What to consider in promotion KPI calculations?

Here are a few promotion attributes that should be incorporated into your trade promotion KPI (Key Performance Indicators) calculations.

Promotion Condition

  • Future: If the promotion hasn’t started yet, there’s no more information available to change the estimate of the promotion KPIs. What you estimated and what was approved is used for your promotion KPIs.
  • Active: Once your promotion is active, several things start to change:
    • Lump Sum: If your promotion has a lump sum, you now technically ‘owe’ the lump sum.  The lump sum, by definition, is an amount that is not directly tied to what you sell during the promotion.  Example:  Ad fee.
    • Shipments: If your promotion is applied to shipments of a direct customer, then every time you sell something you need to incorporate the sale into your KPI calculations.  More detail on this is below for method-of-payment.
  • Completed: When a promotion is completed, we finally know what all the shipments are during the promotion’s start and end dates.   If what you owe is tied to what you sell to the direct customer, then your latest estimate KPI will no longer use estimated volume.  Until the promotion is completed, the KPI measure called latest estimate (LE) should use the greater of actual or estimated volume.  When the promotion is over, you know what you shipped, so the LE will use actual shipments.    Example:  For a completed promotion, it no longer matters that you estimated 1,000 cases for the promotion.  If you sold only 532 cases, then that is used for your LE (Lastest Estimate) KPI, the same as your expected liability.
  • Closed: When you close a promotion, the assumption is that you do not expect any further claims for that promotion. If there are no more claims, then any net-liability for the promotion needs to be set to zero.  This releases trade spending that the sales team can reapply to other promotions, or the finance team can drop to the bottom line by changing the trade promotion accrual.

The allowance method-of-payment

  • Off-invoice: If your method-of-payment is off-invoice, then by definition there should never be any net-liability. The assumption is that any allowance owed is applied to the sales orders and invoices.    Note that net-bill is similar to off-invoice in KPI calculations.   Off-invoice is shown on the invoice.  Net-bill just changes the price on the invoice to apply the discount.  This approach hides the allowance from the customer.   (See our other blogs for more detail on this CPG practice.)
  • Bill-backs: These are discounts given to customers after the transaction.   Bill-backs are a type of discount where a shipment, invoice, and/or promotion does not automatically create a credit memo for the customer.  Bill-back promotions are discounts that are claimed by the customer sometime after the transaction or promotion is completed.  Examples:  $1.00/unit scan event per consumer unit sold at retail between two specific dates, or $6.00 per case bill-back for an in-store merchandizing event.   In the CPG industry, direct customers typically deduct bill-backs on unrelated invoices.  Some distributors deduct on behalf of their major customers, such as UNFI for Whole Foods.   Indirect customers may be paid bill-back allowances by check because they are not your direct customers.
  • Lump-sum: This by definition is an amount that you owe that is not connected to how much you sell during the promotion. An example is an ad or display fee. When the promotion starts, you technically owe the entire amount.
  • Calculate each differently and then sum:  You need calculate your promotion allowance KPIs separately, because each has a different methodology.  Your KPI is the total:     Total Promotion Spending = Lump Sum + Bill-Back + Off-Invoice + Net-Bill + Missed off-invoice

Type of promotion: Linked to what you sell?

  • Linked to shipments? If the more you sell, the more discounts you owe, then you need to use shipments to calculate the expected liability of your promotion.
  • Scan event? If there is no direct connection between what you sell and what you owe on the promotion, then you can’t use shipments to calculate the promotion liability. An example of this are scan promotions, where what you owe is based on what scan data says sold-through at retail.

Type of customer:  Direct or indirect?

  • Direct: You can only have promotions that are linked to shipments with direct customers.
  • Indirect: KPIs for promotions to indirect customers need to be calculated with the same methodology as scan events. Direct shipments aren’t an option because you don’t ship to the customer.  You need to use a different data source.

Accurate trade promotion KPI calculations incorporate all of these promotion attributes and more.   Trade promotion KPI metrics discussed in this blog are described in more detail in our CG Squared blog, "What are trade promotion KPI basics?" at https://cgsquared.com/tpm-blog/

Thank you for reading this month's TPM blog.

Alex Ring,  Co-Founder  CG Squared

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