I was fortunate to be invited to conduct a two day seminar in Kuala Lumpur, Malaysia on Trade Marketing In An Economic Downturn. The group of delegates consisted of 32 consumer goods professionals from a variety of CPG companies. We discussed the relationship of the consumer to the Trade Promotion Management (TPM) process. In many Asian countries and even here in the US, the consumer is not considered in the trade promotion planning process. We explored ways to bring the consumer into the equation when planning events, as a means to gain strategic advantage over competition. Many Asian countries do not have the rich panel data that we in the US can boast, but there are still ways to engage the consumer using custom surveys, Consumer Relations Management (CRM) interaction on the brand's own website and other creative means designed to understand the who, what, and where of the consumer's experience with a brand.
Penetration x Purchase Frequency x Buying Rate = Sales Volume
Let's look at a simple equation for sales volume. Consumer Penetration (new consumers through trial) x Purchase Frequency (how often purchased) x Buying Rate (amount purchase/occasion) = Sales Volume. Impact any one of these measures and volume grows or contracts. Trade promotions that cannot be tied to one of these measures are wasted effort. If a category or brand has a very low consumer penetration index does a Temporary Price Reduction (TPR) or an Every Day Low Price (EDLP) strategy really make sense? Could those promotional funds be better leveraged by funding promotional tactics that bring new users into the brand franchise or category segment? When promotional tactics are designed to drive one of these purchase dynamic measures a clear marketing strategy emerges. Let's look at our three sales drivers and how to impact them with trade marketing promotions.
- Feature Support
- In-Ad Coupons
- FSI Coupons
- In-Store Product Demonstrations
- Cross Ruff Couponing
- Feature Support
- Secondary Locations
- CRM interaction with the consumer delivering targeted marketing communication messages, recipes/usage advice, etc.
- Multiples Pricing
- Temporary Price Reduction (TPR)
- Feature larger sizes
- CRM interaction with the consumer, delivering targeted marketing communication messages, recipes/usage advice, etc.
When trade marketers fit their promotional arsenal into the purchase dynamics equation, holes in their promotional strategy become clear and the right tactics can be developed to drive the right purchase dynamic metric. Low penetrated brands can develop promotional strategies that attract new users. Strategies aimed at increasing purchase occasions will drive purchase frequency, and specific measures aimed at giving the consumer incentives to buy more products for pantry load or other usage opportunities can drive buying rate.
In Malaysia, we dug into the development and use of a lift matrix to improve promotional planning. A lift matrix helps determine the optimal combination of tactic and price discount. We developed simple baseline calculations using data from retailer Point of Sale (POS), shipment, and syndicated data, when a pre-calculated baseline was not available. Here is an example of how to develop a baseline and lift matrix:
- Use at least 52 weeks of POS, shipment, or syndicated data at the UPC level, and take away the weeks with known promotional tactics.
Use the remaining weeks of volume develop a forecast of what sales would have been in the absence of those promotional tactics. You can see our baseline volume is around 98 in this example.
Once a baseline has been established, you can determine the lift over baseline for each promotional tactic, and express that lift as an index. The formula for a Lift Index is ((Total Sales-Base Sales)/Base Sales)*100. In week 11 (see below), Total Sales = 200, Base Volume = 98, so ((200-98)/98) *100 = 104 lift above base for that display.
- Lifts can be determined for each combination of tactic (Feature, Display, Feature with Display, and Temporary Price Reduction (TPR) and price discount levels, and the resulting lifts can then be used for future promotional planning exercises.
The benefits of a lift matrix are many, and here are just a few:
- You can determine which tactics drive the most volume lifts. Does one week of feature support drive more sales volume than six weeks of TPR support?
- You can determine which price discount levels drive the optimal volume lifts. For example, does a TPR at 15% discount drive the same volume as a 20% price discount? If the 15% price discount drives nearly the same volume as a 20% price discount then 5 point of discount savings can be saved and used to leverage another promotional event.
- You can calculate the promotional cost per incremental unit using a baseline and lift matrix.
- A credible lift matrix employed in a Trade Promotion Management tool will always deliver a fact based forecast of promotional lift and ultimately a more reliable sales forecast.
In Malaysia, it was interesting to learn that the companies represented at the conference did not use TPR as readily as we do in the States. If used at all, the deal levels were much lower. While we deal in levels of B1G1F, their promotional discounts were in the 15% range, and there was much less reliance on EDLP pricing action. They were more likely to spend for displays and in-store activities.
The above article is meant to give the reader a high level understanding of how a baseline calculation is developed and to help the reader understand the value of a lift matrix to forecast volume lift for any combination of tactic and price discount level. A much more sophisticated discussion of the development of predictive baselines such as cross-sectional baseline to account for seasonality, will be handled in a future Insights newsletter. If your company is seeking to reengineer your trade promotion process and you want to put the consumer at the center of your trade promotion strategy, call us at Insight, Information & Consulting Services, Inc. Perhaps you are a small to mid-size FMCG company and you don't want to fork out a million dollars to install a trade promotion planning and tracking tool. Call us at Insight, Information & Consulting Services, Inc. We can be reached at 770-425-4243 or visit our website at www.insightinformation.net . We look forward to speaking with you about your trade promotional needs.