How CPG Companies Measure Promotion Effectiveness to Get Trade Promotions Right
Stimulating demand for saleable items across all channels doesn’t come cheap, and CPG companies spend somewhere between 8-14 % of their turnover and up to 20% of their annual revenue on trade promotion. Trade promotions are a staple for every business, especially Consumer Goods Companies. Unfortunately, poor returns can increase the ineffectiveness of their future promotions. Hence, measuring promotion effectiveness is imperative to make all pence spending count. Trade promotion effectiveness analysis with the right tools accurately shows where their efforts fell short of driving expected results. Conversely, best-in-class promotion methods can fetch five times more returns.
Clearly, there’s a huge opportunity awaiting CPG companies to improve ROI on their trade promotions. The question is – how to go about it?
How do promotion effectiveness analytics prove better than traditional approaches?
Now, the apparent reluctance among most CPG manufacturers compels them to opt for a more traditional approach to stimulating demand for their goods. And, that being, creating loyalty programs for already churned customers. Believe it or not, old-school conservative methods are short-sighted and often ineffective in driving long-term growth, even though they can boost short-term sales. There’s no point in becoming too comfortable with such short-term wins because the market reach eventually does not grow beyond what it has already covered. Often buyers waive off loyalty to shop around and become a tad bit experimental. And, conservative methods of promoting items fail to consider buyers’ changing habits and preferences; more importantly, losing otherwise potential buyers.
For example, the demand for canned goods, carbonated beverages, and laundry products has slowed down recently, following a surge in preference for healthier versions. Traditional promotion based on historical data clearly omits the short-term change in customer preferences, proving how ineffective those approaches were.
Thankfully, recent technological advancements can help CPGs increase the promotion effectiveness of their marketing initiatives. Advanced analytics have improved to the point that they can provide CPGs with real-time granular information about each and every change in consumer behavior. Any minor change in the buying behavior of a single customer is valuable insight for the brands, empowering them to customize their marketing efforts to increase promotion effectiveness manifold. With the help of Big Data and analytics, CPGs can fully optimize trade promotions and improve their effectiveness.
The four metrics to measure promotion effectiveness
Trade promotion effectiveness analysis is quite impossible without the correct metrics to measure. Here are four metrics to consider when analyzing trade promotion effectiveness: –
Consumer units: A simple logic for all CPGs – if you wish to make your services customer-centric, put yourself in their shoes and measure exactly what customers buy. So, start by converting consumer units into pounds and measuring.
Revenue: Here, revenue doesn’t typically mean total net sales value. Instead, it is the shipment value of the consumer units sold at retail. It evaluates incremental sales following promotion against based sales.
Incremental factor: Incremental factor simply means total incremental revenue following promotions divided by the total revenue generated. This factor can help companies understand how much percentage of the business they will stand to lose once the promotional campaigns stop running eventually.
Spend ratio: This is measured incremental value divided by total spend for a single event or an aggregated period like a quarter or a year.
How does trade promotion effectiveness analysis work?
In order for businesses to leverage the potential of advanced analytics for measuring trade promotion effectiveness, here are five mandatory steps to follow: –
Determine the value source
While measuring the success and effectiveness of trade promotions of a single product or group of stores, it’s a fact that most companies fail to consider sales cannibalization and panic buying or consumer stockpiling. Both of these can destroy value when promotion impact is measured on the primary lift and ROI assessment. And their effects on specific groups of shoppers can be astronomical. Hence, it is essential to focus on the value source for measuring promotions and guide their initiatives accordingly.
Create data supporting the ecosystem
In order for businesses to leverage AI modeling techniques to deliver predictive capabilities while measuring promotion effectiveness, they need to have a cloud-based central repository of data. And promotional use cases require a certain shared percentage of both internal and external datasets, harmonized for strategy planning and measuring the actual effectiveness of campaigns.
Use data analytics for insights
Armed with all the relevant data and a corresponding analytics platform to generate insights, the CPGs can easily segment shoppers based on the impact of trade promotions on each segment’s buying behaviors and preferences. Such actionable insights help design future trade promotions hyper-personalized for each segment of buyers to increase promotion effectiveness.
Translate insights into actions
Following insights into each segment of buyers, CPGs can not only design specific promotions for a particular segment but also track the impact of promotions on pilot buyer segments. Once the effect is validated, the promotions are rolled out to a broader customer base in the next promotion planning cycle.
Drive execution and measure performance
Driving execution at scale and capturing the total value of promotion effectiveness at the end of the cycle are probably the most challenging endeavors. However, CPGs can easily handle these complexities in place of specific guidelines for promotion calendars, spelling management of metrics, compliance, measuring effectiveness, insights generations, and future promotion guidelines.
Obviously, in the absence of the right talents, advanced analytical tools, and technical infrastructure, many of the earlier factors will remain unrealized. And CPGs will continue with their struggle to come up with optimized and effective promotions. Hence, resorting to AI and ML-enabled tools is the best bet for CPGs to measure promotion effectiveness correctly and get their trade promotions right every time.