Trade spend includes all the funds that consumer-packaged goods (CPG) manufacturers invest with retailers to facilitate product promotions, discounts, slotting fees, and various allowances. It is a complex and many-layered fund management system dedicated to incentivising retail chains to promote, sell, and boost visibility of the manufacturer’s CPG and also boost consumer demand. Trade spend management includes many factors, such as partnerships, fees, coupons, and supply chain issues at the very least. For manufacturers of CPG, trade spend is, more often than not, the second-largest expense after cost of goods sold (COGS). If it is not managed efficiently or left unaccountable, trade spend can become the proverbial straw that breaks the camel’s back, leading to the company facing high losses, blocks in cash flow, and an overall undermining of the strategic goals of the company. Surprisingly, the impact of unaccountable trade spend is often overlooked or underestimated by a company’s management.
challenges of managing trade promotions
Common challenges faced by companies while managing trade promotions or trade spend include:
- Effectively tracking trade activities
- Clear understanding of the ROI on trade spend
- Comparing projected sales growth with trade spend
- Failing to hold enough reserves to deal with any deductions
- Managing to keep up with large retailers and distributors that have strong buyer and accounting teams
effects of practising unaccountable trade spend
Here is a brief look at the effects of practising unaccountable trade spend.
- an invisible drain in scale and efficiency
- inaccurate ROI assessment
- cash flow constraints and liquidity stress
- organisational silos, poor visibility, and manual chaos
Trade spend is typically quite large. It includes 15–25% of gross sales, and can sometimes even reach 30–40%, depending on the category of the products and the company’s cost structure. Surprisingly, 25–70% of that trade promotion spend may be quite ineffective because of badly planned promotions, poor execution, or unattractive incentives. In such situations, for every billion dollars in revenue, companies could lose tens of millions.
In an industry study, it was found that sometimes trade fees alone averaged 15–20% of the gross revenue. It rose to 30–40% because of high raw material costs. It is not impossible to keep trade fees low with smart and detailed accounting, but small companies often lack that level of expertise or bandwidth. In fact, 1–2% of trade spend can quite frequently be inaccurate or invalid. A large part of these costs can be recovered if companies have the right knowledge and enough expertise to contest the costs.
A critical issue that plagues many companies is that they do not measure promotion ROI accurately. Improper analytics may lead companies to assume false promotional success while cannibalising full-price sales or paying for unexecuted offers.
Industry observers have noted that although trade spending can be optimised so that it boosts the bottom line, very few companies take advantage of it. In recent times, only about 22% companies could measure trade spend effectiveness at the individual event level. Even a 15% improvement in trade spend ROI can significantly boost the operating profits of a company.
Unvalidated deductions and promotional overcommitments can seriously disrupt cash flow. Paying for cancelled or poorly executed promotions ties up working capital, leaving no budget for innovation, new launches, or marketing.
Moreover, events such as over-ordering during promotions due to poor coordination or under-shipping because of production constraints can also trigger audit deductions months or even years later, catching firms completely off-guard.
Many companies still manage trade spend via spreadsheets or siloed legacy systems that lead to limited visibility, poor forecasting, a high probability of errors, and low agility. It has been observed that 75% of CPG firms struggle to align promotions with retail execution.
When a company’s sales, finance, and accounting departments are not integrated but work in silos, inconsistent data and fragmented processes lead to miscommunication and waste. Without having access to real-time data and insights, departments may act at cross-purposes or assume that the promotions are delivering the expected value.
call to action: validating, automating, and optimising trade spend
The first steps to manage this critical area of business include recognising the complexities, followed by planning and establishing processes to better manage the company’s trade promotions. Here are a few suggestions:
- conduct a thorough trade spend audit: Dive deep into trade spend by product, channel, and region to identify underperforming tactics and redundant discounts.
- set clear KPIs and align objectives: Move away from volume-driven goals to value-driven ones. Track growth in sales, incremental revenue, ROI from non-promoted and promoted activities, net profit after trade spend, and customer retention.
- implement strategic post-event analysis (PEA): By automating PEA and data integration, companies can improve their ROI quite significantly.
- adopt trade promotion management (TPM) systems: Modern TPM tools from leading providers support real-time validation, deduction management, promotion analytics, and cross-functional alignment. In other words, centralise data and avoid dependence on spreadsheets. Also, build strategies based on real data rather than intuition or old habits.
- foster cross-functional collaboration and training: Invest in training and document workflows, and align sales, accounting, and finance to prevent unnecessary promotions and to ensure transparency.
- transition from reactive to data-driven strategy: Leverage predictive analytics, real-time insights, and mix-driven approaches to deliver up to four times better ROI over less strategic spending. In short, strategise instead of reacting.
conclusion
Unaccountable trade spend is a bigger issue than just a budgeting headache. It quietly reduces profitability, obstructs cash flow, and undermines strategic growth. However, when properly planned, measured, and managed through technology and cross-functional alignment, trade spend can transform from a hidden cost to a revenue-driving asset. The key to success lies in visibility, validation, and a strategic approach in every trade promotion decision.
can Infosys BPM help?
IBPM offers its clients a comprehensive suite of Trade Promotion (TPM) services tailored for the CPG industry. Our services include analytics advisory and data consulting, business process consulting and advisory services, and managed trade promotion services, among others. We help CPG businesses with the optimisation of their trade promotion strategies and ensure maximum ROI.
