What is trade promotion optimization?
Trade Promotion Optimization (TPO) marks integrated operations, tools, and processes aimed at increasing the effectiveness of a retailer's promotion strategy. Trade promotion optimization is a means of strategic business goals achievement with a regard to supply chain and promotional policy constraints. To put it simply, TPO helps retailers to maximize the value generated by promo campaigns.
The lack of sustainability in promotion policy management is one of the main reasons causing the devastating price wars in retail. An example of the “big four” UK supermarkets’ price war in 2016 shows that poor promo policy could ruin a retailer’s financial health in just a few months. Considering the fact that retail companies may rely on profit margins as low as 1% for particular categories or products, it is no surprise that the price and promo wars are among the top risks for retailers of any size or industry.
The recent survey by Pomo Optimization Institute shows that the trade promotion activities by more than 65% of retailers are not integrated with the other retail execution domains. What it means is that promos do not align with a retailer’s pricing, supply chain, and assortment management policies. And overcoming these gaps is actually the main purpose of trade promotion optimization.
Trade promotion management vs. trade promotion optimization
Trade promotion management (TPM) is another element of a comprehensive promo strategy dealing with the implementation part of the trade promotions. The latter include operational activities, logistics, budgeting, etc. Roughly speaking, TPM deals with the practical implementation of previously planned promo activities while promo optimization is more related to the planning of future promos based on the relevant historical data.
In many cases, both TPM and TPO are executed by the same team of professionals. However, the two processes should not be mixed up. To make things clear, let’s look at the differences more closely.
The two core processes underlying trade promotion management are:
Promo execution. Allocating resources necessary to run the promos.
Results tracking. Monitoring and collecting operational and sales data impacted by the recently launched promo activities.
In contrast, promotion optimization deals with the following processes:
Data analysis. Patterns and cross-dependencies are identified based on a retailer's relevant historical data.
Scenario testing. With regard to a retailer's goals and constraints, various scenarios for future promos are generated and tested.
Recommendations delivery. The ready-to-use promo activities are proposed.
Win with trade promotion optimization. Example
Promo is a remarkably powerful tool helping to increase brand loyalty, reinforce customer base, impact consumer behavior, sell stocks, and, eventually, maximize the revenue. But this is only one side of the coin. Promos can also damage sales and margin undermining the financial health of a retailer. To keep business metrics under control, retailers need to implement, evaluate, and plan promos in an integrated and sustainable way. The trade promotion optimization is indispensable in this regard as it:
Connects systems enabling retailers to undertake complex promotion plans. The trade promo management process has various stakeholders as it deals with supply chain, marketing, pricing, and other structural units. Using a promo optimization solution means that all the input and output data is collected under a single domain with no risks of disintegration.
Enables effective cross-channel promo execution. Every omnichannel retailer knows the importance of aligning in-store and online promos. And there is no better idea than using promotion optimization solution to ensure that promos across sales channels do not cause the sales cannibalization.
Reinforces brand loyalty and increases the customer base. Just one example: key-value categories (KVCs) and key-value items (KVIs) are crucial in terms of managing loyalty and attracting new value-conscious consumers. Trade promotion optimization solutions help to identify KVIs and keep them out of risk.
Secures margin rates. As we've mentioned already, the damaged margin is one of the most common and devastating consequences of promo wars in retail. Most of the advanced promo optimization solutions are powered with a rule-based engine enabling retailers to set, for example, the minimum and maximum possible price change at every level. With customized business rules retailers can easily protect their margin rates along with the other crucial metrics.
Here's a very simple example of how poor promo policy could be fixed with an optimization solution. Imagine you're an omnichannel eyewear retailer with the premium-class glasses for close vision as a KVI. Eventually, you decide to launch a 15% promo to gain even more revenue. Yet, the upper-middle-class buyers as your core customer group are not impacted by the discount while, on the other hand, it is also not enough to attract new groups of shoppers. As a result, KVI sales are dropped in addition to brand perception being under risk. To avoid cases like this, advanced trade optimization solutions enable pricing teams and managers to predict the impact of discounts on sales and identify products that are worth being protected.
AI-driven TPO: make promos your superpower
In today’s data-driven world, automated pricing and promo management has no alternative. The third-way software solutions, like Competera pricing platform, are capable of processing billions of data points at once to identify even the most implicit cross-dependencies between particular pricing or promo decisions and sales.
At Competera, we believe that promo policy should be integrated into a comprehensive pricing system and, that’s why, we offer retailers a set of solutions suitable for all types of pricing (i.e. market-based, rule-based, demand-based, and hybrid pricing).
Let’s look at some examples to see how Competera helps retailers to manage promotions in a smart way. First, using the rule-based engine, retailers can set maximum and minimum constraints for a price change to make sure promos are not going to damage the margin.
And another example: Competera’s Sandbox helps to find the best pricing and promo strategy in a proactive way. A range of modules enables your commercial team to test various promo scenarios using either predefined strategies or ones customized to your goals and constraints.
Above are only two examples out of the dozens of opportunities that the platform brings to retailers. Now, let’s look at some real facts and numbers that the business gains with Competera’s price and promo optimization. A recent example: we’ve helped a leading Eastern European apparel retailer Intertop to get to the point of 10.3% gross profit saving along with 200 BPS of profit margin saving after only 6 weeks of using the platform.