Trade Spend Strategies for Effective Promotion Management

If you are curious to learn trade spend strategies for effective promotion management, then this article is for you. Trade spend is the most important key to influencing buyer purchasing behavior. However, the majority of trade promotion spending does not substantially increase brand awareness, product sales, or revenue. Optimizing your trade spend can seem like a daunting and confusing task. Luckily, we have complied this guide to help you turn your inefficient trade spend into a significant asset for your company.

Continue reading for an in-depth look at the many aspects of promotional trade spend, including relationships between manufacturers, retailers, and consumers, types of promotions, metrics and data to track and analyze, and tips for maximizing your trade spend efficiency. 

What is Trade Spend?

Trade spend is the cost of marketing your product to other businesses – in other words, it is the money that manufacturers provide to retailers in order to sell the product to consumers. This is usually measured as a percentage of sales and is commonly referred to as an “allowance”. Trade spend includes expenses related to promotional campaigns, including advertising and marketing. It can also include the costs of revenue lost while offering temporary price reductions (TPRs), and the costs associated with product demonstrations and events.

While these types of promotional spending account for most of a company’s total trade spend, there are other types of allowances as well. These can include fees for stocking new items, an allowance for “bad goods”, or an allowance that covers payment terms. These types of trade spend allowances protect both the manufacturer and the retailer from situations where a product is damaged or expired, or by supplying incentive for paying off credit within a specific timeframe.

Unfortunately, many companies do a poor job of effectively tracking marketing campaigns and promotions. This leads to ineffective business strategies and decisions, and slower growth for your brand. One of the challenges of tracking trade spend accurately is due to multiple promotions running at the same time, making it difficult to know which campaign is leading to an increase in revenue. Luckily, there are several steps you can take to de-mystify trade spend and manage it effectively.

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Understand your product’s relationship to manufactures, consumers, and your own marketing strategy

Manufacturers

Manufacturers have several goals to prioritize when working with retailers. They want to meet consumer demand, which means they invest in consumer insights to indicate which products to discontinue, invest in, or increase production of. They are also concerned with any aspect that could affect their brand and overall company. This can include issues with logistics and supply chain, production materials, and retail price points. Finally, manufacturers also want to determine the most effective route-to-market, which involves how the products get to consumers. Some examples include direct-to-consumer, wholesale, retail, and online.

How is this relevant to trade spend? Building a productive working relationship with manufacturers is key to the success of both parties. As manufacturers develop promotional and marketing strategies with retailers, they can increase consumer interest, demand, and brand awareness. 

Retailers

Retailers are concerned with their overall retail strategy, retail cash flow and vision – determining which products align with their overall mission and goals. They are aware of the overwhelming number of manufacturers and products competing for limited shelf space. Retailers have to prioritize offering products that meet consumers’ needs. By leveraging their relationship with manufacturers, retailers can build highly effective promotions that lead to an increase in sales and profit, and this is where trade spend comes in to play.

Consumers

One of the most effective ways to optimize your trade spend is by targeting the right customer segment. By targeting the right customers, marketers are able to better influence buyers’ purchasing behavior. This means more conversions for your business. You can target consumers based on geography, age, gender, etc. It is also possible to target customers based on their interests and their social media activity. If you are trying to promote a product geared towards women, for example, then you may want to create ads that will be shown only on relevant sites (e.g., a popular women’s blog instead of a men’s magazine).

Understanding these relationships between manufacturers, retailers, and consumers allows you to implement the most effective marketing strategies and promotional campaigns. For instance, you can offer free samples of food and beverages, but free samples of non-consumable goods do not make sense. Additionally, some products lend themselves to practical demonstrations, such as cleaning products. However, there are obvious products that should not be demonstrated, like toilet paper and other toiletries.

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Four types of trade promotions

In general, there are four essential categories of trade promotions:

  1. Temporary Price Reductions/Markdowns – Coupons, “% off” sales, buy-one-get-one deals, rebates, etc.
  2. Retail Branding – Stickers, store displays, posters, etc.
  3. Sales Contests – Prices based on excellent sales
  4. Events – Free samples and product demonstrations

Most effective promotions are from the TPR/Markdown category. However, these are also subject to limitations, which we will explore below.

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Smarter Sales Management

Offering sales on certain products is a highly common trade promotion strategy. Although it might seem simple on the surface (“% off” markdowns appear straightforward, after all), there are several aspects of promotions that you should be aware of. 

Temporary Price Reductions — TPRs

TPRs, as we have already noted, are any price reductions related to sales or promotions that are advertised to customers. When choosing to implement a TPR strategy, here are some pros and cons to consider.

Pros:

  • Using bright, colorful stickers and tags captures your customer’s attention.
  • Using the percentage sales format requires your customers to perform mental math, which slows and focuses their attention onto your product.
  • Since sales are generally offered infrequently, they provide an urgent call-to-action to persuade customers to buy your product now.
  • They can potentially convert customers to you over competitors that are not offering a competitive price or sale.

