Trade Allowances and Promotions Defined
Imagine you're a supplier working hard to get your product in stores, and you decide to invest in trade promotions to increase visibility. You might offer price discounts and rebates or set up in-store displays. These promotions are a huge deal; for consumer packaged goods (CPG) companies, trade promotions are the second-largest expense after production costs, often eating up a significant portion of the budget—about 20% of revenue, on average.
But here's the kicker: with these promotions comes the need for diligent tracking and validation. Let's break down what trade promotions are, the common ways they're managed, and how a robust Trade Promotion Management System (TPMS) can save time and money by preventing costly errors and unauthorized deductions.
What Exactly Are Trade Promotions?
Trade promotions are incentives manufacturers give retailers to support promoting their products in specific ways. Think of it like an agreement between you and the retailer: you provide discounts, rebates, or in-store displays, and in return, the retailer promises to promote your product as agreed.
Here's a quick rundown of popular trade promotion types:
Price Discounts: Reducing the price of a product for a specific period.
Coupons and Rebates: Offering incentives directly to customers.
Volume Discounts: Discounts for purchasing in large quantities.
Slotting Fees: Paying for premium shelf positioning.
In-Store Displays: Special setups in-store to draw attention to products.
Product Sampling: Free samples to generate interest.
Staff Incentives: Bonuses or gifts for retailer employees who promote your product.
These promotions are intended to help your product stand out, increase sales, or raise brand awareness. But the process doesn't end there—making sure the promotions are executed as planned can be complex.
Trade Promotion Settlements: A Mixed Bag
How these promotions get paid out, or "settled," also varies:
Off-Invoice: The incentive is deducted directly on the invoice, making it straightforward. However, if the retailer doesn't adjust their system cost, it might result in an incorrect discount for the customer.
Net Bill: The customer sees only the reduced price on the invoice, which is great but can still result in a missed deduction if not properly tracked.
Rebates: Credits are given after retailers show proof of performance, which requires tracking systems to be managed well.
Bill-Backs: This method involves a chargeback or debit memo, which can lead to issues for manufacturers if the retailer makes errors or if reconciling these deductions is challenging.
Why Clear Documentation Matters
One simple but essential piece of advice is always to have a clear, standardized trade deal document format. When everyone's on the same page about what's being offered and how, you reduce the risk of miscommunication, which is often the cause of costly mistakes for manufacturers.
Why Trade Promotion Management Matters
Trade Promotion Management (TPM) means more than simply tracking expenses for many suppliers. It's about managing and maximizing these promotions' return on investment (ROI). Using a Trade Promotion Management System (TPMS), companies can evaluate which promotions work best, track expenses, and accurately reconcile payments.
The Power of an Integrated TPMS and Deduction Management System
A robust TPMS, integrated with a Deduction Management System, can help validate that retailers are following through on their end of the agreement. This integrated approach does a few critical things:
Prevents Double Deductions: TPMS can automatically link promotions to customer chargebacks, reducing the chance of unauthorized or duplicate deductions.
Reconciles and Validates: It matches deductions against the original trade deal to prevent errors and ensure an accurate accrual balance.
Manages Collections: When retailers over-deduct or don't meet the agreed terms, the system can handle chargebacks and track collections.
Prepares for Post-Audit Claims: Many chargebacks come up during post-audit claims—sometimes years later. With a detailed and auditable history in place, you're better prepared to handle these claims efficiently.
The Bottom Line: Make Every Dollar Count
The right systems can make all the difference in trade promotions. A well-integrated TPMS and Deduction Management System safeguards your investment by minimizing errors, preventing unauthorized deductions, and keeping your hard-earned revenue where it belongs.
At HRG, we understand the ins and outs of trade promotion and deduction recovery. Our goal is to help you protect your investment, avoid unexpected costs, and ensure every dollar you put into trade promotions has the impact you expect. Because in the end, we're not just managing numbers; we're helping you grow your business.