Trade Promotion ROI

Calculating ROI for Trade Promotions in CPG

Calculating ROI (Return on Investment) for trade promotions helps determine the effectiveness of promotional spending, ensuring it drives sales and profits. ROI in trade promotions measures the incremental gross profit generated from a promotion relative to the investment cost. Here’s a straightforward guide:

1. Calculate Gross Profit per Unit

Gross Profit Per Unit is the amount of money made per unit after paying for the Cost of Goods Sold (COGS). To calculate the trade promotion ROI, you'll need the Gross Profit per Unit, as it helps in finding out the incremental profit generated by the promotion.

2. Determine Incremental Gross Profit

Incremental Gross Profit is the additional profit earned during a promotional period. To calculate Incremental Gross Profit, a brand will need to multiply the Incremental Units from Promotion by the Gross Profit per Unit. Incremental Units can be inferred by looking at the uptick in volume vs. normal baseline, or commonly, can be pulled directly from syndicated data providers.

For example, with incremental units of 40,000 and a Gross Profit per Unit of 0.92, the Incremental Gross Profit would be $36,800.

3. Identify Trade Costs

Trade costs include the spend associated with a promotional event, which can come in the form of OIs, Scanbacks, MCBs, Ads, and many more. In forecasting for variable Trade Costs, a brand would multiply forecasted units on promotion by the funding rate on that promotion. As it relates to Actual Trade Costs, brands can leverage deductions to see the actual costs associated with running a promotion. When considering the spend and ROI for an event, a brand should consider all funding for that promotion, which can include multiple funding vehicles (i.e. Scan + AD).

4. Calculate ROI

In calculating ROI, a brand would need to divide the Incremental Gross Profit generated by the promotion by the Trade Costs of the promotion. A value of 1 or 100% is breakeven, meaning less than that is an unprofitable promotion and more than that is a profitable promotion.

Continuing from our example above, with the Incremental Gross Profit of $36,800, and assuming trade costs of $15,000, then the ROI would be 245%.

How to Implement ROI Calculations through Excel

CPG brands can implement these calculations in an Excel sheet that is tracking product line and promotions. Below is an example Promotion ROI calculation done through excel. This is a great way to get started on ROI calculations, still has some flaws. The excel method doesn't update for new deductions and new promos planned in real time, and doesn't account for changing COGs. This creates a bit more manual work on updating the excel sheet, but it is still a great method for brands that have low volume of trade promotions.

The Better Method: Calculating ROI in Confido

Confido also supports ROI calculations! Since Confido is flowing in real time data on deductions and the sales team is actively planning promotions, the Trade Costs / Promo Spend in the ROI equation is always accurate without any need to manually update. Pricing per Unit and COGS are plugged in from the product page setup, and Incremental Units come through from the syndicated data that Confido integrates with.

In summary, Confido stitches together all of these separate data sources to give your brand a complete and accurate picture of ROI in seconds, so you can continue to plan profitably.

Conclusion

ROI for promotional spend can be tough to calculate given the various data sources needed, but is critical to maintaining profitable growth. Need help? The experts at Confido are always here to help.