February 25, 2023

Deductions 101: A Comprehensive Guide to Trade Deductions for CPG Brands

Vividly Team

Every year, CPG companies from all over invest billions of collective dollars in trade promotions. Unfortunately, 55% of the trade spend allocated by CPG brands fail to grow their product in any meaningful way. All of this leads to a sad hostility between manufacturers and retailers, who feel like they need to constantly compete with each other throughout the negotiation process.

But the real reason behind this hostility isn’t negotiating space, it’s data. 

A lack of visibility is the number one reason why most CPG trade promotion efforts fail — because manufacturers and retailers don’t have enough data or because they don’t know how to properly mine the data they have for valuable insights.

At Vividly, we help consumer goods manufacturers make the most of their trade promotion campaigns with better data visibility and improved data hygiene. That leads to less friction in the deduction process, which in turn leads to reduced spend. 

Today, we’re sharing everything you need to know about successfully using data to handle trade deductions smoothly and easily. Let’s go!

What Are Trade Deductions?

Trade deductions are a form of payment that CPG companies make to retailers as an incentive for stocking their products. By providing incentives to retailers, CPG companies can help increase their product's visibility and market share.

In the world of CPG trade, errors in the deduction process are one of the most important reasons why manufacturers lose money. That’s why, CPG companies have to invest in a dedicated accounting system to dispute invalid deductions and clear deductions that are valid. 

However, data in the world of trade promotion management is scarce. The current deduction management process is a bit like fumbling in the dark with no idea of what’s ahead. Thankfully, there’s a better way for manufacturers to manage your trade spending.

An Overview of the Complete Deduction Management Process in CPG Trade

Deduction management is a complex process that requires collaboration between multiple departments such as trade, finance, and accounts payable. Here’s how it usually works:

  • Receive: The first step in the process is to receive the deduction from the retailer. Manufacturers should ensure that the deductions are valid and that any necessary documentation is in place.
  • Validate: Once the deduction is received, the manufacturer must validate it to ensure that it meets all of the criteria for the deduction. This includes verifying the deduction amount, description, and expiration date.
  • Reconcile: Once the deduction has been validated, it must be reconciled with the manufacturer's internal records to ensure that it matches what was expected. This means confirming that the deduction is for the correct product and quantity, as well as verifying that any discounts or credits have been applied correctly.
  • Resolve: If there are discrepancies between the deduction and the manufacturer's internal records, they must be resolved. This could include contacting the retailer to obtain a revised deduction or adjusting the records to match the deduction.
  • Respond: After the deduction has been reconciled and any discrepancies have been resolved, the manufacturer should respond to the retailer. This could include providing a confirmation of the deduction or requesting additional information.
  • Record: The manufacturer should then record the deduction in their internal accounting system to ensure that it is properly accounted for.
  • Track: Finally, the manufacturer should create a tracking system for the deduction to ensure that it is monitored and managed appropriately. This usually involves tracking the payment status, any disputes, and any adjustments to the deduction amount.

Tips for Efficient Trade Deduction Management for CPG Brands

Trade spend is usually the second largest line item in a CPG brand’s P&L statement, right after Cost of Goods Sold (COGS). However, most manufacturers treat trade deductions as the cost of doing business instead of approaching them as an opportunity for investment. 

This problem is largely due to a lack of visibility and data, which makes the trade experience a bit like looking for a needle in a stack of needles. But, it doesn’t have to be that way.

At Vividly, we have spent years studying the trade promotion management process for consumer goods brands as part of our product research. With time, we have developed our own set of best processes that we recommend to all our clients for efficient trade management. Here they are:

  1. Establish Consistent Policies: Establishing clear policies and procedures is the first step towards efficient trade promotion deduction management. This includes things like setting standard service-level agreements for vendor payment, establishing a budget for each promotion, and defining how deductions will be handled.
  2. Track Deductions Accurately: Accurately tracking deductions is essential to ensuring that there are no discrepancies between the real-time deductions and the actual amounts that are paid. This can be done using an ERP system or other software.
  3. Monitor Promotion Performance: Monitor the performance of your promotions and cross-reference them with deductions to see if you’re getting a decent ROI. This can be done by tracking the sales figures for each promotion.
  4. Negotiate with Vendors: Negotiating is a great way to reduce trade spend. However, you should always prioritize building long-term relationships with retailers and distributors over short-term gains.
  5. Invest in Technology: Investing in software can be extremely helpful in managing the complexities of trade promotion deductions. Automating the process can reduce errors and inefficiencies.
  6. Utilize Scenario Planning: Scenario planning is a great way to anticipate deductions and plan for them in advance. With the right dataset, you can forecast future deductions with considerable accuracy, giving you time to prepare.

The Role of Data in Trade Deductions

Until now, trade deductions have been managed primarily using manual processes and cumbersome spreadsheets, which are prone to human error and have limited visibility in terms of data. However, data science has the potential to change all of that.

Using advanced analytics, CPG brands can now track trends in past deductions and develop predictive models to anticipate future deductions. They can also leverage machine learning algorithms to automate the resolution process, reducing the time and resources required to dispute and validate deductions.

But it doesn’t stop there. With a deep knowledge of retailer relationships, CPG manufacturers can now selectively prioritize invest opportunities and develop a long-term retail strategy that doesn’t rely on pure speculation. 

How Vividly Empowers CPG Trade Professionals With Data on Trade Deductions

The possibilities are endless. But without the right tools and data for the job, trade automation can quickly turn into an expensive disaster.

Vividly's trade promotion management software automates all stages of the deduction management process — from planning to reconciliation to reporting. We’ve helped brands like Amy’s, Perfect Snacks, and Liquid Death achieve a 90% reduction in deduction-processing labor and a 21% improvement in planning accuracy. “They have trade management for brands like us down to a science,” says Chris T., VP of Sales at Bulletproof.

Want to learn more about how Vividly can improve efficiency across your trade deduction management process? Request a free demo, today!

ABOUT author

Related Posts

Goodbye Excel. Hello Vividly.

Discover a new vision for trade

Goodbye Excel. Hello Vividly.

Discover a new vision for trade

Goodbye Excel. Hello Vividly.

Discover a new vision for trade

Goodbye Excel. Hello Vividly.

Discover a new vision for trade

Discover a new vision for trade