs, facilitating better collaboration.
How to choose the right revenue growth management solution
As technology continues to evolve, new RGM tools have entered the market, each promising to revolutionize your revenue growth strategies. But with such a vast array of options, how do you navigate through the noise and select the tool that best aligns with your unique business needs? When evaluating different RGM solutions, make sure you consider the following key factors:
- Integration capabilities: The RGM tool you select should be able to integrate seamlessly with your existing systems and software - including your TPM. After all, who wants to enter plans twice? This ensures that all of your data can be consolidated, providing a holistic view of your operations and ensuring you can leverage all your data effectively.
- User-friendly interface: Look for a solution that offers an intuitive, user-friendly interface. This makes the system easier to navigate, reduces the learning curve for your team, and ensures everyone can leverage the tool effectively to drive growth.
- Configurability: Every business is unique, so your RGM tool should be configurable to your specific business needs. The right solution should allow you to tailor dashboards, reports, and analytics to suit your business's specific requirements. Additionally, it should enable you to configure rules and workflows, fostering cross-functional collaboration.
- Advanced analytics: The strength of an RGM tool lies in its analytics capabilities. It should provide sophisticated data analysis, predictive modeling, and forecasting capabilities to empower your decision-making processes. Strong scenario planning capabilities for pricing and trade optimization is a must!
- Support and training: Consider the level of support and training provided by the software provider. You want a partner that stands by you, offering comprehensive training and continuous support to ensure you get the most from your investment.
- An advancing product roadmap: No vendor has 100% of RGM covered; therefore, partner with a vendor that shows commitment to their product roadmap. This way, you can ensure that you will continue to have access to evolving capabilities in the future.
Here at CPGvision, our RGM software helps you save your company money and time by providing answers and making recommendations, delivering speed to value for your company.
Enhance your RGM strategies with CPGvision today
Staying one step ahead of the competition requires a winning combination of innovative strategies and cutting-edge technology. CPGvision is an integrated RGM suite that stands out for its comprehensive features, superior analytics capabilities, and commitment to client success.
Navigating the complexities of the CPG market can be a daunting task, but with the right tools and strategies, it's a challenge that can be mastered. Don't leave your revenue growth to chance. Contact us at CPGvision, and let's start your journey to unrivaled success.
