Are Your Trade Promotions Hitting the Mark?

Economic challenges have left CPG companies clamoring for consumers' attention – and paying more to do so. Since 1980, the average percent of revenue devoted to trade spending has gone from 5 percent to 18 percent, reports Durham, N.C.-based Clarkston Consulting. By 2020, it is expected to hit 30 percent. Total annual spending is about $200 billion, according to the Bardonia, N.Y.-based Promotion Optimization Institute (POI).

Many CPG companies and their retail partners have turned to trade promotion optimization (TPO) to maximize return on these investments. The Promotion Optimization Institute defines TPO as the process of integrating goals and predictive analytics, while keeping in mind the limited time and money available, to continuously improve trade promotion strategies and results. This includes determining which type of promotions yield the highest return on investment and how they can be used together most effectively. According to the March Lempert Report, 44 percent of CPG companies were using TPO in 2010; by 2012, the number almost doubled to 87 percent.

"The recession brought TPO to a head," said POI CEO Michael Kantor. "TPO is critical given the spending and number of promotions suppliers run. Just as somebody would invest in a retirement portfolio and look for positive indicators, CPGs want to better use resources to predict, measure, analyze and continuously improve results. Ultimately, they want to better – and more profitably – serve shoppers."

Complicating the matter is that, with the advent of mobile and Internet marketing, more promotional vehicles and combinations are available than ever. "Beyond price promotions, it's a more packaged approach," said Bill Schamp, director of consumer products at Clarkston. "But there [are] so many touch points to choose from to hit the consumer during path to purchase. If you're looking at social media, search engine and tying in a contest, game or package promotion plus in-store sampling, it's difficult to determine what did what. Marketers' challenge is to make sure they have the right combination of things happening simultaneously and matching the cost to effect of combining them."

TPO'S Origins

TPO's results can be significant. According to Accenture, more than 60 percent of TPO users surveyed have increased profitability. Hormel Food Corp., for one, saw its 60-day trade promotion accuracy go from 18 percent to more than 50 percent, according to Logistics Viewpoints. Out of 30 promotions, 23 have been successful.

TPO, which was first used 25 years ago, grew out of category management. The latter involves retailers and suppliers working together to offer the best assortments and brands in a given category. TPO took this to the next level.

"Suppliers and retailers realized they couldn't go it alone," said Kantor. "They saw that each had different insights and data. Combined, they produced greater results for all stakeholders. Now, instead of taking data and tasks and throwing them over a wall, people work together."

TPO looks at the entire cycle of corporate planning, added Schamp. "You get the level of granularity needed to build a proper optimization model. It's a checklist of whether you both have what you need."

TPO factors in constraints like private brand availability and performance, timing, price elasticity and cost of goods, said Kantor. Forecasting accuracy is often a more immediate benefit since companies can predict more accurately (and upfront) what should be produced given demand. This reduces learning time, and by sharing more information, retailers and suppliers can determine appropriate product volumes "from production to shelf."

Benefits of Trade Promotion Optimization
Source: 2011 POI and Accenture "Charting Your Course to TPO" Survey
Source: 2011 POI and Accenture "Charting Your Course to TPO" Survey

Next, Kantor suggests launching sample programs or pilots aimed at achieving certain outcomes. "Pilots can be used whether the goal is to grow basket volume, get new customers or drive category growth. They can range from predictive analytics and 'what if' simulations derived from shared insights to targeting specific offers to shoppers based on advanced analytics."

Companies should implement what Kantor called "guardrails" to establish parameters for tracking and measuring results. "If something goes outside the guardrails, they must be in agreement up front to course-correct and ensure they get back on track. It's okay to miss the mark, but having the means to course-correct is at the core of optimization. By tracking, measuring and improving metrics, they can increase revenue, return and/or profitability."

