Roadmap to Revenue Growth Management Excellence
Overhauling trade promotion practices is a prerequisite for CPGs looking to drive more meaningful growth across all commercial spending. Here are eight steps that every company should take.
Each year, consumer packaged goods companies funnel enormous sums of money into trade promotion. More than $500 billion is spent around the globe on promotional activities such as temporary price reductions, weekly circular features and in-store display placement. Yet the industry overall still has little to show for its outsized trade spending – typically the second-biggest P&L item behind the cost of goods – in terms of consistent or meaningful revenue growth beyond short-term incremental gains.
Thanks to advances in data analytics and technology, today’s CPG marketers have ample opportunities to change that equation. Machine learning and artificial intelligence are accelerating the power of brands and retailers to leverage real-time shipment data, POS data and external factors such as weather to better understand constantly shifting consumer behavior and adjust their commercial programs accordingly. Such forward-thinking approaches are critical in an environment that offers consumers an unprecedented level of pricing transparency and shopping choices.
But first, marketers must commit to overhauling their traditional trade promotion management. Spending on retailer trade programs represents as much as 25% of a consumer packaged goods company’s revenue and 60% of its marketing budget. Yet many marketers continue to make crucial decisions based on a post-promotion analysis that considers only what was spent versus what was sold during the period – an outdated approach to ROI measurement that fails to address increasingly complex purchase decisions and has little to no connection to the company’s broader commercial spending strategy.
In fact, there’s a far more sophisticated way for CPGs to conduct trade promotion in the context of a holistic approach to commercial spending across all business units: revenue growth management.
“Revenue growth management is a more strategic way to think about driving growth efficiently to the business,” says Tarun Kataria, global director, advanced analytics and machine learning at confectionery giant Mars, Incorporated. “Marketers need to think about their trade promotion spending as an investment to drive overall growth. Historically, it has been used more as a blunt financial instrument to buy back share for individual brands.”
In recent years, companies like Coca-Cola and PepsiCo have succeeded in implementing a two-pronged strategy of diversifying their portfolios while improving financial conditions by adopting best practices in revenue growth management. Yet a similar urgency is not being felt across the CPG landscape. In a fall 2017 survey, for example, only 29% of packaged goods executives identified trade promotion as a “priority area” within the larger category of digital transformation.
But that sentiment may be changing. Over the past year and a half, as the industry has come under even greater financial pressures, companies have been forced to take a more serious look at all their revenue growth practices. When Kraft Heinz was forced to absorb a $14.5 billion write-down of its brands early in 2019, the move “sent shockwaves throughout the industry,” says Catherine Guo, senior client success manager at CPG solution provider UpClear. “It’s obvious that slow-growing consumer goods companies need to invest more strategically and spend more efficiently.”
With more companies waking up to the need, the question now becomes how to get it done. There may be no single formula that will work for every CPG. But there are several steps that every company can take that, when strung together effectively, provide a roadmap to effective revenue growth management.
1. Envision the big picture — then start small
Exactly what form revenue growth management takes will depend on a company’s business model and the markets in which it operates. As with any major organizational change, the process can be slow and painful. “You can’t just go from A to Z. You have to start with basic processes and improvements to get to something universal,” says Carl Granfelt, senior manager of trade planning and promotion management at candy maker Ferrero.
To ease the transition, many practitioners suggest taking a few modest initial steps and then accelerating the path forward. “It is a journey. Start small – for example, with one brand or one product, and then step-by-step roll activities out to the entire portfolio,” advises Kathrin Hoder, senior profitable revenue growth manager and member of the sales leadership team at Danone Germany. “Get started and find the right balance between delivering quick wins while preparing mid-term efficiencies and building the right capabilities.”
Ken Harris, managing partner at Cadent Consultant Group, recommends a three-phased approach: identify market conditions, analyze trade efficiencies, and develop options for deployment of investments for key businesses by market. “Start with the familiar,” he suggests. “You need to show the contrast with the legacy system so that everyone in the organization knows what to expect from the new approach.”
2. Assign ownership from top corporate talent
Based on the above, each company needs to ask: What are the key value drivers that are already part of day-to-day business management that should be weaved into the RGM practice? And who is leading the charge: marketing, finance or sales? “For our organization, RGM is a function within the sales department and [sales] is leading the transformation yet is interacting with all relevant functions,” notes Hoder.
Bringing in top corporate talent and training the existing workforce are also key steps. Hoder says the three most desirable qualities to lead RMG initiatives are analytical skills, resilience and a growth mindset. When training, she recommends keeping things simple. “It could start with a session on how to apply the ROI calculation to the day-to-day operations,” says Hoder. “For a specific RGM team, it’s also good to have cross-market and cross-CBU best-practice exchanges to learn from work that has already been achieved – so that the wheel is not always re-invented.”
3. Get your data ducks in a row
While data is obviously critical for effective revenue growth management, the practice doesn’t necessarily require a large volume of proprietary data. “A lot of data needed to understand performance both volumetrically and [with] the consumer is publically available – assuming you’re willing to pay for it,” says Kataria. “The question is whether the organization has the capability to invest in data assets or the right mindset to sustain the curation of those assets long enough to stitch together a more effective RGM strategy.”
