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total of Merchandising & Marketingtrade Customer InsightsoptiMization at the Point of Decisionone plan. many perspectives.
totaltradeoptiMizationone plan. many perspectives. table of contents introduction 2 the size of the prize is compelling 4 demandtec total trade optimization 6 the challenge 16 about demandtec 18
introduction “ Who knew three little letters could mean so much? TPO can stand for Third Party Origination, Technical Planning Objective, and even Thermo Plastic Olefin. However, most much has changed involved with trade in the consumer packaged goods industry know it as Trade Promotion Optimization. The clarity of what in the world of tPo during the Past ” constitutes Trade Promotion Optimization begins to lose focus shortly after the acronym is spelled out. several years... Trade Promotion Optimization, or TPO, was born of trade planning management system gaps. The industry has recognized a short list of innovative consumer products leaders that have invested in trade optimization with demonstrated success as advanced econometric modeling techniques allow consumer products manufacturers to simulate the impact of proposed plans against volumetric and profit targets. But much has changed in the world of TPO during the past several years as it has evolved beyond promotions to include pricing and can even be inclusive of shopper insights. Due to expanding needs, the analytics that are inclusive of TPO have not been entirely clear until now. 32 Total Trade Optimization Introduction 3
the size of the Prize is comPelling Even small improvements can deliver big returns. For a $5B manufacturer that annually invests $750M or more into trade programs, a 3% improvement in return can yield $15M or more in incremental margin – profit that can be dropped to the bottom line, or reinvested into additional trade programs. These numbers make it nearly impossible for management The stakes of understanding TPO are high. In 2009, The to ignore the opportunity to plan trade programs with a new Nielsen Company reported that almost 43% of grocery items approach. in the United States were sold on promotion. That is up from about 41% in 2008.i To put it simply, trade promotions are big With this much at stake, a specialized system is required to business! Each year, consumer products manufacturers invest help you make the best decisions in creating better trade roughly $125B to $175B in trade-based pricing, promotion, events and plans – but how do you know if your existing and merchandising programs. According to industry system is maximizing your return? estimates, this massive pool of spending accounts for roughly 14% to 22% of manufacturer sales – historically with little to enter total trade optimization. no return to the brands.ii $15M $5B $750M Trade Manufacturer Investment Programs 3% Improvement Incremental Margin Increasei The Nielsen Company, “Almost Half of U.S. Supermarket Purchases are Sold on Promotion”, October 5, 2009ii Cannondale Associates, “Trade Promotion Planning & Analysis: A Game that Needs Changing”, 2009 4 Total Trade Optimization The Size of the Prize Is Compelling 5
demandtec total trade oPtimization™ demandtec total trade optimization™ Total Trade Optimization is the framework used to measure how comprehensive your existing TPO approach may be while identifying areas that need improvement. It consists of five core components that enable better plans and sales forecasts, lower process inefficiencies and costs, and improve retailer collaboration and execution. The Total Trade Optimization framework addresses TPO’s roots, where it is currently, and what the future holds, using the five components detailed below: • Drive Trade Strategy + Account-Level Planning • Support Predictive + Post-Event Analytics First, though, we will lay the company dynamic groundwork that makes success much more likely. Step one is identifying • Incorporate Shopper Insights if the organization has the necessary skill set. The right • Integrate with Existing Systems talent, skill set, training, and ongoing support are critical. • Enable Retail Collaboration Step two is ensuring the company is focused on improving trade effectiveness. That includes who owns and sponsors the solution as well as the metrics for success. Trade decisions can reside across finance, marketing, customer teams, and sales, so depending on the organization, multiple champions may be required. These dynamics enable ongoing success after opportunities are identified with the Total Trade Optimization framework.6 Total Trade Optimization DemandTec Total Trade Optimization 7
linking trade strategy and Ultimately the recommendations fuel predictions back to thecustomer-level planning strategic planning level, which enables mid-year changes inShould it be top down, or bottom up? The answer is yes. the event of additional funds, a widening gap, or a change inA planning system should address the macro needs of direction. This also enables greater retail collaboration as thebrand marketing and trade finance in order to enable macro total category view and impact are measured. The tandem isplanning. This allows strategic teams to utilize science in their essential for Total Trade Optimization.decisions on how price changes, display and ad coverage,and adjustments in trade funds or accrual rates would affectthe annual sales and profitability. Strategically, teams must beable to understand consumer demand and use this insight toallocate funds across regions and accounts. However, it does HEADQUARTERSnot stop there. Need consistency and on-strategy planningAn effective solution passes along the annual objectives and Science andguidelines to field sales so they can create customer-level Guidelinespricing and promotion plans. In this way, tactical promotionsmay be coordinated with national campaigns, but moreimportantly it involves starting from an optimized plan versusreusing last year’s figures as an opening point. The customer- SOFTWAREspecific planning system then enables the customer teams to • Planning templates Improvedunderstand the best promotional tactics not individually, but • Common science Planning • Work owwithin the larger category campaign. Account- Level Plans CUSTOMER TEAMS Need exibility DemandTec Total Trade Optimization 9
