We know discounting products is a reality in the food and beverage industry. Over the years consumers have been trained to look for the savings and retailers expect suppliers to fund ads, in store specials and loyalty offers. When I worked for a retailer, we called these investments. It certainly sounds better than discount or price reduction. The word investment implies there should be a return.
To determine if there is return on your investment, you need to measure the results. The first number you will need is your sales in dollars or units.
The X factor is the lift you get from your baseline sales. Compare the sales you generate on temporary price reduction to the sales you achieve during a week with no ad activity. The X factor is the multiple of the change. For example, if you do 1,000 units in a non-promo week and your customer sells 2,500 units with the ad the X factor is 2.5.
Measuring results is a weekly job
We have discussed before how important it is to understand your baseline sales. You have a few options to figure this out:
- Purchase front end sales data from a third party or your customer. This can be expensive, but it is the best data you can use to measure what is happening with your items and your category. It does not make sense to me that retailers want to charge so much for this. If it is a ‘partnership’ where you both win if the data is analyzed and used to improve the next promotion it should be more reasonable. Obviously, they don’t ask me!
- If you deliver direct to stores you can track the sales you have to each store and understand the results relatively easily.
- Develop a good relationship with your customers and sometimes they will share some sales data with you.
- If you ship into the warehouse measure movement during non-promo periods and calculate average sales per week.
Once you establish the baseline sales you can measure the sales when your items are in temporary price reduction. You will have a much better chance to understand what is happening if you measure this every week. If you wait to figure it out before a meeting it will be much more challenging.
Determining the X factor
If you do not purchase the data, there are a few options to determine the X factor for your products and different promotion tactics. You should compare the results with different levels of investment and options such as ads, in stores and loyalty. Here are some options to consider:
- There are different methods of reducing your price with retailers. Many retailers will look for an off-invoice deal. This implies you will reduce your selling price to them for all of the goods they buy. Some will bill you back for the discount based on what sells through the cash register. This is better, because you only pay the reduction on what sells and you will know how many sold.
- Loyalty programs are another form of temporary price reduction where you are only charged the amount for what sells. This is preferable because it is only a percentage of the retailer’s shoppers who have the loyalty card. You only are charged the discount for these shoppers and they have to tell you how many units had the discount.
- If you deliver direct to stores, you can track the sales you have to each store during the promotion. This allows you to understand the results relatively easily.
- Develop a good relationship with your customers and sometimes they will share some sales data with you. You do not always have to get the exact sales. If you know 8,000 cases were shipped in for the ad. Ask the question of your customer, “what was the sell through?” If they tell you 90%, then you know the number was close to 7,200 cases.
- Compare your purchase orders the week prior to the promotion and the weeks of the promotion to average weeks. This only tells you what goes in the warehouse and not what goes through the cash register. Not ideal but if they don’t complain about excess inventory it is probably safe to say it sold through during the promotion.
Once you know the promotion sales and the baseline you can measure the X factor. Compare the actual to your forecast and decide if the promotion was successful. If you got the desired results and you see a lift in your baseline sales look for the opportunity again. That is a return on the investment. If your baseline sales return to previous levels after you reduced your price you should try something different. There was no return on the investment.
If you have any questions about X factor in food and beverage, you can always send me an email email@example.com or call me at (902) 489-2900.
FCC mid year update
We have shared the FCC annual and midyear updates in previous newsletters. It is a great resource for our industry and so important for suppliers in different categories to understand how they are performing relative to the industry and their categories.
Food service has rebounded to pre-pandemic levels but not caught up the with trend it was on prior to the pandemic. We believe it will if food inflation does not drive people back to eating at home.
Where is Peter Speaking?
We have been working hard to put together a new video to promote the work we do speaking at conferences and events. Hope you enjoy the video!