Trade promotions are an essential part of the Consumer Packaged Goods (CPG) industry, with a significant amount of a company's budget allocated to them. However, not all trade promotions are created equal. To ensure that your trade spend results in a positive return on investment (ROI), it is crucial to measure and optimize your trade promotion effectiveness. In this article, we will delve into the importance of trade spend ROI, discuss the trade spend formula, and provide insights on how to improve your trade promotion ROI.
Trade spend is the amount of money a CPG company invests in promotional activities, such as discounts, rebates, in-store displays, and other marketing initiatives to drive sales and brand awareness. Trade spend ROI, or trade promotion ROI, is a key performance indicator (KPI) that measures the effectiveness of these investments. It helps brands evaluate the success of their promotional activities and make informed decisions about future spending.
To calculate trade spend ROI, you need to first determine the net sales and the gross margin generated by a trade promotion. Next, you need to calculate the incremental sales, which is the difference between the net sales during the promotion and the net sales without the promotion. Once you have these figures, you can use the following trade spend formula:
Trade Spend ROI = (Incremental Gross Margin - Trade Spend) / Trade Spend
This formula calculates the return on investment by comparing the incremental gross margin generated from the promotion with the initial trade spend. A positive trade spend ROI indicates that the promotion was successful in generating more profit than it cost, while a negative ROI suggests that the promotion was not profitable.
To boost your trade promotion ROI, consider implementing the following strategies:
Let's consider a hypothetical CPG brand that wants to improve its trade promotion ROI. The brand decides to implement the strategies outlined above and starts by conducting a pre-promotion analysis. They identify that their most successful promotions in the past have been in-store displays and price discounts. As a result, they plan a new trade promotion campaign with a focus on these tactics.
Next, they set clear objectives for their campaign, such as increasing sales volume by 10% and boosting brand awareness. They also establish key performance indicators (KPIs) to monitor the success of their promotions, including incremental sales, promotional lift, and sell-through rates.
The brand invests in a trade promotion management software solution to help streamline their promotional planning, execution, and analysis processes. They work closely with their retail partners to ensure that their promotions align with the retailers' objectives and capabilities.
During the promotion, the brand closely monitors its performance using real-time data analytics. They discover that while their in-store displays are driving strong sales growth, their price discounts are not generating the expected lift. Based on this insight, they decide to adjust their promotional mix by increasing the visibility of their in-store displays and refining their discount strategy.
After the campaign, the brand evaluates its post-promotion performance and finds that it has achieved its sales and brand awareness objectives. Moreover, the trade spend ROI has significantly improved compared to previous campaigns. By implementing the strategies outlined in this article, the brand was able to optimize its trade spend and boost its trade promotion ROI.
Trade Promotion ROI: A Comparison by Retailer Type
To better understand how trade promotion ROI varies by retailer type, let's take a look at the following comparison table:
As the table illustrates, the average trade promotion ROI tends to be higher for independent and small chain retailers compared to large chain retailers. This could be due to several factors, such as lower trade spend requirements, more targeted promotions, and a stronger focus on niche markets.
Improving your trade spend ROI is crucial for maximizing the effectiveness of your promotional activities and driving business growth. By leveraging data insights, setting clear objectives, optimizing your promotional mix, and working closely with retail partners, you can boost your trade promotion ROI and ensure that your investments deliver tangible results. Investing in trade promotion management software and continuously refining your promotional strategies based on performance data will further enhance your ability to make informed, data-driven decisions and maximize the return on your trade spend.
Vividly empowers brands to plan, execute, and analyze their trade promotions more effectively, ensuring that every dollar spent delivers the best possible return. Here's how Vividly can help your brand achieve better trade spend ROI:
To learn more about how Vividly empowers brands to make data-driven decisions, optimize their promotional activities, and drive business growth, schedule a demo today!
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