support predictive & post-event analytics incorporate shopper insights Predictive analytics is about distilling historical performance to A recent Nielsen study found that in 2009 Chicagoans bought demand drivers and understanding their impact on the future. the most items on promotion, a whopping 55.9% versus the Think of all of the elements that can affect a promotion, be it 43% nationwide grocery average. Are Chicago shoppers more price, cannibalization, cross-category affinities, or competitive deal savvy? Are they exposed to more trade opportunities? actions, and translate that to an overall measurement of Is it a combination of both? How do we capitalize on this baseline and promotional lift. Predictive analytics enables you insight? Trade preferences can be noticeably identified at the to estimate a $1.79 price point with 60% ad acv, 80% display market level, but the incorporation of Shopper Insights in the acv for a single week in July even if it has never been tried Total Trade Optimization framework allows us to be even individually or as a combination. more precise. Unfortunately, the future does not always follow our plans. There will be times when we do only 35K cases when we expected to do 45K, and we are left wondering what happened. Post-event analytics present a retrospective “ on what was planned and what was executed, providing clarification for trade optimization. This retrospective diagnosis enables us to identify if we were expecting 60% and we only in 2009 chicagoans received 40% or instead of 80% display compliance we only received 50%. This understanding allows the identification bought the most of operational gaps that can be addressed or accounted for items on Promotion, in the future. It may also identify new causality which can be used to improve the model. a whoPPing 55.9% versus the 43% nationwide grocery ” average.10 Total Trade Optimization DemandTec Total Trade Optimization 11
Stores with more kids in their trade area sell more cookies. Not Shopper insights typically utilize transaction log (t-log) dataa very profound statement, yet traditional TPO encourages us or syndicated panel sources to identify desired behavior.to promote all stores in the exact same way. The introduction The shoppers are then identified though loyalty cards or aof shopper insights into trade decisions allows teams to not geodemographic targeting system in order to locate them ononly know but act on the differences through targeting. The the ground and cluster stores in which a specific action needsnet result is a more efficient trade spend as shoppers with to take place. A store cluster may include “Deal-Sensitivea higher lift toward a particular vehicle such as a temporary Moms,” for which specific promotions may be customized,price reduction are targeted, while those who are less and underperforming stores may be identified based on theirresponsive are given another. It may even be extrapolated to sales to potential ratio. The Deal-Sensitive Mom clusters area higher level and allow us to determine the right promoted then brought into the TPO system and aligned to events toproduct mix in a geography for the best results. create customized promotions and realize more effective plans. General Shopper Population CHANGE IN MANUFACTURER SHELF PRICE PER UNIT A RESPONSE -$0.45 Competitive Threat B RESPONSE -$0.25 Gross Margin Preferred Shopper Segments
integrate with existing systems enable retail collaboration Insights without action are overhead. The Total Trade The desire to be a strategic partner with a retailer is a common Optimization framework recognizes that companies may have aspiration—and should be. Collaboration may be founded a variety of Trade Promotion Management (TPM) systems as through joint insights, common modeling, or joint systems. In well as an ERP system but if you pardon the analogy, it will the marketplace, superior insights and partnership provide the need a bigger analytic engine without replacing the whole foundation for a more profitable business. car. This enables TPM and ERP systems to excel at funds tracking, checkbooks, settlements, and execution while That can take the form of comprehensive analytics. When incorporating predictive trade planning. Key to full integration evaluating an event, the ability to measure the impact on the is the alignment of analytic planning and execution systems to category and store brand down to a SKU level is not only reconcile their respective consumer consumption and factory collaborative, but good business. The ability to understand the shipments. impact of an event based on the retailer’s pricing strategy not only leads to better forecasts, but a stronger partnership. Integration comes in varying degrees that do not require full exchange of information. The ability to pass promotion events Shopper insights also enable collaboration. Segmentation is and plans to a trade planning management system with the a tool that has been used by retailers and manufacturers for reciprocal results creates a repeatable cycle that greatly decades as a way to identify the 80/20 shoppers, or the 20% improves efficiency. Interaction with a deal management of shoppers that make up 80% of your volume. Introducing system simplifies the process of deal approval with the retailer segmentation into trade via shopper insights allows retailers as the terms of the deal are imported directly. and manufacturers to identify where their respective segments overlap. For example, a retailer may find their High Perimeter Suburban segment highly overlaps with a manufacturer’s Brand Loyal Families, which enables mutual activities toward a common goal.14 Total Trade Optimization DemandTec Total Trade Optimization 15
the challenge the total trade optimization challenge Redefining the three letters T-P-O for better plans and sales forecasts, lowered process inefficiencies and costs, and improved retailer collaboration and execution: those are the goals of Total Trade Optimization. The stakes are high, but the rewards are proportionally high as well. demandtec total “ the stakes are high, but the rewards are ProPortionally trade oPtimization™ ” high as well. Are you ready to take the Total Trade Optimization challenge? Will you find yourself one of the innovative trade leaders in the CPG industry or in a position to greatly improve your performance? How will you score across the five components of the Total Trade Optimization framework? contact your demandtec representative to find out.16 Total Trade Optimization 17
about contact us demandtec DemandTec One Franklin Parkway Building 910 San Mateo, CA 94403 USA DemandTec (NASDAQ: DMAN) connects more than 280 retailers and consumer products companies, providing inquiries common tools to transact, interact, and collaborate on Phone: +1.650.645.7100 core merchandising and marketing activities. DemandTec’s Please visit www.demandtec.com software services enable customers to achieve their sales volume, revenue, shopper loyalty, and profitability objectives. DemandTec customers have collaborated on more than 3.5 million trade deals. DemandTec software services utilize a science-based software platform to model and understand consumer behavior. DemandTec customers include leading retailers and consumer products companies such as Ahold USA, Best Buy, ConAgra Foods, Delhaize America, General Mills, H-E-B Grocery Co., The Home Depot, Hormel Foods, Monoprix, PETCO, Safeway, Sara Lee, Target, Walmart, and WH Smith.18 Total Trade Optimization About DemandTec 19