Trade Promotion Optimization
In today’s global marketplace, a company’s trade promotion acumen can make or break both the top and bottom lines. Yet, a surprising number of firms still attempt to increase profits without the aid of an advanced Trade Promotion Optimization (TPO) process. Here, Michael Forhez, director of Business Solutions for TCS (www.tcs.com), sheds some light on an often overlooked analytical tool.
Why focus on Trade Promotion Optimization (TPO)?
Forhez: First, it is a very, very big P&L lever. Most of us now see that a 1 percent boost in price realization improvement will generally average a net income gain of 12 percent for a typical large corporation. We should also remember that virtually all trade promotion expenditures, for accounting purposes, are now considered reductions of revenue. Therefore, marketing ROI is the “end” metric. Today’s marketing objective should be to repeat good promotion programs, while discontinuing bad ones. With most of the P&L opportunity resting in the trade promotion budget, the question is how to do this. Second, marketing and sales teams must have data that is more accurate, timely and relevant, as well as the tools to manage it. Each must understand what is happening now — not just what happened two months ago. They must know a program’s value to the customer — not just its cost. And, they must understand what is happening at the individual account or key market segment level — not just as a broad market aggregate. For this discussion, I suggest we consider an often overlooked data driven tool known as the Optimization Waterfall. Using simple visual representations, a TPO Waterfall would clearly show where money is being made and lost.
How and why does a TPO Waterfall work?
Forhez: The image clarity and data input flexibility of the waterfall is what makes it such a valuable and efficient tool because it shows whether assigned KPIs are being met. It can also be designed as a financial, economic or process behavior compliance model, or incorporate any combination of available key corporate data points. Salespeople, for example, can use waterfalls during negotiations with pricing analysis to measure and compare product or customer profitability. Lastly, management can view, in near-time, snapshots of business operations with profitability delineated by segment.
What are the benefits?
Forhez: There are several:
Why focus on Trade Promotion Optimization (TPO)?
Forhez: First, it is a very, very big P&L lever. Most of us now see that a 1 percent boost in price realization improvement will generally average a net income gain of 12 percent for a typical large corporation. We should also remember that virtually all trade promotion expenditures, for accounting purposes, are now considered reductions of revenue. Therefore, marketing ROI is the “end” metric. Today’s marketing objective should be to repeat good promotion programs, while discontinuing bad ones. With most of the P&L opportunity resting in the trade promotion budget, the question is how to do this. Second, marketing and sales teams must have data that is more accurate, timely and relevant, as well as the tools to manage it. Each must understand what is happening now — not just what happened two months ago. They must know a program’s value to the customer — not just its cost. And, they must understand what is happening at the individual account or key market segment level — not just as a broad market aggregate. For this discussion, I suggest we consider an often overlooked data driven tool known as the Optimization Waterfall. Using simple visual representations, a TPO Waterfall would clearly show where money is being made and lost.
How and why does a TPO Waterfall work?
Forhez: The image clarity and data input flexibility of the waterfall is what makes it such a valuable and efficient tool because it shows whether assigned KPIs are being met. It can also be designed as a financial, economic or process behavior compliance model, or incorporate any combination of available key corporate data points. Salespeople, for example, can use waterfalls during negotiations with pricing analysis to measure and compare product or customer profitability. Lastly, management can view, in near-time, snapshots of business operations with profitability delineated by segment.
What are the benefits?
Forhez: There are several:
- Higher Revenue and Increased Profits: The primary function for the TPO Waterfall is to pinpoint where the leakages are with customers, product, programs and transactions.
- Better Controls: The TPO Waterfall can be used as the basis for a disciplined, data driven process that measures and controls the effectiveness of a trade promotion as identified by assigned KPIs.
- Improved Planning: A TPO Waterfall can break down any trade promotion program into its constituent parts. Over time, the organization will develop a higher “Trade Promotion IQ” with a nuanced and balanced view of what is working.
- Value-Based Negotiation: A TPO Waterfall represents a significant opportunity for sales and marketing teams to achieve mutually beneficial trade promotion results; results that are not just about achieving sales volume OR brand building goals, but both.