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How analytics can combat the ‘necessary evil’ of spiralling trade promotion spending

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17th Nov 2014
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From buy-one-get-one-frees to price discounts, trade promotions have always been one of the cornerstones of retail marketing strategy. However with spending on promotions steadily increasing, companies can no longer afford to simply roll campaigns out and hope for the best – they must take a smarter approach if they hope to see ROI.

While promotions have always been expensive, spending is starting to become a serious issue. In the CPG (consumer packaged goods) sector for example, a comprehensive study by world-leading analyst group Gartner, Vendor Panorama for Trade Promotion Management in Consumer Goods, 2014, revealed that approximately 20% of company revenues are spent on trade promotions. Even in developing countries, we have seen spending reach a significant 10% or more.

However, despite the ever-increasing budget, there is still limited visibility in just how effective this spending is. Most companies are now making use of trade promotion management (TPM) to better control and understand their promotions. To transform trade promotions from a ‘necessary evil’ to a strategic growth enabler though, they must take the next stepby analysing the promotions using trade promotion analytics (TPA) and by implementing advanced predictive planning through trade promotion optimisation (TPO).

TPM has now become a standard practice for helping to define promotions, targets and discount levels, and indeed Gartner’s report found that more companies are now leaving error-prone and time-consuming spreadsheets in favour of automated solutions. More companies have started investing in TPA to gain a better understanding of how their campaigns have performed and assess what combinations have worked best.

TPO takes things step further, equipping marketers with the ability to predict the performance of their planned campaigns and allowing them to more confidently invest in promotions in a scientific manner, by removing the guess work. Using advanced analytics, companies can analyse the past performance of promotions and leverage the insights to run multiple simulations for each promotion to find the most effective combination of tactics and discounts across different markets.

Apart from ensuring that a proposed promotion will bring strong ROI, TPA and TPO brings many other operational benefits. The supply chain can be more effectively managed, maintaining the right level of stock to avoid out-of-stock (OOS) instances for products on promotion as well as overstocking of products likely to get cannibalised on account of promotion.

The first step in utilising TPA and TPO is to have TPM successfully implemented and to start gathering the data that matters. The data quality must be up to the mark and it usually needs at least two or three years in order to ensure that the data is reliable and comprehensive enough to undertake advanced analytics initiatives.

Once this has been achieved, TPA can be used to begin assessing the effectiveness and efficiency of previous promotions. A few proof-of-concept projects should be completed to ensure that both the data collection and the analyses are working as intended, and are proving valuable to the business by providing actionable insights. Companies must understand and appreciate that this is a journey and there are no short cuts.

Pitfalls to be wary of

Before launching the advanced analytics initiatives, companies should be aware of the pitfalls in this journey, which otherwise could potentially derail such initiatives in the very early stages and will act as a major deterrent in relaunching the same in future. One of the most common mistakes we see is companies attempting to perform advanced analytics without gathering a complete set of data – both internal as well as external. While investing in TPA andTPO, it is advisable to have sufficient data from as many different areas as possible which are relevant for the analysis. An effective TPM programme and a repository of external data should capture this and crucially, present in a structured, coherent way.

Some of the critical areas (endogenous factors) include media and advertising efforts for the promotion and the brand in general, as well as pricing, distribution (fill rates) and merchandising. A key area that many companies overlook is influences outside of their own efforts (exogenous factors).

In particular, the entire analysis will go haywire if competitor data is not taken into account. A company may launch a very good promotional campaign for example, only to have it undercut by an even more aggressive discount on a competing product. Even if the promotion itself was popular with consumers/customers, the performance data will indicate a total failure if considered in isolation.

Likewise, all relevant external factors should be taken into account. Sales of ice creams and cold drinks will obviously sky rocket during hot weather, regardless of any promotional efforts, so another otherwise mediocre campaign will appear to be outstanding if seasonality is ignored.

It’s crucial to assess how many people in the business will actually be using the TPA and TPO. In a smaller company, where only a few key staff will be involved, a simple software solution will suffice. For a larger company, with a lot of intended users, the solution will need to be integrated across several different business processes and systems.

Launching a full TPA and TPO programme requires a very high level of investment, so the marketing team must be able to prove that it will be worth the cost. Once the company is convinced it has a working TPM system, after another two or three years it will be able to take on TPA and TPO.

In the first instance, companies should work with the firms that can provide advanced analystics as a service. This will reduce the considerable spending commitment for both advanced software and the experienced technical staff needed to run it.

Once the value of the project has been proven, companies can then look into a hybrid model, combining a service provider with a lean in-house team. Finally, larger companies may look to build larger teams in-house, and keep a service provider on hand to act as support in activities such as cross-checking existing models, build more complex models or taking on additional, high-volume projects. The cost of internalising such a capability vis-à-vis the cost of outsourcing the same will lead to an appropriate balance in the size of team structure and the nature of work in such a hybrid model.

With retailers across many sectors continuing to rely on discounts and offers to stand out in an increasingly competitive market, spending on promotions is set to continue. Companies must remove the guesswork from their campaigns if they are to ensure their inflated budgets are put to good use. Those organisations that are able to approach campaigns with the proven scientific approach of TPO and TPA will be able to roll out smart, calculated campaigns that bring in maximum ROI and put them ahead of the crowd.

Sandeep Yadav is gobal practice leader, advanced analytics, business consulting group, at ITC Infotech.

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