Calculating return on investment for trade spend
You need to know if trade spend is effective
Trade spend is a fact of life for almost every food and beverage product. We have trained consumers to look for deals, specials, savings, call it whatever you want. These temporary price reductions do influence consumer behaviour and chances are your competitors are doing it.
Managing the execution of trade spend is the responsibility of the people who own sales in your organization. They need to figure out the most effective tactics and timing for these investments. You have heard us say investments before. Yes, they are expenses but when you see them as investments you should expect a return. In your own personal finances if you have investments, you expect a return. Trade spend is the same in your business.
Great to call them investments, but now you need a process to calculate a return. We will illustrate how we would determine the return on trade spend investments.
Baseline sales growth is the goal
You need to understand your baseline sales with each customer. Baseline sales is the average volume you are doing with no promotional activity. Your competition could be on promotion but you are not. In other words, how much do you sell at regular price each week? It can be a challenge to determine this but you need to know it. You need to know baseline sales so you can forecast the volume you do on promotion and to calculate a return on the investment.
The ultimate goal of trade spend should be to grow your base line sales.
The basic idea is:
If you are averaging 100 units per week and you invest in an in-store special to sell 150 units, what happens to your baseline sales after the promotion? If your sales average 110 units in the 4 weeks after the temporary price reduction, you have brought new people to your brand. Awesome. We still need to answer the question; was the discount on the 150 items worth it to sell 10 more per week?
Calculating return on investment
We need to do some math. Your sales people need to do this math. To illustrate the math, we will use an example. We understand your business can be more complex but you need to know these numbers to determine what return you are generating.
In column 1 you can see the results you achieve in an average week. These are driven by your baseline sales of 1,000 units per week.
In column 2 we have summarized the numbers during a 4 week in-store special. An .80 discount was implemented and your average sales during the 4 weeks were 1,200 units per week. Note your revenue changes because of the increased units but decreased selling price with the .80 discount.
In column 3 we illustrate the sales in the 4 weeks after the temporary price reduction. Note your baseline sales have now increased to 1,100 units per week and your selling price has returned to the regular 4.30 per unit. Revenue and profit are both up but are they up enough to pay for the 4 weeks of temporary price reduction?
Here are some of the formulas to help with the calculations:
Value of investment over the 4 weeks. Profit changes from positive $500.00 per week to negative $160.00 per week.
In the 52 weeks after the investment you generate more profit per week because you were able to grow baseline sales by 100 units per week.
To calculate the return on the investment you should look at the profit you generate over the next 52 weeks. Assuming your baseline sales would stay at the new level of 1,100 units per week.
This is a positive return on the investment. The temporary price reduction did get new people into your brand or existing people are buying more.
We appreciate there are a lot of factors that can impact this but you do need to make some assumptions and measure the results of these investments. You could dive deeper to understand if the higher baseline sales can impact your cost of goods with efficiencies etc.
There is more to the story…
Dollars are important. As I was told during my career at Loblaw, “that is what we take to the bank”. Your sales people should be measuring the return on investment for trade spend. There are also some other factors you should consider when determining if trade spend opportunities are right for your business. Next week we will share how we would assess the overall opportunity.
Peter
SKUFood Recipes for Success Podcast
In this episode of SKUFood Recipes for Success, we sit down with Pedja Radjenović, a CPG strategist who helps founders transform their brand stories into strategies that actually sell.
After building multi-million dollar brands at Molson Coors and Carlsberg, Pedja discovered that the difference between a good product and a great brand comes down to one thing, how well you tell your story. With experience leading brand growth across borders, he understands the nuances of positioning, messaging, and selling in different markets.
Today, Pedja works with food and beverage founders to sharpen their positioning, clarify their message, and stand out in the crowd. In this conversation, he shares what makes a story stick, the kind that consumers connect with and retailers rally behind.
This episode is a must-listen for founders ready to move beyond features and claims, and start building a brand narrative that opens doors and keeps shelves stocked.
Listen and subscribe wherever you get your podcasts.
If you would like to be a guest send us a note. We are always working on the upcoming episodes.
One of the best parts of my job is the opportunity to moderate peer groups for FCC. We meet once per month and discuss issues in the industry, challenges people have and opportunities. This is a great format for food and beverage entrepreneurs to talk with other people who are trying to accomplish similar goals. I have been fortunate to be part of the program since its inception. If you are interested give me a call or use this link to register.
It is that time of year when we star to see different organizations releasing trends for the upcoming year. We thought this was a good summary of Canadian food and beverage consumers in Canada. One issue not identified is the focus on Canadian products. Something that would be on our list for 2025. Watch for our SKUFood trends in a few weeks. We take a different approach and focus on issues impacting people in the food and beverage value chain, other than consumers.
Where is Peter speaking?
With the focus on Canadian food and beverage we wanted to share a program we have developed with Alain Bosse, the Kilted Chef. We partner to share insights about Canadian food and beverage at conferences and events. We talk about where products come from, share insights about some hidden gems and of course Chef Alain has great tips for using the products at home. This is designed to be entertaining and engaging. Not just for food industry audiences, it works for everyone.
I do have travel coming up to Toronto and Fredericton so if you want to connect or have an event in any of these locations give me a call or send me an email.