“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” U.S. department store magnate John Wanamaker reportedly made this comment a century or so ago, but, sadly, the same can be said today when it comes to Trade Promotion Management and trade funds ROI in particular. Trade is typically the second-largest item on a manufacturer’s P&L, amounting to 20%-25% of net sales on average. With this level of investment, even small improvements to how you allocate promotional funds can generate large returns. But how? Trade Promotion Management and ROI: Work hard for the money?
To start, forget about the traditional approach of optimizing individual events. Instead, adopt a continuous improvement model that starts at the total investment level. This holistic view will deliver insights into where spend sits today and how it performs (ROI) at a brand/pack, category, channel and customer, or even country level.
Use artificial intelligence to produce promotional fund optimization curves, which represent the level of turnover or profit for any given trade investment. These curves can help you identify the “tipping point” where you start to get less back than you put in (with very little impact on total turnover or profit). Each trade spend effectiveness curve is different and hits this point at different moments, depending on the customer/pack combination. When applied at the total trade investment level, these ROI curves illustrate where to spend beyond these tipping points leads to only marginal gains in return across an organization.
Once you have a true understanding about how effectively and efficiently you are managing your funds, you will be in a better position to reallocate them with an opportunity to:
- Spend less to achieve the same by identifying how a lower promotional fund budget can achieve consistent business growth (or, at the very least, limit negative impact)
- Invest in strategic growth areas with a constant promotional fund budget, while protecting today’s growth brands
- Spend the same to achieve more by identifying how a constant promotional fund budget can improve total business growth either through revenue or profit
- Fix inefficient promotional ROI that is undermining business performance by identifying the drivers behind low promo ROI for brands, categories, channels/customers, or countries
A well-designed promotional fund optimization process, which is best activated when hard-wired into the heart of the business planning cycle, can answer these common questions:
- How can you best allocate trade spend across channels, products, and customers?
- Could a reallocation improve your overall trade spend efficiency?
- How can you “make room” in your trade budget for tactical products, new launches, or high-growth areas?
- How can you exceed midyear targets by reallocating trade budgets until year-end?
By taking this high-level macro view of trade investment and using the latest artificial intelligence technology, you can make insightful decisions on where best to deploy funds. True success then comes from continuous insights into both revenue and profit optimization to understand which half of the total investment is potentially wasted. Wanamaker would be very happy.