Data. Its both the key to enlightenment and the thorn in our sides! Whether you are just at the point of moving from spreadsheets to TPM software, or you are further along with TPO and RGM, one thing is for certain; accurate baseline modeling will drive your success in trade promotion management and optimization.
In the world of consumer-packaged goods, promotions are a vital way to increase sales and drive growth. However, without accurate base and uplift models, it can be challenging to measure the effectiveness of historical promotions and apply learnings to future promotions.
What is a base model?
A base model is a statistical model that predicts the expected value of a response variable without considering any covariates. In other words, a baseline model projects sales you would expect to see in the absence of trade promotions.
Why is this important?
For TPM – you need to deliver a holistic consumption forecast. That means you need to forecast volume in all product/account/week combinations, not just when you are running promotions. Additionally, when paired with modeled uplift factors, a TPM built on a solid baseline foundation will enable your sales team to enter promotional variables and have a solid projection of sales, spend and ROI.
For TPO – accurate (i.e. modeled) baselines are the foundation for optimization. We have to know with a fair amount of certainty the result of all of our potential combinations of price, product, and tactic.
For RGM – baseline models are the start for accurate price elasticity work, and our pricing work and predicted results must also inform our base models, it is a cycle.
What is an uplift model?
An uplift model is a statistical model that predicts the expected sales lift of a promotion, taking into account customer-specific factors like price discount and tactics. An uplift model aims to estimate the "individual" response to a promotion, i.e. the expected sales lift generated by a promotion. The uplift model will allow you to understand how different customer types respond to promotions and tailor your promotional campaigns accordingly.
By using both base and uplift modeling, you can optimize your promotional campaigns for maximum ROI.
The importance of base and uplift models for trade promotion management
With accurate base and uplift models, you’ll be able to understand the effectiveness of your strategies and tactics.
ROI calculations focus on the incremental volume gained from promotions relative to the cost of those promotions. Without accurate uplift models, you cannot expect to have a real projection of return on investment.
CPG companies who are tied to disjointed spreadsheets and disparate tools are finding it is just not possible to keep up in today’s economic environment. With accurate base and uplift models, and the right software solutions you’ll be able to:
- Get an accurate projection of your planned sales
- Generate a holistic forecast- all consumption included, whether a promotion exists or not
- Generate optimized promotion plans
- Manipulate a promotional plan and get an accurate impact on total planned sales
- War-game promotional scenarios
- Calculate your overall ROI from trade events
- Perform on-demand price elasticity analytics
Modeling baseline as an annual exercise is no longer enough in today’s environment. We need models at our fingertips and integrated into ongoing business processes. The right trade spend strategy should include ready-to-use and accurate base and uplift models in order to:
- Significantly improve your forecast accuracy
- Access reliable analytics and ROI evaluations
- Feed not only your TPM applications but your TPO/RGM applications
Tips for maintaining accuracy over time
There are a few things you can do to maintain the accuracy of your base and uplift models over time:
- Retrain your models regularly: As your data changes, so will the accuracy of your models. Therefore, it is essential to retrain your models regularly.
- Monitor your data quality: The quality of your data will also affect the accuracy of your models. Therefore, monitoring your data for errors and missing values is essential.
- Keep your models updated: As new covariates are introduced; you will need to update your uplift model.
What makes an effective trade promotion management strategy?
Trade promotion management (TPM) is the process of planning, executing, and evaluating trade promotions to drive sales growth. The goal of TPO is to optimize promotional spending and ROI by:
- Aligning promotions with strategic objectives: TPM should be aligned with the company's overall strategy to support its objectives
- Analyzing customer behavior: TPM should take into account customer behavior to create promotions that are targeted and effective. All modeling activities should happen at the lowest level, account/SKU/week in order to be applied differently across channels. The price sensitivity of a customer shopping at Target may be different from one shopping online, for example.
- Measuring promotional effectiveness: TPM should include measures of promotional effectiveness to learn from and optimize for future campaigns
For an effective TPM and TPO strategy, base and uplift models are essential to measuring your success through reliable analytics and ROI evaluations.
Looking to improve trade promotion management and optimization?
With CPGvision, you can get in control and stay on track through changing economic conditions and consumer behavior. You’ll be fully equipped with real-time data that lets you manage, understand, and optimize your trade spend and pricing.
If you’re interested in learning more, get in touch with us today.