Insights -- March 2005

By the numbers, some experts estimate that the consumer goods industry is spending upwards of $100 billion annually on Trade Promotion Management (TPM) and one recent study revealed that fewer than one third of companies rate themselves as above average, compared to their peers in program execution. That's a lot of spend for less-than-average performance.

 How spending on TPM reached these all-time highs without good processes for measurement teaches valuable lessons in the boardroom, but outside in the real world, it's all about solving problems and proving results. If your promotion spend is out of control, here are five steps to bring it under control:

1. Improve the accuracy of settlements Evaluate your process; find unnecessary duplications, invalid SKUs or even invalid contracts. These fixes can save big money and can help fund more fundamental changes in your processes. Redesign where necessary and consider deploying technology tools to help with program integration. Focus on the settlement process to achieve some short term gains.  

2. Use transaction data to analyze the effectiveness of events The biggest of the biggest companies know the value of using trade promotion Analysts to study the effectiveness of their programs. Think in terms of developing an evolving process where more accurately recorded data can lead to better planned and managed programs. Hire talented staff to do pro-forma and post-event analysis of programs and events.

3. Better forecasting yields supply chain efficiencies Better integration of promotion planning with demand and supply planning will cut back on retail out of stocks. One company recently poured $75 million into a particular promotion budget to market a new product. Within weeks demand outpaced supply, they couldn't deliver on the products they advertised, and ended up losing market share due to shortages. An extreme case, but one that demonstrates the high cost of poor integration of promotions planning with supply planning and execution.

4. Know your true net pricing  Establish and seek to enforce conformity to more standard pricing rules versus dial-a-deal pricing.  Invest and implement pricing technologies that allow you to take advantage of true elasticities.  This is a new horizon for many in the industry but technologies are emerging that can take advantage of the knowledge capital companies have about their products.

5. Treat TPM like any other process Most companies do not regularly assess their processes and technologies with the mindset of continuous, incremental improvement, nor do they use proven techniques for identifying and garnering ongoing gains in productivity. We encourage companies to gather every three months and spend a few days looking for process improvements. Gather feedback continuously and monitor your processes. Attack delays. Clean up data. The worst 10 percent of your data is probably causing 80 percent of your problems. By improving the settlement process, analyzing your transaction data, better forecasting and focusing on knowing your true net pricing, the time and money you invest in TPM will return lasting value for your company. Continuous, incremental process improvement can be the foundation for ongoing success in all these areas. 

[WHAT'S IN STORE]
Safeway rings up a demand strategy

Like most major supermarkets, the
typical Safeway is stocked with fresh produce, bakery items, major brands and a wide selection of its own brands. Keeping pace with consumer demand across its different product categories is a daunting task for the Fortune 50 retailer that operates 1,815 stores in the United States and Canada. In response, Safeway says it will soon get a better handle on how it sells to customers with help from DemandTec software. This new strategy is expected to support Safeway's sales and marketing objectives by enabling the company to determine and plan pricing and promotions based on demand.

 "Safeway has a well defined strategy to accelerate sales growth and enhance the shopping experience for our customers," says Brian Cornell, chief marketing officer for Safeway. "In this context, the careful management of prices and promotions is important both for our customers and for the company."
 DemandTec Price and DemandTec Promotion are part of an integrated application suite that optimizes Complete Lifecycle Pricing and includes DemandTec Markdown. All built on the DemandTec Consumer Demand Management Platform, these applications enable retailers to strategically plan and execute optimal pricing strategies throughout the product lifecycle -- new items, everyday priced items, promoted items and markdowns -- based on a holistic and actionable understanding of consumer demand.

What It Means for Manufacturers
Consumer goods firms also understand that price optimization tools can be used to analyze massive amounts of data in order to understand buying behavior and patterns. The challenge for all users of these tools lies in the completeness and quality of data. So a retailer can use the technology to help determine prices at store level and manufacturers can do the same. The relationship will dictate who sets the price.

 According to Andrew White, research analyst for Gartner, the benefits do not end there. Interestingly, the technology can also help evaluate more complex problems and relationships from the consumer goods side. "Given that a consumer goods manufacturer sells branded products, and they might also sell retail own-label products, the question then becomes focused on the share of the category across brand, non-brand and own-label," says White. "The same technology can be used to help figure out where there is opportunity to increase price differentials and where to introduce own-label products without undermining total category spend. In essence, the cat and mouse game between retailers and their partners gets even more complicated."