Key Takeaways
- Trade spending can support manufacturer-retailer relationships, but poorly planned promotions can quickly erode margins.
- Effective trade spend optimisation requires understanding which promotions actually drive profitable volume.
- Testing, performance-based incentives, streamlined promotions, and selective discounting can improve trade spend effectiveness.
- Strong alignment between manufacturers and retailers can create better commercial outcomes for both parties.
- SKU-level profitability and customer insights help CPG businesses make smarter trade spending and pricing decisions.
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When it comes to consumer packaged goods (CPG), the manufacturer-retailer relationship is not always black and white. Sometimes, the relationship can be as smooth as a calm sea. But when it comes to the topic of trade spending, it can be quite stormy. Trade spend is money manufacturers give to retailers to sell and promote their products on their behalf. This includes discounts/coupons, advertising, tokens, and layout/positioning in stores and on shelves.
As you can imagine, trade spending negotiations are not simple. Manufacturers want to know they are getting something for their money. They will spend a great deal of time covering areas such as COD payment terms, annual fees, slotting fees, free items on the launch, return fees, reverse logistics fees, new stores fee, introductory allowances, volume pricing, transaction costs, promotions to end-consumers (BOGO/TPR), tagging of the retailer in external marketing (TV, radio, print ads), and ads in retailer circulars and sampling.
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So, how does trade spending work in consumer packaged goods?
Trade spending is a common practice within CPG (consumer packaged goods) and retail companies. Basically, trade spending is the amount that a company spends to improve demand for its products, including preferential shelf display locations (slotting), coupons, and co-advertising, to name a few.
While this is a normal part of doing business for many CPG and retail companies, the accounting and financial reporting for trade spending varies depending on the type of spending.
Trade spending can represent a significant cost for CPG manufacturers, with industry estimates varying by category, market and company. Trade promotions can give retailers room to offer discounts and promotional activities, but excessive or poorly targeted spending can reduce manufacturer and retailer profitability. Ultimately, overusing promotional discounts can erode a brand’s premium price to the point that consumers are no longer willing to pay. This is because overusing promotional discounts can warp consumers’ price perception. As a result, they may dismiss the product, believing it has diminished in value.
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How to improve consumer packaged goods trade spend
Consumer packaged goods trade spend can support retailer relationships and product demand, but it can also reduce profitability when promotions are poorly planned or overused. Manufacturers can use four approaches to make trade spending more effective:
- Test different promotions: Trial promotions across different stores and brands to identify where campaigns perform best, then concentrate investment where results are strongest.
- Use performance-based incentives: Reward retailers for outselling competitors or increasing product sales during a defined period rather than relying only on broad discounts.
- Simplify promotions: Reduce the number of ad hoc promotions and use simpler promotional planning to avoid unnecessary trade spending.
- Eliminate or reduce selected promotions: Test what happens to volume and the P&L when promotions are reduced, particularly for premium brands where customers may value the brand beyond its price.
These approaches can help manufacturers understand which promotions actually contribute to profitable volume rather than treating trade spending as a blanket cost of doing business. The right approach also depends on the product, retailer, market and customer response, which makes careful testing and analysis important.
The effectiveness of trade spending ultimately depends on how well manufacturers understand the relationship between promotions, pricing, profitability and customer behaviour.
Common forms of consumer packaged goods trade spending
The money manufacturers give to retailers to promote their products is often used in the following ways:
- Coupons – the revenue is considered redeemed when the coupon is used following a previous purchase. For example, when a $5.00 item is bought along with a 25% discount coupon, the 25% discount of the $5.00 price, which is $1.25, is included in sales.
- Buy one get one free coupon – when an item is purchased with a buy one get one free coupon, the revenue collected is considered revenue from one purchase. For example, if the item price is $2.00 with a related cost of $1.00, using the buy one get one free coupon, the revenue collected is $2.00 with the cost of goods of $2.00.
- Co-advertising – when a retailer decides to advertise, they commonly invite the CPG company to jointly advertise with them. The retailer pays the full costs of the advertisement and the company reimburses the retailer for a portion of the advertisement. If the company has past dealings with advertising, then it has an additional benefit that is separate from the joint venture with the retailer. The reimbursement of the CPG company is considered a marketing expense, whereas the amount that the retailer receives is the offset of the advertisement expense.
But when a manufacturer gives a budget to a retailer to co-advertise, that is considered a cost on the P&L, i.e., SG&A. The retailer, meanwhile, records it as a gain to the P&L because it sees a reduction in its cost of goods sold.
