One of the most difficult conversations a salesperson can have is with retail customers about trade promotion. The reason: there's big money at stake. Trade promotion is often the single biggest line item in a manufacturer's P&L. And since many retailers have razor-thin profit margins, every penny counts.
What is trade promotion? The next time you go to the grocery store, take a quick count of how many "deals" you see, from the "buy one, get one free" offers to all the brands showcased at the end cap of the aisle. While these specials are good for the shopper, the problem is that for manufacturers and retailers, a trade promotion can be a profit treasure trove or a profit landmine. In some cases, the ROI can be 800% or more in highly elastic and expandable categories like cereals. In other categories like frozen vegetables, success might be defined as losing less money — say, going from a negative 90% ROI to a negative 60% ROI. Either way, getting trade promotion right is the key to selling more...and maximizing profit.
A further challenge with trade promotion is that many manufacturers make different bets on multiple SKUs at different stores. This makes it very difficult to figure out the ROI on any single promotion. And with so many different bets, identifying and trying to remove a bad bet is like trying to defuse a bomb with many wires: Everyone is afraid if you cut the wrong one, the entire thing blows up. And that can make for a heated negotiation.
Unfortunately, a major Nielsen study last year showed that 55% of trade promotion dollars fail to grow the brand and the category for both the manufacturer and the retailer. Both parties want to get out of that box, but the question is: How?
Avoiding the pitfalls in trade promotion negotiations requires bringing the right tools. First, you need microscopes, not telescopes, to build your fact-base. Often times the data is too high-level and the analysis needs to be much more detailed — often at the SKU level, by store, and with weekly data.
Second, you need to measure the end outcomes and not symptoms. Often companies don't fully account for costs — they're too focused on volume, and ignore the impact on margins. So you can end up in the proverbial situation where the operation was a success, but the patient died.
Finally, you need hand guns and not cannons. Often companies will house the data centrally in a massive software system with central analysts. The fact-base is far more effective in Microsoft Excel-based laptops that are simple and built for speed. This way the field sales force can use the facts to negotiate real-time wherever they are.
Perhaps the most critical issue is for senior management is to more closely tie trade promotion to their vision for category growth. The default mindset and culture is one of zero-sum, which often manifests as sales reps offering three common complaints to their managers: "The retailer is very demanding," "Competitors are doing crazy things," or "Our brands/products aren't strong enough." Often there is truth to all of these, so it is important to acknowledge it.
Senior management needs to change the culture of trade promotion to one of category growth. The ideal for trade promotion is to have a clear vision for bringing in new, incremental growth to the category. This could be an incremental consumer segment (for example, bringing more women into beer with more citrusy wheat beers), or an incremental usage occasion/need state (such as promoting hot dogs as an afterschool snack in addition to BBQ) or an incremental palate (cross-promoting gourmet chicken sausage to bratwurst users).
Changing the culture is hard. What companies often find is that trade promotion opportunities have broader strategy, branding/marketing and innovation issues at the core. Companies also find that to really change the culture to category growth, performance metrics and incentive compensation must also be realigned. But it ultimately comes back to how simple and compelling a vision for category growth senior management can paint. When this is done right, trade promotion optimization frees up much-needed resources. It can be a wonderful way to sell more with the resources you have, which ultimately helps you grow the resources you'll have to spend in the future.
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