Return on investment (ROI) is a performance metric used to measure the efficiency of an investment, the higher the ROI, the more favorable the investment is in comparison to its cost. By calculating ROI, a company can evaluate the profitability of their trade spend and make informed decisions on where to allocate their resources, and identify areas of improvement.
Throughout the following article we will go over: common challenges around trade spending, how to calculate ROI and share some strategies of improvement that can maximize CPG companies’ trade spend ROI.
Understanding Trade Spend
In retail, trade spend is the budget manufacturers allocate to influence a consumer’s in-store behavior. Within trade spending, we can find promotional discounts, allowances, marketing efforts, co-op advertising and rebates among other incentives.
Some common challenges CPG companies may face when it comes to trade spend are:
- ROI Calculation: calculating the actual return on investment for trade promotion activities is a challenge as retailers have different data systems and collecting the information can be difficult.
- Competition: the CPG landscape is highly competitive, with hundreds of players looking for consumers’ attention, attracting consumers to the product on the shelf is one of their biggest challenges.
- Trade spend management: tracking all the different incentives; it’s a tough task without the right tools and technology. Gathering promotion results without a data analytics tool can be almost impossible to achieve. For more insights on how you can benefit from using a TPM solution, check out CPGvision.
Calculating Trade Spend ROI
Quantifying the impact of promotional activities can be complex. Here we will walk you through the essential steps to calculate trade spend ROI effectively and gain valuable insights that will lead data-driven decisions and optimize your marketing strategies for success.
Step 1: Gather Data
In order to calculate your trade spend ROI, you will need to gather certain types of data such as:
- Point of Sale (POS) data: this includes product sales, amount of units sold, price and price discount, revenue generated, among others.
- Promotional data: any trade spend activities during the period you are evaluating. This should include type of promotion, duration, spend and channels.
- Cost data: total cost of the trade spend activity. Including the cost of discounting price, running an ad in a retail flyer or in-app, demoing product, etc.
- Market data: external factors that influence sales and ROI and provide context. This could include changes in market trends, economic conditions or competitor activities.
Step 2: Define the Measurement Period
Choosing an appropriate measurement period will have a direct impact on the analysis relevance and accuracy. You should make sure the time frame selected reflects objectives, dynamics, and conditions of the business and industry. Here are some thing you should consider:
- Promotion duration: to make sure the analysis includes the full effects of the promotion, the period being measured should align with the promotional activity duration.
- Seasonality: demand may change according to seasonal factors such as holidays. When considering a period that shows seasonal variations, the comparison and interpretation would be more accurate.
- Historical trends: your own historical sales data can help you identify patterns and trends that will help determine a time frame by considering past performance during similar periods.
- Business objectives: the period of time selected should be aligned with the trade spend objective. A short-term sales objective should suggest a shorter time frame than a long-term customer relationship objective.
- Industry standards: considering industry standards and benchmarks is necessary when selecting a period to measure. This will provide context and help with results analysis and comparison.
Step 3: Calculate Incremental Sales
Incremental sales volume measures the increase in sales during a promotion, by calculating it you will be able to determine the additional revenue a specific promotion has generated.
In order to calculate it correctly you need to identify the baseline, this means what your sales would be without the influence of the promotion. Once you have your baseline you will subtract to it the total sales during the promotional period. This gives you the total incremental sales.
Incremental Sales = Total Sales During Promotional Period − Baseline Sales
Step 4: Determine Incremental Profit
Once you have your incremental sales calculated and its revenue, you will calculate the incremental costs by identifying any additional costs directly related to the promotion. These would typically include: production costs, marketing expenses, additional staffing, etc.
With these two indicators you will then be able to calculate the incremental profit by using the following formula:
Incremental Profit = Incremental Revenue − Incremental Costs
Step 5: Identify the Cost of Investment
The cost of investment refers to all expenses included to acquire, implement and maintain a promotion. These will be: cost of goods, promotional costs, trading terms etc.
To ensure you are not leaving out of the equation any important expenses, you should compile every relevant financial documentation, break down and categorize costs, and consider opportunity costs—what could have been gained from alternative uses of the investment funds. Once you have all these covered, you can calculate the total cost of investment.
Step 6: Calculate ROI
At last, you will calculate your return on investment to evaluate the efficiency and profitability of the promotion.
The formula for calculating ROI is straightforward:
ROI = (Net profit / Cost of investment) X 100%
ROI is calculated as a percentage. This being positive indicates the investment has generated profit, otherwise indicates loss.
Maximizing Trade Spend ROI
In order to maximize your ROI, you should effectively manage your trade spend. Below you will find 5 strategies that seek trade spending improvement and promotion efficiency:
1. Make sure your decisions are based on data
Analyzing your promotions performance should be the foundation of your strategy. This will predict future trends and help you make informed decisions that would lead to accurate promotions and increased ROI.
2. Allocate your budget effectively
Data and insights will help you determine where to effectively allocate your budget between different channels and promotions. If nailed correctly, this strategy will increase sales and ensure long-term brand growth.
3. Be precise when targeting your promotions
Transforming broad outreach into targeted segments will lead to better campaign results as the right message will reach the right audience, making your promotions more relevant and effective.
4. Collaborate with retailers
Aligning your promotional goals with the retailers’ is the best way to succeed when it comes to trade promotion spending. This can not only improve ROI but also consumers’ engagement.
If you are looking for a TPM solution that helps you manage your trade spend, you should choose one that provides both internal KPIs as well as retailer KPIs.
5. Enhance your processes with the help of technology
If you are seeking to improve planning and forecasting, relying on technology will help you understand better market trends and consumer behavior. Artificial intelligence, machine learning and predictive modeling will optimize your efforts and make your spending more efficient.
TPM software solutions like CPGvision will optimize your trade spending and integrate into your existing workflow. Leveraging your technology will leverage your trade promotion investment and brand’s success.
Start your journey
Unlocking the full potential of trade promotion spending is a journey of continuous learning and adaptation. These 5 strategies of improvement will serve as a starting point, but you can find more ways in which you can maximize your trade spend ROI on this blog post by CPGvision.
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