- Slotting fees – the fee paid by the company to the retailer to have its products put on the shelf. This is also seen as a reduction of revenue by the company and the retailer, as well as a reduction in cost of goods sold.
How to best utilise trade spending
Promotions given to consumers are the largest hole in both manufacturers’ and retailers’ profits. Since retailers want to properly introduce the product to the buyers, they offer giveaways and discounts. But if the external marketing strategy is already pulling in the customers, then maybe the retailers can reduce their trade spending. External marketing includes digital media like social media, while traditional media includes radio and print media.
Some manufacturers increase revenues by cutting overheads and improving product quality. But, these cost changes have to be offset by increases in trade spending. Often, there is minimal improvement after trade spending is accounted for. The only way to minimise trade spending is to optimise the entire system and boost bottom- and top-line growth.
Much of trade spend optimisation is concentrated on “push efforts” such as discounts and promos rather than on “pull efforts” designed to draw the customers into the stores, i.e., things like media advertising.
Spend optimisation
Spend optimisation is organised around push-pull tactics because big conglomerate stores compete daily for smaller shelf space with competing brands and overwhelming advertisement clutter.
The problem with a tactics-led spend optimisation programme, however, is that it eats through profits quickly and encourages consumers to enter ‘pantry loading’ mode whenever there is a discount on products. For example, a radio advertisement announces a big promotion, and consumers then go to the store to stock up on items they want and are prepared to buy. Additionally, executing a discount can be risky. Poor implementation could result in lower profits. This could potentially attract the wrong types of customers: people who will only buy from you if there is a discount.
A tactical trade spending strategy often results in low profit margins for both the manufacturer and retailer. On top of this, available resources run low. The manufacturer is left to manage serious branding problems as consumers believe their products (even premium ones) are low value. This, in turn, impacts the long-term strategy, as the manufacturer is forced to reduce investments in R&D, product enhancements, and marketing.
Four approaches the manufacturer can use to control trade spending and drive profitability:
To avoid profit loss from a tactical pricing and trade spend strategy, manufacturers and distributors should consider the following approaches:
The input approach
Trial different promotions in different stores. Find which promotion is effective in which store and for which brand. The approach here is to find the hot spots where your campaign is successful. That way, you can put more of your brands in that store. Also, trial the use of incentives to encourage retailers to put more of the products on the shelves.
The performance approach
This is when you give rewards to retailers if they can outsell their competitors. A variant of this is the bundled approach. Instead of individual sales, the retailer obtains a reward for selling more of its products in a single period. It is up to the retailer what strategy to use to sell the products quickly.
The far-and-between approach
One way to minimise trade spending is to make fewer and simpler promotions. The advantage of streamlining promotional planning is that you eliminate individual, ad hoc or reactive promotions every time a new product comes out or the market turns.
It is common for manufacturers to use temporary price decreases sporadically throughout the year. Another way to drive revenue could be to section off some products to everyday low prices (EDLP). This works in favour of the manufacturer because it can discourage retailers from buying in bulk in one month and then buying none the next month. With the everyday low price, buyers can no longer juggle which product to buy, and they know what they are getting.
The elimination approach
Another approach to try (though some may think this is radical) is to cut back on the promotions for the product. What really happens to volume? Do consumers still buy your products? What’s the impact on the P&L? This approach is best applied to premium brands, while some lower-value products may already be sold using EDLP. Choose products that customers care about and where brand equity is greater than price. While doing this, spend the money on advertising to increase brand visibility and capture more word-of-mouth recommendations. Market share might decrease, but the gross margin percentage per SKU might significantly increase. You can also recoup market share using EDLP and lower-value brands. But again, think about the promotional elasticity here too as you can gain margin and share with strategic discounting.
Discussion: A mutual benefit for both Manufacturers and Retailers
The relationship between manufacturers and retailers need not be antagonistic. A firm understanding of both parties’ commercial position, margin targets and business strategy can reduce the negative tension between both parties when it comes to trade spend.
Most manufacturers want a trade spending system that offers incentives to retailers for selling their products quickly, efficiently and at more profitable price points. Why? Like retailers, manufacturers ideally want to increase per-unit gross margin and market share.
