Difficulties and Payback of Evaluating Trade Promotions

This seems to be a simple question with a straightforward answer.  Of course it's neither.  Evaluating trade promotions is a subjective and undefined term.  There are examples when what appears to be a successful promotion is repeated it fails, while other promotions that look unprofitable are actually profitable.  There are three major reasons why Promotion Evaluation Systems fail.

  1. What is stated as Trade Promotion Evaluation is actually Trade Promotion Process Evaluation.  There is nothing wrong with Process Improvement but improving the processes without accurately calculating the impact of Trade Promotions on Incremental Sales and Profits is ultimately unsustainable.  Process Improvements often revolve around setting objectives, tracking results, getting retailer feedback and researching industry best practices.  Big name consulting or accounting companies (e.g. Ernest and Young, Accenture) with entry to c-level executives will sell high ticketed projects with little follow up to measure the impact of what was implemented.
  2. Results are inaccurate leading to the wrong conclusions.  Quantifying the impact of trade promotions on incremental sales and profits is very difficult.  Many companies who “evaluate the impact of trade promotions” by building a baseline use a univariate model which changes the results based on the order the marketing conditions or variables are processed.  Both IRI and Nielsen use univariate models and these models can show poor promotions are profitable and successful promotions unprofitable.  When the recommendations are implemented with negative results future recommendations are ignored.
  3. No concerted corporate effort behind the evaluation.  A CPG company can spend a billion dollars on Trade Promotions knowing that much of it is wasted.  But when the time comes to build a system to evaluate the incremental impact of Trade Promotions on sales and profits a few analysts with a limited budget are expected to make it work.  This is compounded by selecting people without the broad skills necessary to build such a system and who understand the realities of the retail market.  The result is necessary money and manpower with the correct skills are not applied to the project and when a higher priority comes along the project disappears. 

When done correctly what can be expected as a bottom line result?  My experience is a CPG company will increase their gross profit by 15% of Trade Promotion spending by eliminating unprofitable promotions and spending more on successful promotions.  

With a proven and believable material impact on gross profits why don’t more companies do this? 

It takes a leap of faith.  There is no way to prove in advance the incremental profits will occur and many companies will not approve a project where the payout is not clear.  An entrepreneur takes prudent risks but a VP of sales, marketing or marketing research will rarely approve $1,000,000 for results that aren’t assured.  It is particularly difficult because the mathematical techniques to quantify promotions are difficult to understand by someone without a mathematical background and the techniques that can be understood are simplistic models that produce wrong results.

There will be entrenched opposition.  Sales doesn’t want their Promotions cut back, Market Research doesn’t want anyone doing their job, IT has higher priorities and Brand Management doesn’t want their programs discredited.  The executives who want the best results are the most senior officers (e.g. CEO, President, MD) and these are the people least likely to spend time on this issue.

The payoff is not immediate.  The results can take 1-3 years.  A plan needs to be prepared and approved, databases built, the analysis completed and used for future promotion planning.  Since promotions are usually planned a year in advance the impact will be seen in 18 months after starting.  Many people are not willing to invest when comes out of their budget today but will generate benefits 2 or 3 years later.

In summary, there are many reasons Trade Promotion Evaluations are either not performed or performed poorly.  It is therefore not surprising that CPG Companies admit they don’t do a good job evaluating Trade Promotions.  But if they do successfully implement a system to quantify the impact of promotions on incremental sales and profits they can expect to add 15% of what is spent on Trade Promotions to gross profit.