In Search Of Better Baselines

Why search for better baselines? Brands promote their products — to deliver incremental sales and bring consumers to the brand's franchise. There is no way to understand the impact of a promotion if there is no reliable understanding of the volume we would've received in the absence of that promotion. Therefore a baseline, which is really nothing more than a forecast of the sales we would've received in the absence of a promotion, provides an estimate of sales we would have expected based on historical sales when no promotions were in effect.

For many years, we have relied on syndicated data services, such as Nielsen and IRI, to help us understand our promotion effectiveness. However, syndicated data suppliers do not collect 100% of scanner sales data from all stores in the channel or do they collect data from all channels. Data suppliers cannot provide data for retailers, channels, and product segments that they do not collect. Now there is a way to develop baselines and lift benchmarks for accounts that are not reported in syndicated data services.

A baseline is a benchmark of your expected sales volume in the absence of any promotions. Baseline sales are sales generated by your product with no in store promotional efforts. Baseline calculations are required to develop a lift matrix of promotional response for each tactic by price discount levels. A lift matrix is a measurement system to determine how much additional or incremental sales volume resulted from specific promotional tactic and price discount combinations. Fusion Point, a data measurement and modeling company, has built a set of models that build "custom" baseline volume estimates from shipment and/or retailer point of sale (POS) data sources.

Another reason that "custom" baseline volume estimates are important, is because syndicated data suppliers' baselines tend to be inadequate for today's promotional evaluation needs. These general baseline models do not handle seasonality, long term on shelf price reductions, or non-measured promotional tactics (Loyalty Cards, In-store TV/Radio) very well. Fusion Point is able to process syndicated, shipment and/or retailer POS data with its new baseline models to include many external variables such as weather, seasonality, etc. to generate a set of reliable baseline and lift matrixes; even for accounts that are not reported by the syndicated data services.

A reliable baseline is crucial to a fact-based approach to Trade Promotion Management (TPM). Without a reliable baseline, there is no way to develop lift matrixes which help account planners to determine the most productive and profitable promotional executions. Most CPG companies rely too heavily on flawed syndicated data suppliers' baselines to power their TPM systems and to perform promotional analyses.

The following chart is an analysis of the anatomy of an in-store trade promotion tactic (such as feature, display, feature with a display, on shelf price reduction):

Anatomy of an In-Store Promotion:

Without a reliable baseline, we don't know how much of our volume was incremental, how much we subsidized, and how much lift each combination of tactics & discounts generated. Look at the 4th week (5/10/2009) in the chart above and you will see that the lift over the baseline (narrow orange bar) is very small versus the week of 5/31/2009 when volume over baseline is nearly doubled the base volume projection.

The amount of promoted volume (red bar) under the baseline is "subsidized" volume (narrow yellow bar). Subsidized volume is the volume you would expect to have without any promotion. The volume generated below the baseline level receives promotion funding; and is a necessary expenditure in any promotion. However, the trick is to generate enough incremental volume to offset the cost of subsidized volume.

"Incremental" volume (narrow orange bar) is the volume sold over the baseline. Incremental volume usually is generated by a promotional tactic such as a print feature, an in-store display, a print feature with an in-store display, or an on-shelf reduced price. We gauge the sales over baseline as a "lift" over baseline. The lift calculation is as follows and is usually expressed as an index:

(Total Units – Base Units)/Base Units.

Lifts can then be combined with the level of price discounts for each tactic to generate promotional lifts thereby creating a lift matrix. A lift matrix might look like the following example:

Example Lift Matrix

In the example above, a feature ad with a 30% price discount below normal pricing generates twice as much lift or incremental volume as a 30% on shelf price reduction only (TPR=temporary price reduction). This information might guide the account manager to try to sell more feature ads than on shelf price reduction events at a discount level of 30%.

This type of analysis cannot be performed without a baseline calculation, and most trade promotion management tools require a lift matrix to forecast promotional sales. Armed with the new Fusion Point baseline model, any CPG manufacturer that can supply retailer POS or internal shipment data can develop a base volume estimate that will fuel a lift matrix which can be an effective trade promotion planning tool.

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