According to Hoder, commercial spending should be invested into profitable growth spaces where there is a triple win for the consumer, retailer and brand. She therefore points to the following external data points as important to derive from qualitative research:
• What price is the consumer willing to pay for a certain product?
• Which channels trigger consumption?
• In which areas of the store are shoppers most willing to buy a new product (entrance vs. checkout, perimeter versus center-store)?
Key data points from a quantitative perspective include sell-out data with pricing, shopping frequencies and basket sizes, adds Hoder.
At the store level, accurate data capture for pricing and promotions is also critical, says UpClear’s Guo. “That means being diligent about field execution and following up with store managers, for example, to make sure products are being placed in the right section of the store.”
4. Embed KPIs into the commercial routine
As with any cross-functional approach, an RGM practice requires a shared set of common objectives and buy-in from all departments. Thus, KPIs need to be clearly defined as part of day-to-day business reviews to drive decision-making. “It is not only a question of how much you’re investing but how you evaluate progress at each step,” says Harris. “Are you including supply chain costs, or is it strictly promotion?”
Most contemporary RGM practices are built around four basic pillars: strategic pricing, trade promotion, product assortment, and trade architecture. On the trade promotion component, Kataria urges marketers to consider all the factors that may have affected the program’s success. “A strict ROI analysis is too myopic,” he warns.
For example, a typical ROI analysis of trade promotion does not take into consideration market share rebalancing or penetration. “A company might look at it as a pure play: We spend $100,000 and got two times our return – that’s our ROI,” says Harris. “The response is, “OK, but if that category went down and you didn’t increase share [but] just swapped dollars, what is the point? The whole idea is to build your business.”
5. Be flexible when choosing tools and partners
Increasingly, consumer goods companies no longer see the need for a one-size-fits-all technology solution. “In the last couple of years, we’ve seen a shift in demand for cloud-based solutions and a desire to work with a variety of vendors with expertise in different areas, which affords the company more flexibility,” says Gabriele Plate, client services director for EMEA (Europe, Middle East & Africa) at UpClear.
Finding promotion management tools that are intuitive to use and (therefore) more likely to be adopted by sales teams is often a sticking point, says Ferrero’s Granfelt. “The front-end piece is always a challenge because we tend to build tools that are not user-friendly,” he says. “There is often a gap in data and planning due to the clunky nature and non-integration of those tools.”
When selecting tech partners, Danone’s Hoder looks for the ability to adapt an RGM solution to a company’s needs in different markets, as well as teams who are eager to develop and continually refine the solution together. “What is sufficient today might already be outdated tomorrow,” she notes.
6. Build a portable solution
For multinational companies, an overriding objective is to create a platform that takes into consideration individual market and customer dynamics while providing a consistent approach to the business. “It’s one of the reasons why people have gravitated to RGM: It’s transportable,” says Harris. “Individual components are different by country, but the process is the same. The idea is to take the key people on the job and pollinate them in other markets.”
Besides being portable, experts argue that a newly created RGM practice needs to act as a discrete unit within the organization. “Think of the RGM practice as if it were a product company within the organization,” advises Kataria. “It is an end-to-end service where you bring together the three pieces of the puzzle – technology, analytics, business – in a horizontal connection. That is where it starts to come to life.”
7. Bring retailers into the fold
Brands and retailers aren’t always on the same page when it comes to prioritizing business practices. But despite a trade relationship that is becoming increasingly adversarial in some respects, the two sides share a common desire to remain relevant with omnichannel consumers through digital transformation. Walmart’s recent push to transform itself into a “technology company” through major investments in e-commerce and in-store capabilities like virtual reality is a clear sign of that commitment, says Kataria. “The more retailers can embrace and drive this transformation, the easier it will be for manufacturers.”
“Revenue management solutions, and specifically machine learning-based capabilities, can be leveraged by ‘category captains’ to provide deeper insights into the brand, pack mix, price points and promotional mechanics that can drive category expansion while minimizing negative effects such as product switching,” says UpClear’s Plate. “Such insights can deliver more robust joint business plans, strengthening the relationship between brand and retailers through ‘win win’ category deals.”
8. Take the plunge now
For companies that are stalling or resisting the move to RGM entirely, experts suggest looking beyond the confines of the day-to-day operation at the radically changing world around them. “My advice to any company that is slow to adapt is, wake up,” says Kataria. “If marketers believe their business lines are not going to be impacted by technology, AI and analytics, they couldn’t be any more wrong. It’s going to continue to have a huge financial impact.”
Of course, there is no guarantee for success and companies should be prepared for uneven results initially. “There are examples where it’s already very aligned across the different functions and then, of course, there are always examples where it does not work,” acknowledges Hoder. “We try to fail forward, to learn from what wasn’t working and where – for example, the digital campaign could have been more aligned with the in-store activation or vice versa.”
After all, it’s hard to grow without experiencing some growing pains.