As we get further into 2022, inflation has only become more of an issue for CPG companies and the economy as a whole. There are daily stories in the news showing inflation is hitting unprecedented levels and has no signs of slowing down as lasting impacts of COVID-19 continue to cause havoc in global markets. As a result, It has become even more critical to implement strategies to combat inflation and maintain already thin profit margins.
In part 1 of this 3 part series, we explored the pros & cons of price increases. In part 2, we looked at how to be more efficient and eliminate wasteful spending. In part 3, we will discuss another approach to counteract inflation & maintain profitability - cutting back on trade spend.
Strategically Reducing Spend - Customers
To strategically cut back on trade, the first step is to understand how much you’re spending at each retailer. While this typically can be a time consuming challenge for indirect customers, Vividly (formerly Cresicor) provides that visibility, utilizing POS data to estimate revenue, and then aligning that detail with deductions processed. With that data at your fingertips, you are able to make better and quicker decisions on where to cut back.
Gaining detailed visibility where trade dollars are going always reveals skeletons in the closet. According to our data, clients are spending more than expected on the smaller customers that don’t have specific trade plans, which are captured in what we call the All Other Bucket (AOB). From year 1 to year 2, our customers showed a 274% increase in planning accuracy and a 52% reduction in overall spend going to customers falling under the AOBs.
You will also want to look at your Tier A and Tier B customers - are they getting their fair share of trade or is one customer getting more than the rest? Looking at where to pull back from your Tier B customers is a great first step in reducing spend. The goal is to never take away trade from those customers that make you famous as they will continue to drive growth!
Strategically Reducing Spend - Products/Product Groupings
Another consideration in cutting back trade is to review trade spend by product line. In part 2, you evaluated ROI to become more efficient. Use that same thinking in this process here. Are you spending your trade on the right product groups that drive the best return while taking into consideration product margins? Lift and ROI can vary greatly depending on price sensitivity and competition. It’s vital to understand where you’re getting the most out of your trade dollars so you can strategically pull back on the right products.
Do any of your products provide higher lifts than the others? If so, you could shift spend to those product groups. What product groups have the highest margins? Maybe supply chain issues have impacted certain product margins more than others. Prioritize your spend to drive volume on the products producing the highest margins.
Strategically Reducing Spend - Frequency or Depth
Now that you have an idea of what customers and/or products you want to target, there is one more decision to be made. Do I pull back on frequency or should I reduce the depth of discount and run shallower promotions? The answer depends on the % lift you see per % discount, allowance, and any ad fees associated. Of course, the customer will have a say in what is possible too!
Generally, a deeper discount will drive a higher lift. Not only are you paying more per unit, you’re paying that discount on more units sold. If you work with the retailer to reduce the allowance and increase the promoted price point, you can often dramatically decrease your trade spend. Ad fees have the opposite effect; If you are paying a proportionally high ad fee it often requires you pull the ad all together.
Executing and Measuring Impact
Once you’ve decided where and how you’re going to cut back on trade, it’s time to execute. To do this efficiently, it’s essential to have your promotions organized. Being able to quickly sort and filter by customer, product, timeframe, etc is going to save a lot of time. Having a software with a user-friendly interface and analytics tools that summarize your trade spend in a couple clicks is a lifesaver.
Lastly, and maybe most importantly, you need a way to measure the impact of your changes and track progress! Vividly offers the budget tool (scale tier), allowing you to set revenue and trade budgets, comparing actuals and your latest forecast to them . Quickly reset your trade spend budget by product & customer and see how your promotional adjustments measure up to your goals!
Cutting back on trade is another option to combat the shrinking margins due to inflation. To do so effectively, you want to protect the customers that will drive your growth, allocate spend to your highest margin products, and make informed decisions on how to pull out spend (frequency or depth). Execute strategically and you will minimize topline revenue loss and reduction of trial. To do so, you need to have the right data and tools available. If you're interested in how Vividly makes this process simple, request a demo with us today. We hope this 3 part series on how to combat inflation was informative and will help you deal with these unprecedented challenges the CPG industry is facing.
Vividly is a trade promotion management (TPM) software built by and for people in the consumer-packaged-goods (CPG) industry. We provide a range of services and solutions in strategy, consulting, technology, and reporting. We are designed to fit the quintessential business model of smaller CPG companies that typically rely on indirect business models.
Historically, the CPG industry has experimented with several TPM solutions. As the complexity of trade has risen, the need for process improvements has also increased. Spreadsheets no longer deliver the clean and concise information needed to support trade promotion decision-making. For brands to achieve optimal growth, trade spend needs to be viewed as a series of thoughtful, purposeful investments, not just the cost of doing business. Cash flow is critical to businesses - at Vividly we help each brand understand how to accurately organize, track, and forecast spend, and thus how to more efficiently utilize cash flow. With our easy-to-use platform and industry-leading experience, we pride ourselves in our ability to bring businesses to the next level. Check us out at www.govividly.com