Human Elements of TPO

Nontechnical elements of TPO are just as important as technical ones, particularly corporate culture and any changes to business processes, roles and responsibilities, training and organizational structure. Success necessitates that everybody understand TPO's benefits, including the corner office. "Corporate culture can be one of the most underestimated, forgotten pieces of the puzzle," said Kantor. "This is a new way of doing business. It's not a tweak or adjustment; it's utilizing new data and new sets of facts to drive continuous results."

Retailers and suppliers need clear, complementary goals. "Goals can intersect and frequently do," said Chris Donnelly, global managing director, retail practice, Accenture. "But they're not always perfectly aligned. There's confusion when both want something different and don't realize it. [Retailers] need to align with the supplier so the factory can meet demand. With everybody on the same page, there [are] benefits."

Companies must ensure they have the right data. But retailers can be inundated with data that's misaligned. "Many of their systems aren't talking to each other – they have islands or silos of data," said Donnelly. "It's a big effort. And once you get it together, you should think thoughtfully how to use it."

They must also be on the lookout for areas of "data failure." These need to be monitored manually. Donnelly pointed to a store in an affluent, non-Hispanic neighborhood that was being patronized by Latino commuters from a nearby bus stop. "It didn't come up in demographic data. You can't always rely on technology."

Once elements are in place, it takes at least two years for a TPO initiative to deliver a 1 percent to 3 percent ROI, said Kantor. But results are ongoing. "There are improvements and advantages along the journey. The early wins include eliminating wasteful spending and improving retail execution."


Maverik, a 244-location convenience store chain, is leaving no stone unturned with its new Black debit card. Launched in February, the card not only processes payments and awards loyalty points, it also consolidates and tracks all shopper initiatives. And it makes consumers sit up and pay attention by matching competitors' fuel prices and providing a 6-cent per gallon discount.

Customers also can use the Black debit card to enter vendor sweepstakes, take part in a buy-10-get-the-11th-free program and participate in discount programs aimed at growing select shopper groups in the 10 Midwestern states where Maverik operates. Eventually, Maverik wants to tie the rewards part of the Black card to its Isis mobile wallet, which it plans to launch in May.

Putting all incentives under one card lets Salt Lake City-based Maverik view customer behavior across categories. Vendors, in turn, can increase brand loyalty and maximize promotional investments by pinpointing and tracking promotions.

"Past loyalty programs focused mainly on gas," said Aaron Simpson, customer segment director. "The Black card gets people into stores by giving them a reason to drive an extra half mile. For vendors, it drives brand loyalty and is a good return on their investment. CPGs are looking for payback and to optimize dollars. The better the returns, the more they'll come back, which is good for us."

In July, for example, shoppers who buy Coke will be automatically entered in the supplier's sweepstakes via the Black card – along with any other vendors' contests that may be running when they buy their product. In the past, vendors sponsored individual text-to-win programs that were not tied to a loyalty card. In July, Coke shoppers can also use the Black card to join Maverik's buy-10-get-the-11th-free Punch It! program, said Simpson. In the past, Punch It! used cardboard tally sheets.

For Maverik and suppliers, having common goals is key to the Black card program. "Early on, we had everybody aligned with objectives and communication to make sure it was right and not just good for Maverik," said Simpson. "This was critical. Without a culture where people worked together, this wouldn't work. We had to put our objectives aside to see how to make it bigger for everyone."

Other promotions target certain demographics. In April, Maverik linked the Black card to Maverik Underground, an existing program aimed at growing its mom and young adult shoppers. During certain periods, various items are buy-one-get-one-free.

This summer, Maverik will add Smart Couponing. The sampling program analyzes purchase data from the past 90 days. Shoppers receive coupons redeemable for free samples of something they have never bought. Coupons must be redeemed within 24 hours. If the customer does not use the coupon immediately, Maverik makes two more attempts to attract them. After three rejections, it automatically moves the person to another category.

The former chief editor of several publications, Debby Garbato is an independent business journalist and research report analyst who has covered retail for 25 years. She can be reached at [email protected].