For many consumer goods companies, trade promotions are the second-largest item on the P&L behind cost of goods sold. Trade spending has tripled globally during the past two decades and some experts predict it will soon reach 40% of annual sales and for many companies, exceed the cost of goods sold.
Trade promotions are a high priority expenditure for CPG and FMCG companies, while retailers run a hybrid EDLP (Everyday Low Price) & promotional approach. In this complex landscape few companies understand what they get in return for their promotional spend and how to optimise their processes. Many businesses suffer from ineffective trade management with promotional campaigns failing to provide the desired ROI and turning into wasted efforts.
Adding to the complexity is the widespread use of home-grown spreadsheets and manual manipulation of data, making it difficult (if not impossible) to optimise promotional plans in a way that maximises category growth and product penetration.
Understandably, the common practice is to take last year's plan and tweak it, without identifying ways to improve or optimise, and at times trying to force last year's plan to solve new problems.
To address this situation, we see many companies looking for software to digitalise their workflows and optimise their promotions. There are two main components to that process, and (despite many vendors' claims) they are not the same, and are rarely executed by the same software:
- Trade Promotion Management (TPM) systems
- Trade Promotion Optimization (TPO) systems
Trade Promotion Management (TPM) systems
For companies wanting to replace the home-grown spreadsheets and automate the labour-intensive processes for data loading and handling, customer planning and budgeting, TPM is usually the starting point.
TPM systems are used by a broad range of users (e.g. merchandisers, category teams, trade marketing, strategy and customer finance) for the transactional workflows associated with planning, managing (funding, budgeting and reconciling promotions) and monitoring promotional activities in a more streamlined manner.
Being transactional at its core and including basic analytics, the key intent is not to completely address the challenge of missed returns and wasted efforts on bad promotions, although TPM does play a role in the workflow from the perspective of collating, reconciling and visualising past performance results.
Trade Promotion Optimisation (TPO) systems
Trade promotions have the best potential to increase sales with data-driven strategies. An IDG survey showed some large global manufacturers making a move beyond the basic trade promotion management tools towards achieving trade promotion optimisation (TPO), defined as the ability to run what-if scenarios when planning promotional campaigns was “now one of the strongest desires among larger companies.”
Trade Promotion Optimisation (TPO) systems are sophisticated applications capable of advanced analytics (e.g. advanced price elasticity and cannibalisation modeling capabilities). TPO enables users to automate the exploration of a large number of what-if scenarios, and run optimisation algorithms across those promotional programs, whilst considering various constraints and objectives (e.g. trading terms constraints, market share objectives, promotional guardrails, supplier constraints, category growth objectives, etc.)
The table below provides a quick overview of the main functionalities of TPM and TPO systems:
A successful TPO implementation can deliver a range of benefits including:
- Reduced time and labour required for creating new promotional plans
- Improved returns from optimised promotional plans
- Increased market share
- Stronger manufacturer-retailer relationship
To perform their optimisation workflow, TPO systems extract data (both transactional data as well as promotional slotting boards) from TPM applications and then push back optimised promotion plans that deliver the right mix of category growth and sustainable share. Given the complexity of the business problem and the algorithmic techniques involved, it's important to note that no two deployments are the same. The algorithmic techniques are trained on each client’s data, and the various constraints/objectives used by the optimiser (e.g. trading terms constraints, market share objectives, etc.) are configured to each client’s needs.
Complexica's Promotional Campaign Manager (PCM) application combines some of the essential features of both TPM and TPO. PCM, with its predictive and optimisation capabilities, provides both practical decision support as well as tactical and strategic management of trade spend.
To explore how our software can improve your promotional planning process and optimise your trade spend, please contact us