The Evolution of Trade Promotion Management (TPM) What is trade promotion management (TPM) for CPG (Consumer Product

Goods) companies? The following is the Promotion Marketing Association (PMA) definition of trade promotion: Trade Promotion […] is any expenditure paid directly by a manufacturer to the trade or retail factors in a given industry as a set amount on a per unit basis or in payment for a merchandising value provided by the retailer. Trade Promotions [..] include "slotting allowances", "performance allowances", "case allowances", and […] "account specific" promotions. (Text from www.pmalink.org) This text-book definition is a good start, but trade promotion is much more complicated than this definition might suggest. Synectics Group has presents this short history of trade promotion to give you a better understanding of trade promotion. How did trade promotion Trade promotion and trade promotion management evolve? Trade promotion evolved as a result of default, not design. In the Nixon era the administration enacted a price freeze to help stem inflation on retail products. Prior to the price-freeze effective start date, the consumer products industry initiated a significant price increase to protect the inevitable escalation of material cost-of-goods during this period. A bi-product of this across-theboard price-increase on consumer products was the birth of trade promotions in the CPG universe. Consumer products companies dealt back the difference of the old price and new to keep their retail prices to the consumer the same. A harmless strategy to get around Nixon’s price controls has evolved to over a $115 billion annual expenditure, representing an average of 15% of gross revenue, in the consumer products sector in 2005. In the early stages of trade promotion the retailer began to create merchandising opportunities at a nominal cost revolving around retail price reduction and in-store display. The leading edge manufacturers of the time (General Foods, P&G, Lever Brothers, etc.) aggressively supported the retailers merchandising opportunities and realized a significant sales lift when their products were promoted in-store. This escalation of trade promotion spending by the CPG manufacturer was a win-win scenario for both parties. Tracking these promotion expenditures at this time was relatively simple as a result of a flat dollar rate per case sold built a fund that the manufacturer and retailer planned promotion activity around. The brand managers at the larger manufacturers internally tracked these accruals against their P&L’s creating the first formal trade promotion management process. As time progressed in the late 70’s and throughout the 80’s, the retailer became extremely creative in developing new merchandising vehicles with separate costs associated with them. There was the evolution of weekly newspaper advertisements promoting products, television and radio programs, in-store sampling programs, and the evolution of slotting fees for new products just to name a few. All of these programs came with an incremental cost and resulted in a substantial escalation in the trade promotion investment made by manufacturers. The addition of all these promotional programs also began the evolution of the combination of offinvoice and bill-back allowances. The off-invoice allowance was designed to maintain an everyday or promotional retail price point. This allowance like the initial rate per case allowance was relatively easy to track and to account for.

The combination of this type of systemized approach to tracking the growing trade promotion expenditure.Over time. in theory. both in frequency. Retailers would have to submit paperwork. retailers decided to simply deduct trade promotion monies that were due. retailers realized that they would get these off-invoice allowances even if they didn’t perform all of the required merchandizing and other stated requirements to ‘earn’ the allowance. manufacturers began to take longer to pay bill-backs. However. trade promotion management required a more detailed and organized pre and post promotion analytical approach. With the administrative burden of trade promotions increasing. the dramatic increase in bill-backs. proving that they performed the necessary tasks to qualify for the trade promotion allowances. In the late 80’ and throughout the 90’s. deduction management systems evolved to track expenditures against specific manufacturer brands at specific retailers. As this happened. form variations and dollar amounts. retailers’ cash-flow was squeezed by slow trade promotion payments. Retailers and manufacturers soon realized that they had created an administrative nightmare. did give the manufacturer the ability to pay only for retail performance. These systems provided a comfort level to brand managers and gave them the ability to track the trade promotion liability by retailer. These bill-backs would not be automatically paid to the retailers. Retailers got increasingly frustrated at having to wait for payments. provided the brand managers the tools they needed to deliver the bottom-line profit contribution objectives. Bill-backs had been around for many years. Manufacturers realized that they could also have more leverage with their direct-ship customers if they layered on additional bill-back incentives. These deductions would be taken on un-related invoices. in addition to the solid profit margins that were being enjoyed at this time. Bill-backs. rolled-up to a total brand liability. unfortunately it was the evolution of the billback allowance that significantly and irreversibly complicated the trade promotion management world. Every manufacturer started offering several bill-back programs per year per product. The technology of the day could not keep up with the information and data processing demands to provide efficient trade promotion management. met resistance from . One consequence was the creation of great inefficiency within the CPG supply chain. by brand. At the breaking point. that they should require documentation and proof-ofperformance. It would become the genesis and force the industry to create a more formalized trade management approach. the new product line extension. This approach would require the field sales force to keep records of their bill-back offers to retailers and tie the expenditures back when the retailer deducted off of subsequent invoices for the merchandising activity (bill-backs). manufacturers began to look for ways to put more pressure on retailers to perform for these trade promotion allowances. Consumer product categories matured. As a result. typically being used for in-direct customers that pulled product from a wholesaler or distributor. Another unforeseen consequence was the rapid and dramatic increase in deductions. Although they were created with good intensions. Bill-backs became perhaps the first form of pay-for-performance trade allowances. Each required paperwork to be submitted for payment. It seemed logical to manufacturers. With retail margins being much smaller than those of the manufacturers. Only if the paper work was submitted would the retailer get a check from the manufacturer. had several unintended and unfortunate consequences on the CPG industry. The evolution of the deduction by the retailer created the need for a more systemized approach to managing this growing expense. even further increasing the administrative burden of trade promotions. The brand manager’s best ally.

