Simplifying TPM Complexity
According to findings in the Aberdeen Group's recent Trade Promotion Management (TPM) study, the hyper-competitive retail environment is driving a high number of promotions leading to greater complexity in the promotions mix and a lack of trade ROI. The findings point out there are unique requirements involved with TPM process, analytics, reporting and planning applications.
The top pressure affecting trade promotion improvement, according to the study, is the hyper-competitive retail environment. This is driving the high number of promotions and leading to greater complexity of the marketing and promotions mix. It also leads to a faltering trade ROI due to inadequate planning and execution.
The main reason for the explosion of promotion complexity and lack of trade ROI is due to poor promotion visibility, and the resulting lack of ability to capture marketing and promotion expenses at the retail store or channel-level.
Thirty-three percent of best-in-class companies utilize performance management criteria for capturing effectiveness in trade promotion execution versus 19 percent of all others.
From a performance perspective, best-in-class companies are more likely to have the visibility of trade promotion program progress and results. This area has the maximum impact on trade promotion effectiveness due to the standard practice of the sales team leveraging trade funds for increasing sales volumes as opposed to holistically identifying the impact of spending the trade funds. Best-in-class companies have an environment where the entire team has visibility into the trade promotion planning, execution, and analysis process.
Create Visibility
The top strategic action identified for improving the TPM process is to create visibility for trade promotion planning data: distribution, consumption and location.
The key process that identifies best-in-class companies is the ability to achieve collaborative planning (44 percent) for retail and CPG stakeholders relative to execution and effectiveness analysis. Just 20 percent of all other companies have this ability.
Another important process is the ability to manage TPM funds at the SKU and store-level (35 percent of best-in-class companies) versus 18 percent for all other companies. Best-in-class companies have reformed their assumption-based traditional approach to TPM by infusing more precision in planned promotions through real-time data and targeted segmentation. These companies have improved their forecast accuracy and better controlled trade funds by centralizing the enterprise usage of product, customer and location data.
Best-in-class companies are 1.8 times more likely to have the ability to reduce the time from demand-sensing to trade promotion decisions.
Recommended Actions
The following are key recommendations for companies embarking on their TPM transformation initiatives:
€¢ Create standardized metrics to measure trade promotion effectiveness. In the case of standardized metrics, 90 percent of laggard companies are deficient in creating processes for business data gathering and analysis, selection of the most appropriate metrics, and reporting granular and actionable information. Laggards must use clean data to identify meaningful and actionable sales lift, customer spend, and trade cost-related metrics. It is vital that companies use three levels of metrics: 1. Trade promotion effectiveness metrics, such as lift and cost factors, 2. Trade promotion planning metrics, such as forecast accuracy, and 3. Financial metrics, such as trade deduction as percentage of sales, settlement ratio, and trade spend efficiency.
€¢ Capture trade promotion cost-related data (activity based costing). Study results show that 80 percent of laggards are not capturing trade promotion cost-related data from trade activity used for cost, deduction and settlement analysis. A major reason for this shortcoming is the delay in transferring data between retailers and CPG firms. Other reasons are accrual-based cost systems and inadequate BI infrastructure to capture this critical information. As one of the first steps towards retailer-manufacturer collaboration, companies need to coordinate with IT, purchasing and finance teams to create open access cost data frameworks that enable seamless and timely cost data capture.
€¢ Develop real-time trade promotion information access. Eighty-three percent (83%) of
average companies lack real-time data processing and query capabilities for accessing trade promotion information used for market responsive trade promotion processes including promotion planning, execution and retail effectiveness analysis. Companies can achieve real-time data access for their organizations by integrating clean data from all sources for rapid querying, automatic data caching, and developing of open access data framework.
€¢ Manage trade promotion funds at the SKU or unit level. Survey data shows that 70 percent of average companies are adopting broad, repetitive and ad-hoc trade promotion approaches that are not based on accurate SKU or item-level sales forecasts and shopper insights on product and promotion preferences. One of the techniques to establish item-level planning and rapid execution capabilities is by mapping on-hand inventory, planogram (shelf-level product placement plans), retail promotion event calendar, and shopping behavior data with core trade promotion processes, such as volume planning and effectiveness analysis. The end-goal is to gain visibility towards the promotion activity and performance so that rapid changes can be made to maximize trade promotion ROI.
In order to excel in TPM, organizations must realize where they are in the maturity level with respect to their IT capabilities. They must succeed in the previous stage before going to a more advanced stage, for instance companies that do not have a strong transaction backbone should not attempt to deploy predictive analytics solutions. But every effort should be made to move up the ladder to the next step of efficiency and productivity.
