When it comes to a CPG company’s evaluation of trade spend effectiveness there are few KPIs that are used as a barometer of success more than Return on Investment (ROI). However, getting to an accurate ROI during post-event analysis or setting ROI targets as part of the sales planning process has proven elusive for many organizations.
Nonetheless, in the justifiable quest to limit costs while maximizing outcomes, consumer goods leaders continue to set ROI benchmarks for promotional investment leaving finance, sales and marketing teams searching for reliable metrics and capabilities to reach corporate expectations.
Resolving ROI Resentment
Do you trust your baselines?
Before companies can have serious conversations about ROI, they first must decide whether they believe that their baselines are accurate since all incremental lift, revenue and profit – and therefore ROI – are measured from this baseline.
Syndicated data providers offer a consumption baseline to depict what a loyal customer would buy. While a starting point, this baseline definition often overstates base volume and leads to many companies calculating inaccurate ROIs on their promotions during post-event analysis.
A true baseline indicates the volume sold in the absence of a promotion. With this, consumption, spending and shipment data are harmonized for an accurate depiction of base volume, as should be customary as part of a comprehensive Trade Promotion Optimization Solution (TPO). This accurate baseline can then be used to calculate incremental lift, profit, revenue and ROI. Furthermore, the accuracy of the historical analysis builds the foundation for the predictive lift curves used during planning and optimization.
Reconciling ROI Ramifications
For companies to see the greatest benefit of setting ROI benchmarks, the ability to predictively calculate ROI as part of future event and customer planning must be standard practice.
If we agree that
ROI = (Incremental Profit/ Total Promotional Spend)
Then it stands to reason that effective promotions should have an ROI greater than 0. However, many are surprised when conducting post-event analysis for the first time that several promotions have negative ROIs.
Having a negative ROI does not necessarily equate to a bad promotion. It is important to recognize that even with a negative ROI the company may still have been profitable. Instead, the negative ROI indicates that the promotion did not result in incremental profit greater to what would have been seen if the product was not on promotion. As most finance, trade and sales people know, promotions are often used to lure in new buyers or push incremental volume.
Of course, setting the precedent that negative ROI promotions are the norm is equally as dangerous to not calculating ROI at all.
Instead companies need to balance ROI with the objective that they are trying to achieve. What is the promotion’s goal? Will the promotion be accepted by your retail partner? Considering these questions in addition to ROI brings together the experience of the sales team with the financial guardrails of the organization to optimize outcomes.
In this way, organizations begin to have conversations about how to strategically improve the ROI of their trade investment in ways that align with their other business objectives. Unlike companies who take a wait and see approach to their trade planning, using the predictive what-if and constraint-based modeling capabilities of a TPO to explore, compare and optimize the promotions during planning facilitates important dialogue between sales, finance and trade marketing about creating new opportunity instead of why we keep missing the mark.
Redirecting ROI Realities
Optimizing promotional ROI was the number one priority identified as part of an email survey we conducted of finance, trade marketing and sales CPG professionals. This, in comparison to improving post-event analytics, better collaboration with retailers, and cleansing of data. To make this priority an impactful part of your strategy means understanding how improved ROI translates into better business outcomes and having the capability to accurately measure and predict what factors most help achieve the prioritized outcome.CPG companies are, and should be, demanding more than just sunken cost from their trade investment. As such, it falls on the shoulders of the individual finance, sales and trade marketing leaders to encourage their organizations to prioritize the tools to accurately manage ROI as both a metric of past success and as a shifting variable instrumental in optimizing and protecting this investment in the future.