This focus enabled manufacturers to keep a closer watch on what was budgeted vs. deductions/payments. what headquarters was looking at. Financial data (deduction/payments) could be cleared against a specific promotion plan creating the opportunity for an accurate variable contribution P&L by promotion event. planning. In came the age of technological advancement that would provide the opportunity to access all of the pertinent information in what many call the data warehouse approach. The data warehouse provided the opportunity to have all of the silos integrated into one information area for the next generation of trade promotion management. planning. Trade promotion management had evolved to a point where all operating areas of an organization had a synchronized view of the impact of the trade spending liability. As the trade promotion investment made by the manufacturer continued to grow. The trade expenditure cost continued to exponentially increase.the retailer as a result of not generating incremental category volume and profit. It was at this point that all of the critical components of trade promotion management were beginning to be executed (budget/quota. This same financial data could be electronically exported to the appropriate ERP GL’s for accurate financial liability reporting. post-promotion management as well as top-line analysis. In many cases it could take weeks to compile the necessary information from these disparate groups to begin post promotion analysis. As a result of these economic circumstances. Nielsen) provided an analytical component that could begin to measure the sell-through of a promotion as well as the sell-in. Large manufacturers invested significant dollars to develop a department that would act as an intermediary between marketing and sales. Inc. Shipment data could be fed in real-time to this system via automated electronic data linkages. Although progress was being made in the constant monitoring of trade spending effectiveness/efficiency there was still significant room for improvement. The spreadsheet combined with a systematized approach to deduction clearing organized trade promotion management and began to place emphasis on the pre-promotion planning. the spreadsheet evolved as a promotion planning tracking tool. created massive liability gaps on what was offered to the retailer vs. so did the scope and magnitude of the trade promotion management team. what actually was spent to identify potential trade promotion overspends. The necessary information to evaluate trade promotion effectively could reside in as many as 6 different data silos in an organization. pre/post promotion analysis). rolled up to a specific retailer. promoted group or brand. sell-through reporting capability. The fact that the plans that resided on spreadsheets were dependent on constant updates top reflect changes from the field. Budget information could in the hands of the finance department. would be in the hands of the sales force. Realizing that at this point trade promotion management was light years ahead of the evolution of trade spending. In the mid 80’s the evolution of scan data provided by IRI (Information Resources. syndicated data could be in the market research area. It became possible to transmit adjusted plans via the Internet to provide a synchronized view of the actual liability. shipment data could be found in invoiced area of the ERP system and the life blood of analyzing a successful promotion.C. Syndicated data could be electronically fed into the trade promotion closed-loop software for sell-in vs. deduction information would reside in the financial administration area. This accelerated negative trend resulted in a significant reduction in the solid profit margins that the CPG manufacturers were enjoying throughout the 70’s and 80’s. Their charge was to manage the effectiveness and efficiency of the trade promotion investment.) and ACN (A. . it was far from a perfect science. Major surprises were minimized and information was available in time to adjust tactics and strategies on unprofitable trade promotion spends. This cost increase was in large part a result of the retailers rapidly shrinking net-after-tax profit.

the spiraling out-of-control world of trade promotion spending is now manageable. Over that same time period a focused retailer investing in technology by the name of Wal-Mart has gone from a 0% share of the retail grocery business to over 20%. will enable a retailer/manufacturer working together to match what Wal-Mart built over the past 15 years in as little as 15 months. the real focus has to be on the words collaborative.     $115 billion is invested annually representing on average 15% of the CPG manufacturers gross revenue. What do we mean by mismanaged? Let’s dissect the facts. mutual and paradigm shift. for both concerned parties. to as time long ago when trade promotion resulted in mutual incremental sales volume and profit. is there any reason why it could not work today. Collaborative trade promotion management utilizing the technology available today. The next frontier in the evolution of trade promotion management will involve the collaborative use by the retailer and manufacturer of the technology available today to manage trade promotion spending in real-time for mutual gain. .It is logical to surmise that with the advent of the closed-loop trade promotion management system solution. No question the technology is available now to manage accurate liabilities of this incredibly mismanaged investment. The alternative is to stay the current course and the end game is not looking too bright. The combination of these powerful and attainable ideas could bring us back 180 degrees. Implementation of the technology is only scratching the surface. Less then 50% of this substantial investment ever reaches the consumer. Margin erosion over the past 10-15 year period for both the retailer and the manufacturer has been substantial. It seemed like such a simple premise that worked.