Cons:

  • Using TPRs can result in inconsistent product ordering, since you may potentially overstock while running a sale and understock when the sale is over.
  • Inconsistent ordering can make manufacturing needs difficult to predict
  • You may see a reduction in buyer retention, as customers stop buying your product when the sale period ends.

Everyday Low Purchase Price — EDLPP

This refers to marketing your everyday prices as comparatively low in regard to competitors.

Pros:

  • Since EDLPPs do not fluctuate like TPRs, you can retain customers more easily.
  • Consistent pricing results in consistent manufacturing and stocking.
  • Being highly competitive with other retailers can result in long-term market success.

Cons:

  • EDLPP is a long-game strategy, because it takes time to see returns.
  • They can be challenging to sustain without sufficient existing capital.

An example of EDLPP failing is when, in 2012, JC Penny changed their marketing strategy to move away from TPRs completely to rely on a consistent EDLPP model instead. Unfortunately, this strategy did not work out for them, and they ended up scratching it shortly after losing a significant amount of money.

Which price-based promotional campaign is best for my product?

The answer to this depends on the degree of luxury of the product in question. Retailers usually offer products in a range of hierarchal extravagance, selling value or baseline products at one price point, average products at another, and high-end products at the most expensive level. This means that your trade spend strategy should change depending on which level of product you are targeting. Price-based promotions are less effective when selling high-end items, because these purchases tend to be more deliberate buying decisions – the customer has already decided that they are interested in purchasing that specific product. In this case, external marketing campaigns are more effective, since they focus on converting customers and bringing them in, not trying to flip in-store shoppers in the moment. 

Conversely, value items can benefit from trade spend promotions. When completing their everyday shopping, customers are more inclined to be influenced by sales and coupons. There tends to be less brand loyalty with value products, since the consumer’s goal is usually to save money. This is why sales and promotions are more effective with products that are bought out of habit or impulse, and not major pre-planned expenses.

Four things to keep in mind with trade promotions

  1. Depth – Depth refers to the level of discount applied to a product while running a TPR. You have to strike a balance between a depth that is too low, meaning it does not provide enough incentive to draw customers in, and a depth that is too deep, which may diminish the way consumers perceive the value of your product. For example, if you are implementing a sale on a high-end, name-brand product, and you reduce the price to that of a bargain level product, this might indicate to your customers that the high-end product is now less desirable and has lost some of its value.
  2. Frequency – This refers to how often you run a specific promotion. If you offer promotions too often, consumers may expect the promotional price to be the standard instead of the exception. However, if you run sales too infrequently, you are less likely to attract new customers. 
  3. Timing – The timing of your promotions is crucial to their success. For example, discounts on fitness products during January makes sense, since many people incorporate fitness goals into their New Year resolutions. Conversely, offering discounts on alcohol in January would be ineffective, considering many people observe “dry January” and are consuming less alcohol. In order to implement promotional timing effectively, you need to understand your historical sales data and seasonal product performance.
  4. Communication – This refers to the way you communicate your marketing and promotions to the consumer. Behavioral economics is a relatively new field of study that closely examines the relationship between marketing, communication, and consumer behavior. While it would require in-depth research and statistical analysis to fully understand this relationship, there is a simple takeaway. You should consider the most effective way to communicate your promotions. Pay attention to phrasing, format, and placement, and how these affect your sales. Incorporating these items into your data tracking can lead to highly valuable insights. 

All the above features of trade promotions will greatly influence the success of your marketing campaign, either capitalizing on your trade spend or wasting it.

Track effective trade spend by using better metrics

Using smarter data points can help you understand your marketing trends and data, taking the guesswork out of analysis.

Standard vs. incremental revenue

It is essential to know how much a retailer makes from promotions as well as general revenue. However, it can be challenging to determine how individual promotions compare to overall earnings. The best way is by calculating incremental revenue – the actual money generated from specific sales or promotions. You can calculate incremental revenue by taking the difference between the amount of revenue your product typically generates under no promotions, and how much it generates while running a specific sale. The difference equals the amount of incremental revenue that specific promotion generated, and this allows you to measure the effectiveness of your trade promotions.

Calculating return on investment (ROI)

There are two main ways to calculate your ROI – traditional and marginal. Knowing your ROI is vital to determining the success of your marketing campaigns and knowing if they make sense for your business financially. 

Traditional ROI calculations take all trade spend expenses and divide that from the incremental revenue, like we explored earlier, which isolates the specific promotion in question. The result shows your ROI yield. Obviously, you should strive to execute strategies that generate high ROI yields. While this way of measuring ROI is effective at showing the financial practicability of your campaign, it does not predict future investments.

