What is Trade Spend?
Trade spending is no more confusing than the expenses associated with trade promotional campaigns. This could mean the paychecks for field representatives who run product demonstrations; how much potential revenue is shaved when running TPRs (temporary price reductions); or advertising expenses printing and distributing coupons through various channels.
Companies rarely track which promotion leads to which boost in revenue with enough depth to make smart decisions. As several trade promotion campaigns often run simultaneously, it’s difficult to successfully identify which campaign leads to which spike in revenue.
Now it’s time to break down the three, simple hacks to stop ineffective trade spending.
1. Understand Your Product’s Relationship With the Greater Retail World
You cannot give free samples of silverware. Very few people could stomach a practical demonstration for Charmin. Not all products benefit from the same trade promotions. We recently took a deep dive into trade promotion fundamentals, but here’s a general breakdown of the four types.
Visible Price Markdowns: Sales, coupons, rebates, Buy One Get One (BOGO deals)
Off-Shelf Branding: Displays, Posters, Floor Stickers, Premiums
Seller Contests: Incentivized prices for exemplary sales
On-Site Events: Demonstrations and Samples
The most universally viable trade promotions stem from that first category. But as we will see, even price markdowns have product-based limitations.
Run Sales Smarter
Sales are one of the most common trade promotions you can run. Even something seemingly as straightforward as a 40% off sticker can be further split into subsections, each with distinct pros and cons that must be weighted.
emporary Price Reductions — TPRs
TPRs are standard sales, general markdowns advertised to buyers
Colorful tags and invitations for mental math slow customers’ movements and divert attention to your product.
Infrequently offered, a strong call to action for buyers to make purchases now
Flips hesitant buyers to you over competition
Retailers inconsistently order products as they’re encouraged to overstock during sales periods and comparatively understock when products return to full price. Makes warehousing and manufacturing difficult to predict
Buyer retention is low as brands experience a drop off in purchase when the sale period expires
Everyday Low Purchase Price — EDLPP
Consistently undercutting purchase price below competition
Buyer retention is maintained, unlike TPRs that experience fluctuation
Consistency means consistent stocking in retailer
Undercut competition leads to long-term success in the market
Slow burn, brands only see returns in the long-term
Consistent drop in revenue per SKU
Difficult to maintain without high existing capital
What Price Adjustment Campaign Is Best for My Product?
Merchandisers typically offer products of varying degrees of luxury. Trade spend is less effective on high-end items as those sales tend to be more deliberate. Buyers with the express goal of participating in that product. Oakley sunglasses with a $300 price tag (markdowns or no) are seldom an impulse purchase. This product demographic benefits from external marketing campaigns to draw customers in, not flip potential buyers in the moment. Trade promotions are ineffective in this regard.
Value products see a boost by trade promotions. Customers are more easily swayed by samples and coupons if the brand isn’t a major expense. Trade promotions are inherently designed to surprise customers. Break into shopping expectations and create on-the-spot need. The barrier to entry in this break-in is far lower when the price is impulse susceptible.
2. Use Better Metrics to Track Effective Trade Spend
Understand the results of trade promotions with smarter data points. Take the guesswork out of marketing trend analysis with these critical metrics.
Incremental Revenue vs Standard Revenue
Comparing trade spend expenses with general revenue is only half the battle. Often, boosted numbers get lost when thrust into the general pool of earned revenue. Calculating incremental revenue–the actual earned cash from specific promotions–is the best way to judge if individual promotions broke even from expenses.
Incremental revenue ignores the standard baseline of historic sales: what would be expected of your product without promotions. It puts different promotion strategies in direct competition, seeing which yields the greatest return.
Say your brand of toothpaste usually generates $40 weekly at a nearby CVS. If it produces $90 of revenue the week you introduce an end-cap display, the incremental revenue is $50. Let’s say we run a coupon campaign that sees a weekly revenus of $60. Our incremental revenue produced by the coupon campaign would only be $20.
Traditional ROI vs Marginal ROI
Standard ROI calculations are strong ways to determine if campaigns make fiscal sense. Determine all trade spending expenses and divide that from the incremental revenue explained above. This specifically isolates your campaign. For obvious reasons, merchandisers should execute campaigns with high ROI yields. However, this doesn’t dictate where future investments should lie.
Let’s look at our two toothpaste promotional campaigns. We decided our incremental revenue for the end-cap was more than the revenue produced by our coupon campaign. If we paid CVS $120 a week to maintain our end-cap display, 90/120 give us an ROI of 75%. We only see 75% of every dollar spent returned to us, not great. If our coupon campaign cost a grand total of $30 a week to maintain, 60/30 gives us an ROI of 200%, a substantially better investment than the end-cap.
Marginal ROI shows the efficiency of further investment dollars — each dollar added.
Convert the decimal to a percent and we see a marginal mROI of 250%. This is very good. The higher this mROI, the more return we see with each additional dollar spent. This campaign is far from peaking and should be invested in further.
Let’s look at a slightly different scenario. Come October, we buy an additional two posters, now totalling five. Our marketing expense reaches $200. We learn October’s revenue is $340. Let’s set up another equation the same way.
We’re still seeing a decent return for October, but our mROI is notably less. For each poster we’re adding, the efficiency of our investing dollars is decreasing. When this number falls lower than 1 (100% mROI), our standard ROI will start dropping.
Marginal return on investment reveals the future opportunities of increasing investments.
Blend the Two for Good Promotion Strategy
Neither calculation completely overrides the other. They simply dictate individual campaign approach. Avenues with exceptionally high ROI typically show a low marginal ROI. That means you’re already getting the most you reasonably can from this promotion. This is completely fine and usually indicates your promotion was a success.
Things with high marginal ROI are untapped. These campaigns are far from yielding the highest return possible. This signals where future trade spending should occur. Maintain the campaigns that already have a high ROI: spend the same amount, keep up that effort. Push future investments and funnel more money into high marginal ROI opportunities. With these two approaches working in tangent, you are bound to reinvigorate your trade promotional strategy.
Ideally, push each campaign until your mROI equals 1. That’s the largest return per investment dollar. In practice, companies rarely have the budget to chase that perfect balance point for each of their campaigns, leaving their money best developing alternative opportunities. Determining which mROI is sufficient per campaign falls more along personal preference and situational demands.
3. Use Data Analytics to Sell Retailers on Adjusted Strategies
Even if you don’t benefit from every trade promotion campaign, retailers certainly don’t mind the extra spend.
Blowing your marketing budget on an ineffective campaign (something with a dismally low mROI) won’t lower your sales, but will absolutely tank your profit. As sales won’t lower, retailers won’t experience that hit. On the contrary, they reap the benefits of your excess trade spending, a position they likely won’t give up. It takes a hard sell to convince retailers to abandon ineffective promotions.
Negotiating a Shift in Strategy Often Relies on Strong Data Pools
Compile a strong, data-backed narrative fueled by these last two hacks. Understand how your product responds to promotions. Use past successes to forecast future wins. Some products require a shift in narrative, changing buyers’ perspective on your goods. Lean towards posters and demonstrations. If you’re fighting to distinguish yourself in a tight market, price reductions in some form give you the competitive edge. Strong promotional strategies resonate with retailers.
Audit everything. How’s the SKU data during promotions? POS data is everything in this field. Filter your data into digestible metrics. Show stores that the potential growth is largely untapped in mROI stats. Demonstrate how particular promotions lead to spikes in incremental revenue. Retailers will listen.
Smarter trade spending stems from smarter data collection. Are you charting the right information in the right ways? Align your campaigns with these three steps and you’ll be sure to reinvigorate trade spending and reap the rewards of successful product promotions.