May 6, 2021
Trade Promotions Are the Biggest Expense after Product Cost
Trade promotion allowances are how manufacturers directly influence product performance at retail or through distributors. These trade promotion campaigns include in-store promotions and advertising and help boost sales in specific locations or periods, raise brand awareness, or bring a new product to market. In return for the trade allowances, the retailer promises to promote the item in the manner specified in the deal. TPM is is a “big deal” by any measure – CPG companies, for example, spend an average of 20% of their revenues on trade promotion.
Types of trade promotions include:
- Price Discounts
- Volume discounts
- Slotting, shelf-position
- Co-op advertising, catalogs
- In-store displays
- Product Sampling
- Staff incentives, gifting
Trade Promotion Settlement Types
The way trade promotion claims are settled are by Off-Invoice, Net Bill, Rebates, and Billbacks.
- Off-Invoice is the cleanest, as the incentive shows on the invoice, so there should not be double deduction surprises. However, if the retailer does not adjust its system product cost, the consumer may not get the discount, and the manufacturer will not get the expected sales increase.
- Net Bill is also a clean way as the customer sees only the net reduced price on the invoice, but it could be missed and later result in a deduction for the same allowance.
- Rebates are credits issued after the retailer has submitted proof of performance and which, like Billbacks, require a good TPMS to track effectively.
- Bill-backs are trade promotions settled by a customer chargeback (debit memo) deducted from a payment usually not related to the original invoice. Bill-backs cause most problems for the manufacturer because of retailer charging errors and the complexity of reconciling them to the deals.
Deal Document Format
Regardless of the type of trade deal, an essential best practice is to have a clear, detailed explanation in a standardized trade deal format since most problems result from misinterpretation by the customer, often resulting in extra costs to the manufacturer.
Integrated Trade Promotion and Deduction System
An effective Trade Promotion Management System links the promotion and budget to the customer chargeback and prevents customer Billback errors and duplicate deductions that cost the manufacturer money.
Integrating TPMS with a Deduction Management System is essential to complete the trade promotion – settlement cycle plus collect invalid Billbacks or a customer’s double deductions or post-audit claims. The system should match and reconcile deductions to the trade deal and keep the accrual balances to compare the budget vs. the actual cost.
The integrated systems should also provide a means to charge back the customer when they have over-deducted or not complied with the terms of the deal, with workflow to manage the collection of the chargeback. Lastly, the TPMS-DMS system must provide detailed, auditable history when the (inevitable) “post-audit” chargebacks arrive a year or two later. Our experience is that customer chargebacks are rife with errors, so a substantial part of this huge marketing expense is wasted.
Integrated TPMS/DMS software can help prevent losses, keep the accrual accounting straight, and, as a bonus, automate tedious, repetitive work.