Industry: Consumer Packaged Goods and Durable Goods
Trade Promotion Management (TPM) in Small Companies (Revenue below $30-50 million)
Trade spend or trade promotion is the amount a company pays to increase demand for its products, including—but not limited to—advertisements, coupons, and preferential shelf displays, etc. The initial listing fee, known as slotting, is paid as an outright lump sum or a free product.
The accurate and timely calculation of trade promotion cost is a challenge faced by all consumer-packaged goods companies. The absence of an in-house capability to calculate and record this expense can result in unprofitable sales without management knowledge. Since companies can receive retailer deductions as late as 1-24 months after the date of an actual sale, companies must have visibility around trade promotion offers to the customers, what these sales represent in terms of trade promotion cost.
A small company faces several challenges at the onset of tracking trade promotions.
- Assigning TPM to the right individual: From a hiring perspective, it is difficult to find an employee who understands all aspects of the TPM process. Key components of a comprehensive TPM process cross functional lines between sales and finance. The sales team manages the annual promotions planning and subsequently matches deductions with customer backup and syndicated data. Meanwhile, finance departments oversee the monthly accrual calculation process, cash application to record deductions, and resolution of customer deductions in the enterprise resource planning (ERP) system. Most small companies tend to assign the task of understanding promotion plans and related costs to an existing team member (who works with the sales and finance teams while getting on-the-job training). In this situation, accuracy in managing promotions is often the first casualty.
- Managing TPM either manually via Excel or a third-party system: Although there are many choices available, an adequate TPM system can cost tens of thousands of dollars to implement, with an additional ongoing cost of approximately $40,000 to $50,000 annually. To manage a TPM system, the company also needs to assign a well-trained and knowledgeable resource. For a small company, maintaining a TPM system poses issues in terms of money and well-trained staff. For this reason, many companies with under $30-50 million in revenue manage trade promotions via a manual Excel process. Companies with over $30-50 million in revenue can also manage trade promotions via a manual Excel process by maintaining robust Excel promotion trackers for all key retailers and ensuring that deductions are resolved only after matching with pre-approved promotion plans and retailer’s documentation.
- Ensuring a cross-functional TPM effort: From a sales perspective, all promotion plans presented to retailers need to be laid out upfront and consolidated as a trade promotions budget in the company’s annual operating plan. These plans are then executed carefully. The return on investment (ROI) also needs to be verified. Sales participation in calculating the ROI on these promotions is essential for an effective spend. The finance team uses promotion plans to build monthly accruals and track the over-and under-spend. The finance team aids in maintaining oversight, ensuring the full expense is accounted for in a timely and accurate fashion, and bringing all overspend immediately to the management’s attention.
There are several key components for tracking trade promotions and reconciling deductions.
From a trade promotions point of view, the following is needed: (a) a promotion tracker by key retailers rolled up to the total company. This records promotion plans by month for each key retailer, along with baseline sales, resulting lift, and cost (e.g., fixed fee, scans fee, advertisement fee, etc.). This tracker’s roll-up gives the trade promotion cost for each month, and (b) a slotting tracker that calculates the total projected slotting cost by SKU and retailer. The objective is to ensure all revenue for shipments and corresponding costs relating to these shipments are recorded in the same period, as required by US GAAP.
To reconcile deductions received by the accounting department, the company requires (a) retailer promotion contracts, (b) deduction documentation from the retailer portal, (c) shipment data from the ERP system, and (d) syndicated data for movement and incremental lift on the shelf and average retail price-point movement. The sales team occasionally helps in interpreting this information.
In situations where the product is being distributed via a distributor, there is an added layer of cost known as the distributor administration fee. This is a lump sum cost that the distributor charges for various dollar-value tiers of deductions. This could add up to hundreds of thousands of dollars for a company with a revenue of $30 million annually.
In summary, the absence of trade promotion planning and deductions tracking can expose the company to unpleasant surprises and losses. For example, the sales team may offer promotions that may not be authorized by the management. Also, the retailers may send unauthorized deductions, which, if not challenged promptly (usually within 3 months of receiving such unauthorized deductions, depending on the retailer policy), can result in significant loss to the company. Post-audit deductions charged up to 24 months after the shipment of products are another reason to maintain tracking of trade promotions. The monitoring of logistics-related deductions (e.g., late delivery, shortages, etc.) is also a part of this process.
Contact Expertise Accelerated to help streamline the TPM process to prevent losses due to unauthorized deductions.
Haroon Jafree is the Managing Partner at Expertise Accelerated (www.expertiseaccelerated.com). Haroon started his career in public accounting at Pricewaterhouse Coopers and later worked for over 20 years in the consumer-packaged goods industry, both at mid-management and C-suite levels. He has worked for companies ranging from startups to multibillion-dollar brands.
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