In our work with Ladies Who Launch, we have been talking a lot about the complexities of trade spend and how to analyze the ROI. For Consumer Packaged Goods (CPG) companies evaluating trade spend is a key part of strategic financial management and making good decisions on which sales channels to pursue. Because it is often the second-largest cost after the Cost of Goods Sold (COGS), many early stage CPG founders are hesitant to invest in trade spend and struggle with how to analyze the cost against the increase in sales volume. 

Because trade spend can take many forms including discounts, coupons, cash incentives, advertising, free products, and demos, CPG companies need to properly track and analyze the components to get a clear picture of the return on the investment. Below are some key elements on how to track and evaluate Trade Spend. 

Placing Trade Spend on the P&L

Trade spend can be multifaceted affecting price through discounts, coupons, and rebates and requiring an outlay of dollars in the form of commissions, demos, and advertising. Companies often make the mistake of netting all of their trade spend against revenue when it should be recorded on the P&L in two places with discounts on price, free products, etc. go against sales and COGs and any outlay of dollars for advertising, demos, etc. should be recorded in sales and marketing expenses. Properly recording trade spend provides a clear picture of the gross margin on the product and the investment made in sales and marketing.

Analyzing Return and Net Dollars

Evaluating the impact of trade spend requires looking at margin, investment in sales and marketing in conjunction with the overall increase in volume created by the trade spend. While the investment in the discounting portions of trade spend results in big hits to margin, in theory it should be made up in volume. The key is to do a comprehensive analysis of each trade spend program and channel to determine what the net impact is to the bottom line resulting in the biggest dollar return to the company. The % returns may be much lower on trade spend programs versus other channels, but the increase in volume could result in an overall increase in profit to the company making it worth the investment. 

For emerging brands, investing in trade spend is a great way to test out products, promote the brand, and gain consumer adoption. 

Testing the Effectiveness of Trade Spend

While large brands have the financial resources to invest in marketing research and complex programs, emerging brands need to get creative in how they can effectively test different types of trade spend programs. For example, a brand may want to test if a couponing program is more effective than a demo program. Here are a few strategies that emerging brands can use to run smaller-scale tests: 

  • Work with your retailer to run specific trade spend programs in stores and not others. For example, run a coupon program in one store for a week, a demo program in another store, and nothing in a third store. Make sure that the stores have similar consumer demographics. Over the following three months, compare sales data for the stores to determine the long-term uplift in sales gained from the different programs and net dollar gained from running a program versus doing nothing. Tests like these can provide brands a road map of which types of trade spend programs will be most effective.
  • Implement specific trade spend programs with each of your retailers, couponing with one, rebate with another, and advertising spend with a third. Compare volume and profit metrics between the retailers to gauge the impact of the trade spend strategy. Then switch it up and run different programs with the same retailers to test if different retailers are better at different types of programs and if there is one particular program that has better results, regardless of the retailer.

Effectively managing and analyzing trade spend programs is a key component to success for CPG companies. By carefully evaluating the relationship between margin and volume, and employing strategic testing methodologies, companies can optimize trade spend, drive sales growth, and ultimately enhance their bottom line.

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