Requirements to Calculate ROI on Your Promotions

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To see our latest thoughts on calculating ROI on your promotions, see our series, starting with: How to Calculate Promotional ROI – Start With 5 Key Building Blocks.

A true Return-on-Investment (ROI) calculation is the holy grail of promotion metrics. Sadly, most CPG companies do not know the estimated ROI when planning a promotion or the actual ROI for promotions that have run. So, how would you create the proper processes to calculate ROI?

To be successful, it’s important to understand one basic truth about ROI: ROI is fully dependent on knowing your ‘Base’ Volume (the volume of your product you would sell if the promotion did not run). Let’s face it, if you do not know this number, how can you tell if a promotion is effective or not?

Read on to understand the information you will need to calculate the ROI of a promotion, as well as how:

Step #1Determine/estimate your ‘Base’ Volume.  Unfortunately, this is not an easy to understand concept, but it is fairly easy to arrive at an estimated ‘Base’ Volume.  I would contend that there are two base values that are required for ROI – Shipment Base and Consumption Base – dependent on whom the sale is between.

Shipment Base – How many selling units will we (the CPG manufacturer) sell at our regular price to a customer (i.e., the retailer or the distributor)? By ‘selling units,’ I mean: cases, pallets, etc. – whatever the measure is that you sell to your direct customer.

Consumption Base – How many consumer units will this retailer sell at their everyday price? By ‘consumer units,’ I mean: units, pounds, etc. – whatever the measure is that the consumer buys. If you are putting in a promotion for a distributor, ‘Consumption’ volume will be the volume sold by the retailer to the shopper.

The easiest way to estimate ‘Base’ is by looking at past sales reports and removing the sales for the time period you know you had a promotion that lowered the price for the buying party.

Step #2Determine the two ends of a promotion. By this, I mean to make sure that you understand where the promotion starts and who the recipient of the promotion is. For example, if this is an Off-Invoice promotion, the promotion starts with you (i.e., the CPG manufacturer) and ends with the direct customer (i.e., a retailer) you are selling to.  If the promotion is an in-store TPR (Temporary Price Reduction) rebate, the promotion starts with the retailer and ends with the consumer. Retailer promotions and Consumer promotions are completely different and need to be set up differently in your TPM system.

Step #3 Determine the correct dates. For some promotions, only one set of dates is required. However other types require two sets of dates. The obvious sets of dates are shipping dates, ordering dates, and in-store promotion dates.

Step #4Determine the real promotion and do not turn a promotion into something that it’s not. This sounds obvious and simple, but this is where most TPM systems fail the manufacturer. Let’s eliminate the easy promotions – promotions that are truly lump-sums and promotions such as rate-per-case discounts for direct customers. Fortunately, these are entered correctly the vast majority of the time. Where the problem exists is when the real promotion (the promotion agreed to with the retailer or distributor) is not something that the TPM system can handle (i.e., the real promotion is for $.40 off per purchase by the consumer and if they have a store loyalty card they also receive 3000 loyalty points). Most TPM systems cannot be configured to handle this as one promotion and some TPM systems cannot handle a ‘Points’ promotion in a separate promotion. This also goes for promotions like multi-buys, BOGOs, and performance related rebates. The ‘work-around’ of choice for most CPG companies is to enter these promotions as lump-sums using some undocumented method to determine the amount. Granted, this does satisfy the finance requirements for an accrual and an ROI can be determined, but it does nothing to assist the person clearing the payment or deduction and it makes post-promotion analysis impossible with all the backup documentation detailing the exact nature of the promotion.

If you can ensure that all your temporary promotions follow the steps outlined above, you can calculate a ROI and have a good end-to-end process.

If this is something that you are doing consistently today, please let us know as we would love to work with you on getting even more out of your TPM efforts.

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