Insights -- February 2005

THE MOST VALUABLE ASSET
The power of promotional spending effectiveness

With Wall Street's insatiable demand for profitable growth in the consumer packaged goods (CPG) industry, CPG companies must ensure that every asset at their disposal is faced off against the consumer in an effective manner. It's time that the industry adopts a new approach to unleashing the power of one of their most important and strategic consumer assets: effective promotional spending. Some studies imply that 80 percent of trade promotion spending produces a negative ROI. To make the most of trade promotion investments, four fundamental insights are required for CPG companies to understand how to effectively spend promotional monies:

• Promotional Economics: Understanding of the costs and incremental revenues of promotional events -- also known as return on investment (ROI).

• Consumer Response: Understanding of consumer preferences for various promotional attributes such as tactics, timing and frequency

• Retailer Performance: Retailer compliance to the promotional plan and spending efficiency are two of the most important insights.

• Competitive Strategies: Perhaps most omitted across the industry is a deep understanding of competitive promotional strategies, behaviors and tactics.

Our experience suggests that less than 10 percent of the CPG industry has embedded these insights as the fundamental underpinnings of their promotional spending strategies. Most companies fail to identify hidden costs associated with promotions (special packs, temporary displays, packaging variations, etc.). Our experience suggests that as much as 20 percent of promotional costs are unaccounted for in ROI calculations. When determining lift, most identify incremental lift and baseline sales. However, much of the lift is often the result of stock piling or cannibalization. Stock piling and cannibalization should be removed from promotional lift equations.

Understanding how a consumer responds to promotions is the key to learning from the promotional failures and successes of the past. Creating statistical models that assess consumer response to tactic type, time period, price and product mix is central to improving the trade spend portfolio. Advances in management science now allow companies to assess which attributes of promotions drive consumer consumption and create improved trade plans and tactics.

Do promotions fail if the retailer does not execute the promotion? Not tracking retailer compliance creates two risks for a company. First, companies run the risk of canceling a potentially successful promotion by not understanding how the retailer performance impacted the promotion. Second, on average 26 percent of all trade promotion spending is not passed on to the consumer and goes directly to a retailers "bottom line". (Source: Cannondale Trade Promotion Spending and Merchandising Industry Study, 2001 & 2003).

Most companies design their account plans and annual trade plans without understanding how the competition is using promotions to influence the consumer. Using third-party syndicated data on competitor promotional activities, CPG firms can now track its competitor's promotions and the impact of the competitor promotions on sales. Being able to pre-empt competitor activity is a strategic asset.

Gone are the days when having the time to analyze and assess spending was "nice to have". If you don't consider the fundamentals of promotional effectiveness, rest assured your competition is!