The money you spend on promotions -trade spending – is like the kind of tidal wave that big wave surfers search for. These waves start out small but grow into monsters as conditions change in an environment that is conducive to chaos.
If you haven’t ridden the wave yet, this article will help you understand what conditions lead to the growth of trade spending and business process complexity. If you’re on a wave now, you’ll learn strategies that will help your team ride it with confidence.
As all waves do, this customer-specific spending wave starts out small, but builds over time as conditions change. What makes up this wave includes money for customer promotions (MCBs, scans, ad/display fees), customer marketing, expenses to get your product into distribution (slotting, freefill) , and operational expenses(damages, fees for shortages, fines for late deliveries). It’s worth noting that not all of these expenses are valid. Customers make mistakes, so it is the brand’s responsibility to identify mistakes and get them repaid. The size of the wave at its peak is staggering. The promotion expenses alone are likely to grow to 25% of your gross revenue.
Conditions for Chaos
Just like the ocean is affected by storms in the atmosphere, the trade spending tidal wave is influenced by dynamics in your business. You will see the wave begin to build as you acquire more customers and run more promotions.
When this happens there are more and more tasks, communications, transactions, and usually more people involved in the process. What was once easily managed, quickly becomes stacks and stacks (paper or virtual) of customer invoices that must be processed, and more and more dollars going out the door.
If you’re not prepared, this wave will wipe you out. In consumer goods, wipeouts come in a few forms. First, and most importantly, is that your margin will erode. Trade and other customer expenses will steadily grow in dollars and as a percent of gross revenue. Increased expenses when revenue does not grow at the same rate results in lower profit.
If this occurs, your leadership will very quickly ask where and how this money is being spent. Most of the time, details like this are spread across different people, systems, and tools… mostly spreadsheets. If you put the right effort into it, you’ll be able to provide an answer, but it will take a while.
Another type of wipeout is the sales team over-extending your resources. We call this going “Point Break.” While there is usually an all-out push for distribution and promotion to drive trial of new products, the money spent on this cannot be limitless. Without adequate controls in place, you risk facing customer commitments for which you are unprepared.
The final potential wipeout is accounts receivable. There is typically a team of one managing receivables and the anti-receivable…deductions. It can get gnarly. With more and more customers, promotions, and operational fines and fees come more and more deductions. Each one takes time to process and validate. Just doing the bare minimum quickly becomes a full-time job. And in the process you are probably throwing away valuable information about where your money is being spent and what you’re getting in return.
Riding the Wave
Riding the trade spending wave takes a lot of hard work. Here are three tips to help you get started.
- Declare your sales strategy
It is either maximizing growth or maximizing profit. It can’t be both and they require different tactics. Ensure your entire team is aligned on the strategy and expectations. For example, a maximize growth strategy means you are willing to tolerate trade spending escalation. With a maximize profit approach, however, you will need to be much more attentive to where and how trade funds are applied.
- More of what works, less of what doesn’t
Many of the promotions you run won’t produce great results. To run more of the ones that work, you must embed a post promotion analysis into your business process. This takes data – most advisors will urge you to invest in POS data- and discipline.
Often overlooked, this work should start when you are in maximize growth strategy. Cataloging promotion results will prepare you for the transition from maximizing growth to maximizing profit. If you have prioritized post promotion analysis, you will have more expertise about your business, and you will be able to make decisions faster and easier as you migrate to the new approach.
- Manage deductions (before they manage you)
When distribution begins to grow, your accounting department will need help. As previously established, deductions –short payment of your invoices- grow as you acquire new customers. This does not happen overnight. Rather the wave builds and builds as distribution increases. Your objective should be to make sure you can process (i.e., validate and close) deductions and receivables within 30 days. Some brands just clear everything to meet this goal. If this is your approach, you are leaving money on the table because there are claims that are not valid. Why the 30-day goal? The longer you allow invalid deductions to age, the less likely you are to get repayment. In fact, many retailers and distributors have policies that restrict you from disputing charges after a set period.
Selecting the Right Board
When brands encounter the trade spending tidal wave, there are two types of “surfboards” used:
- 1) Spreadsheets, shared drives, and email
- 2) A Trade Promotion Management (TPM) system.
When we talk to brands that choose the former, the reasons we hear include
- 1) promotions are a cost of doing business…I don’t need to track them
- 2) the system is too expensive, and
- 3) It takes too much time
While there is some truth to each of these, there are also counterarguments.
- First, promotions are a cost of doing business, but if you don’t track them, trade spending will escalate and margin will erode because of bad ones.
- Second, there is a cost associated with a system, but there is a much more hidden (and likely higher) cost of bad promotions and invalid deductions that will result in spending equal to 25% of gross revenue.
- Third, it will take time to use a system, but that system will give you the structure, visibility and control needed to make the best possible decisions for your business.
We all want to be experts in our business. We believe that purpose-built “surfboard” like TPM enables a brand to gain greater expertise about their business. It will also get you that expertise faster than you would get it with spreadsheets, shared drives, and email. TPM will help you avoid wipeouts and ride the wave like a pro.