Sahir Anand is a retail analyst with the Aberdeen Group. For more information go to www.aberdeengroup.com.
The top pressure affecting trade promotion improvement, according to the study, is the hyper-competitive retail environment. This is driving the high number of promotions and leading to greater complexity of the marketing and promotions mix. It also leads to a faltering trade ROI due to inadequate planning and execution.
The main reason for the explosion of promotion complexity and lack of trade ROI is due to poor promotion visibility, and the resulting lack of ability to capture marketing and promotion expenses at the retail store or channel-level.
Thirty-three percent of best-in-class companies utilize performance management criteria for capturing effectiveness in trade promotion execution versus 19 percent of all others.
From a performance perspective, best-in-class companies are more likely to have the visibility of trade promotion program progress and results. This area has the maximum impact on trade promotion effectiveness due to the standard practice of the sales team leveraging trade funds for increasing sales volumes as opposed to holistically identifying the impact of spending the trade funds. Best-in-class companies have an environment where the entire team has visibility into the trade promotion planning, execution, and analysis process.
Create Visibility
The top strategic action identified for improving the TPM process is to create visibility for trade promotion planning data: distribution, consumption and location.
The key process that identifies best-in-class companies is the ability to achieve collaborative planning (44 percent) for retail and CPG stakeholders relative to execution and effectiveness analysis. Just 20 percent of all other companies have this ability.
Another important process is the ability to manage TPM funds at the SKU and store-level (35 percent of best-in-class companies) versus 18 percent for all other companies. Best-in-class companies have reformed their assumption-based traditional approach to TPM by infusing more precision in planned promotions through real-time data and targeted segmentation. These companies have improved their forecast accuracy and better controlled trade funds by centralizing the enterprise usage of product, customer and location data.
Best-in-class companies are 1.8 times more likely to have the ability to reduce the time from demand-sensing to trade promotion decisions.
Recommended Actions
The following are key recommendations for companies embarking on their TPM transformation initiatives:
€¢ Create standardized metrics to measure trade promotion effectiveness. In the case of standardized metrics, 90 percent of laggard companies are deficient in creating processes for business data gathering and analysis, selection of the most appropriate metrics, and reporting granular and actionable information. Laggards must use clean data to identify meaningful and actionable sales lift, customer spend, and trade cost-related metrics. It is vital that companies use three levels of metrics: 1. Trade promotion effectiveness metrics, such as lift and cost factors, 2. Trade promotion planning metrics, such as forecast accuracy, and 3. Financial metrics, such as trade deduction as percentage of sales, settlement ratio, and trade spend efficiency.
€¢ Capture trade promotion cost-related data (activity based costing). Study results show that 80 percent of laggards are not capturing trade promotion cost-related data from trade activity used for cost, deduction and settlement analysis. A major reason for this shortcoming is the delay in transferring data between retailers and CPG firms. Other reasons are accrual-based cost systems and inadequate BI infrastructure to capture this critical information. As one of the first steps towards retailer-manufacturer collaboration, companies need to coordinate with IT, purchasing and finance teams to create open access cost data frameworks that enable seamless and timely cost data capture.
€¢ Develop real-time trade promotion information access. Eighty-three percent (83%) of
average companies lack real-time data processing and query capabilities for accessing trade promotion information used for market responsive trade promotion processes including promotion planning, execution and retail effectiveness analysis. Companies can achieve real-time data access for their organizations by integrating clean data from all sources for rapid querying, automatic data caching, and developing of open access data framework.
€¢ Manage trade promotion funds at the SKU or unit level. Survey data shows that 70 percent of average companies are adopting broad, repetitive and ad-hoc trade promotion approaches that are not based on accurate SKU or item-level sales forecasts and shopper insights on product and promotion preferences. One of the techniques to establish item-level planning and rapid execution capabilities is by mapping on-hand inventory, planogram (shelf-level product placement plans), retail promotion event calendar, and shopping behavior data with core trade promotion processes, such as volume planning and effectiveness analysis. The end-goal is to gain visibility towards the promotion activity and performance so that rapid changes can be made to maximize trade promotion ROI.
In order to excel in TPM, organizations must realize where they are in the maturity level with respect to their IT capabilities. They must succeed in the previous stage before going to a more advanced stage, for instance companies that do not have a strong transaction backbone should not attempt to deploy predictive analytics solutions. But every effort should be made to move up the ladder to the next step of efficiency and productivity.
Sahir Anand is a retail analyst with the Aberdeen Group. For more information go to www.aberdeengroup.com.