Marginal ROI (mROI), on the other hand, does demonstrate the effectiveness of investment dollars. This calculation is a bit more complex than the traditional approach, but it gives you highly beneficial insight into your marketing campaigns. You need to take revenue data from a specific promotion, measured across two different points in time. Once you have that, the formula looks like this: marginal revenue = (total revenue – previous revenue) / (total quantity – old quantity). 

Determining your mROI is helpful to isolate how effective your specific marketing strategy is, and how future investments will impact your revenue. The higher your mROI, the more return you get from every dollar spent – which means campaigns with high mROI rates should continue to be invested in. 

Use both calculations for the best marketing strategy

Both traditional and marginal ROI calculations are beneficial and should be used in tandem for optimal marketing effectiveness. Campaigns demonstrating high standard ROI usually demonstrate lower marginal ROI. This means that specific promotion is already performing at its peak, so you are unlikely to get much more out of it. You can conclude that promotion was a success and work to maintain it as long as it is profitable. However, you should prioritize spending and investing in promotions that demonstrate high mROI, as these campaigns are essentially limitless – they are far from their peak, so you have high earning potential. Utilizing both ROI approaches will highly benefit your trade spend strategy.

Use data analytics to your advantage

Every business should invest in quality data analytics. Keeping an effective track of your campaigns, revenue, spending, sales, etc., is essential to effective trade spend. 

Even if some promotional campaigns are not effective or beneficial, you can still learn a considerable amount from the data. And, while ineffective promotions do reduce your profit, they do not lower sales, which means that as a retailer, you can afford to run a few ineffective campaigns as long as the insight you gain from them will lead to an improved marketing strategy overall.

Strong data can help shift your strategy

Having a strong narrative backed by data can help you understand the relationship between your products and promotions and predict future success. Occasionally, you may need to shift your product narrative in order to change your customer’s perspective. You can use data in your promotional materials and demonstrations to achieve this. If you are in the business of selling products, then you are also in the business of storytelling. Your product needs to stand out. Having a narrative that makes sense to your customers and resonates with their values, along with effective price reduction strategies, can give you a competitive edge in a tight market. 

Track and analyze everything. SKU and POS data is essential to your success. Using understandable metrics, you can demonstrate how your trade spend is benefiting your company, how you are increasing revenue, and that potential growth is possible. 

Essential data metrics

In order to optimize your trade spend data analysis, you need to ensure that you are tracking data across these categories:

  1. Consumer units – This means that you are tracking data the same way that the consumer buys – using consumer units and terminology.
  2. Revenue – As we have already addressed, it is vital to be accurately tracking and analyzing revenue data. However, in addition to tracking your overall revenue, something that you are likely already doing quite well, you should also be tracking the incremental revenue that we explored earlier. This specific to each product and unit being measured and helps you determine promotional success and return on investment.
  3. Incremental factor – This is the metric that determines exactly how effective your marketing strategy is. You can calculate the incremental factor by dividing your total revenue by your incremental revenue.
  4. Spend ratio – This is calculated by dividing your incremental revenue by your total trade spend.
  5. POS growth – The fluctuation of sales across a single or multiple POS will give you insight into how promotions performed by tracking coupons and promotional codes.

Once you have strong data across these different metrics, you can create an overview of your promotional trade spend. You should be able to identify which promotions and marketing strategies are the most effective and which ones are ineffective, in addition to noting any trends in your performance data across categories. Compiling this data will help you prepare an action plan to increase trade spend effectiveness and strategize for continual growth.

Historical performance data

Your promotional data can help you deliver the highest return on your trade spend investment. When exploring your historical campaign performance data, you should focus on some key factors such as seasonality, category trends, and consumer insights. These filters will show you if certain promotions are more effective during certain times of the year, how buying trends are shifting across product categories, and how consumer preference is changing.

Use technology to simplify this process

With all the metrics and complicated calculations that go into analyzing and understanding your data, it makes sense to utilize technology to help you out. Luckily, there are plenty of Trade Promotion Management (TPM) software options that can do just that. They automate and streamline the process of collecting and tracking data, as well as running statistical analysis and generating useful reports. The upfront cost of buying the software is worth the investment when you account for the valuable insight you will gain into your trade spend effectiveness. 

Conclusion: Trade Spend Strategies for Effective Promotion Management

The success of both manufacturers and retailers depends on effective trade spend management that provides the best return on investment. Ineffective trade spend can result in diminished financial performance and unproductive marketing and promotional strategies. Excellent trade spend practices will result in higher margins and sales, as well as an effective marketing strategy for the future. After exploring the above tips, you are now equipped with trade spend strategies for effective promotion management.

We hope you’ve learned some important information from our post. Companies such as Startup Tandem assist companies like you with a range of financial, consulting, bookkeeping and accounting services. You can contact Startup Tandem and get some important financial advice for entrepreneurs and a free estimate on services.  Learn more about their culture and what Startup Tandem has to offer companies such as you! We are a top rating CFO consulting firm near you and would love to get started!

You should now know some effective trade spend strategies for effective promotion management so good luck!

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