Manufacturers realise that retailers want to be recognised and paid for the shelf and floor space they provide to manufacturers. Retailers also put a good deal of effort into promoting manufacturers’ products. Offering retailers active performance bonuses for their effort and good thinking will pay off for both parties. Also, providing retailers with pricing and consumer insights that drive bottom-line profitability and top-line revenue is a great way to keep a strong business partnership, one that rewards good retailing behaviour and grows the share of the pie for all.
Optimising Pricing Strategies for Consumer Packaged Goods
Optimising pricing strategies for consumer packaged goods (CPG) is crucial for businesses to maximise profits and stay competitive in the market. By carefully analysing market dynamics and consumer behaviour, companies can implement effective pricing tactics.
Firstly, it’s essential to understand the various pricing strategies available. For example, penetration pricing involves setting low initial prices to quickly gain market share, while skimming pricing sets high prices initially to target early adopters.
Next, conducting thorough market research is vital. By evaluating competitors’ pricing strategies and assessing consumer preferences, businesses can determine the optimal price point for their CPG products.
Moreover, considering the value proposition is key. Companies must align their pricing with the perceived value of their products to ensure they are competitive yet profitable. For instance, premium CPG brands may justify higher prices by emphasising quality or unique features.
Furthermore, dynamic pricing can be employed to respond to fluctuations in demand or market conditions. For example, offering discounts during off-peak seasons or adjusting prices in real-time based on inventory levels.
Additionally, segmentation pricing allows businesses to tailor prices to different consumer segments. By understanding the varying needs and preferences of different customer groups, companies can optimise pricing strategies to maximise revenue.
Ultimately, optimising pricing strategies for consumer packaged goods requires a comprehensive approach that considers market dynamics, consumer behaviour, and the value proposition of the products. By implementing the right pricing tactics, businesses can achieve their revenue goals while satisfying customer demand and staying ahead of the competition in the CPG market.
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Navigating Pricing Challenges in Consumer Packaged Goods Markets
Navigating pricing challenges in consumer packaged goods (CPG) markets requires careful consideration and strategic planning to overcome obstacles and maintain profitability.
Firstly, it’s important to recognise the complexity of CPG markets. With diverse consumer preferences, intense competition, and regulatory constraints, pricing decisions can be challenging.
One significant challenge is managing pricing pressure from retailers. Large retailers often negotiate for lower prices from CPG manufacturers to maintain their profit margins, putting pressure on suppliers to find a balance between profitability and maintaining retailer relationships.
Another challenge arises from the proliferation of private-label brands. These lower-priced alternatives offered by retailers can undercut branded CPG products, leading to price wars and eroding brand loyalty.
Additionally, fluctuating input costs, such as raw materials and transportation, can impact pricing decisions. CPG companies must carefully monitor and adjust prices to mitigate the effects of cost increases while remaining competitive in the market.
Furthermore, navigating international markets presents unique pricing challenges. Currency fluctuations, import/export regulations, and cultural differences can all affect pricing strategies and profitability.
To address these challenges, CPG companies can adopt several strategies. Implementing value-based pricing, where prices are aligned with the perceived value of the product, can help justify higher prices and differentiate products from lower-priced alternatives.
Moreover, investing in innovation and product differentiation can support premium pricing strategies, allowing CPG brands to command higher prices based on unique features or benefits.
In essence, navigating pricing challenges in consumer packaged goods markets requires a proactive approach that considers market dynamics, competitive pressures, and cost considerations. By carefully analysing the landscape and implementing strategic pricing tactics, CPG companies can successfully navigate challenges and maintain profitability in the market.
Implications
- Trade spending is necessary as it is the bridge between the manufacturer and retailer.
- Ultimately, the end receiver of trade spending is the customer.
- Poorly planned trade spending can reduce profits for both parties.
- Varying trade spending strategies, along with carefully planned promotions, can benefit both the manufacturer and the retailer.
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Bottom Line
Successful trade promotion strategies are about specifics. Build your price waterfall right from the consumer and track profitability at the SKU level. Different geographical regions, retail chains, product categories, and brands all can create different opportunities for cutting costs. Also, improving alignment between you and your customer can produce better results for everyone.
To make decent profit margins, companies need to exploit these differences, not wipe them out. Remember:
- Consumer packaged goods trade spending can be beneficial to both parties if the promotion strategy is sound.
- Discounts can be effective even if they reduce profits in the short term, as they may improve profitability in the long run.
- Careful research into different customer segments, such as geographic area, preferred brands and product categories, can increase the manufacturer’s revenues.
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