Whenever you visit a grocery store, buy a new outfit, or order take-out, you’ll likely see products that are on sale or have some sort of promotion. From buy-one-get-one deals to percentage off coupons, these are all part of what’s called trade spend.
In this guide, we’ll cover everything you need to know about trade spend, from how it works to how it’s managed. By the end, you’ll hopefully be able to make informed decisions about your own trade spend strategy — whether you’re a brand looking to increase sales or a merchant looking to improve margins.
What is trade spend?
Trade spend is the money that brands spend to promote their products at retail locations. This can take many different forms, from volume pricing and discounts to free items to joint marketing campaigns.
The goal of trade spend is to increase sales of a product, either by enticing new customers to try it or by encouraging existing customers to buy more. In some cases, trade spend may also be used to cover the cost of listing a product in a store (also known as slotting fees).
How does trade spend work?
There are two sides to trade spend: the sell side and the buy side. The sell side is made up of merchants that directly interact with end consumers through owned or partner channels. The buy side, on the other hand, is composed of manufacturers or brands that aim to increase product sales and awareness.
Here’s a more detailed look at each side:
Some common examples of sell-side businesses are:
- Retailers & eCommerce platforms: Companies such as Hugendubel, Wayfair, Gorillas, who can sell products through their own channels.
- Service providers: Gyms, restaurants, hotels, and other service businesses that have their own ad spaces that they can monetize by promoting brand products.
- Media platforms: Businesses that have access to e.g. in-store TVs or posters and can use them to advertise products in exchange for a fee.
On the buy-side, we have companies that want to increase product sales and awareness. This includes:
- Brands: Companies that produce and sell products. In many cases, brands also own the distribution channels through which their products are sold.
- Distributors: Companies that purchase products from manufacturers/brands and then resell them.
- Agencies: Some brands outsource their trade spend management to agencies that specialize in this area, such as Group M and pilot Agentur.
What kinds of trade spend are there?
Trade spend can be roughly divided into two categories: discounts and cash expenditures.
Discounts are the most common form of trade spend and can take many different forms, such as volume pricing, product allowances, and free items. What unites them is that they don’t involve any direct payment on the brand’s part.
Cash expenditures, on the other hand, are exactly what they sound like: payments made by the brand to the merchant in exchange for something. The most common cash expenditures are slotting fees and joint marketing campaigns.
More specifically, we can further divide trade spend into the following four types.
Types of trade spend
- Volume pricing or discounts: The brand can allow the merchant to sell their product at a lower price, either for all sales or for certain volume thresholds.
- Product allowances or free items: The brand can provide the merchant with a certain number of units to distribute to customers at no cost.
- Slotting (listing) fees: The brand can pay the merchant a certain fee in order to have their product included in the merchant’s inventory at all or at a preferential location.
- Campaign spend: The brand can pay the merchant to promote their product through joint marketing campaigns, such as in-store displays or advertising.
What are the benefits of trade spend?
Trade spend presents a number of benefits for both brands and merchants, allowing the former to boost sales and/or awareness and the latter to improve margins and/or drive loyalty.
Here are some of the most common benefits:
Trade spend advantages for brands
By promoting a product in a retail store, brands are able to:
- Boost sales: There’s nothing that entices a customer like free or heavily discounted items.
- Increase awareness: Most consumers are unlikely to try a new product until they’ve seen it multiple times.
- Gain insights: Brands can use trade spend data to better understand what promotions are working and what needs to be tweaked.
Trade spend advantages for merchants
On the merchant side, trade spend can:
- Improve margins: By offering discounts on slow-moving items, merchants are able to clear out inventory without taking a hit to their bottom line.
- Increase foot traffic: Promotions can attract new customers into a store, which may lead to additional sales.
- Drive loyalty: Customers who take advantage of promotions are more likely to become repeat buyers.
In order for trade spend to be effective, both sides need to be invested in the success of the promotion. For example, a brand may offer a volume discount to a merchant on the condition that the merchant prominently displays the product in their store. This way, the brand is able to reach more consumers, while the merchant is able to move inventory faster and improve margins.
How to calculate trade spend ROI?
If you’re investing significant resources in trade spend, it’s natural that you want to know what kind of return you can expect. Unfortunately, calculating trade spend ROI is not always a straightforward task. The most common method is to calculate the incremental sales lift, which measures the difference in sales during the promotion period compared to a similar period where there was no promotion.
There are a number of factors that can affect the accuracy of this calculation, such as changes in consumer behavior or seasonality. As such, it’s important to take these factors into account when interpreting the results and not to rely too heavily on them when making decisions about future promotions.
How to manage trade spend?
Whether we’re talking about calculating ROI or designing promotions, trade spend management is a complex task that requires careful planning and execution.
Tips to get started with trade spend
- Define your goals: What do you want to achieve with your promotion? Is it to increase sales, drive foot traffic, or something else entirely?
- Choose the right type of promotion: Not all promotions are created equal. Some may work well for one type of product but not so well for another.
- Test and optimize: Try out different types of promotions and see which ones work best for your products and goals. Don’t be afraid to experiment!
Although you can start out by managing your trade spend in a spreadsheet, it helps if you make use of specialized trade spend management tools. This way, you can track your promotions in real-time and get a clear picture of each promotion’s performance.
As a brand, this will help you make more informed decisions about your trade spend strategy. As a merchant, managing trade spend in a more systematic way will provide well-substantiated data points for your prospective partner brands, among other benefits.
A tool like unea (full disclosure: we’re building it) can help you with trade spend analysis, trade spend tracking, trade spend accounting, and many other aspects of trade spend management.
This guide should have given you a better understanding of trade spend and how it works. To recap, here are the key facts that will help you going forward:
- Trade spend is the money that brands spend to promote their products at retail locations.
- Trade spend can take many different forms, such as discounts, free items, and joint marketing campaigns.
- Trade spend presents a number of benefits for both brands and merchants, allowing the former to boost sales and/or awareness and the latter to improve margins and/or drive loyalty.
- In order for trade spend to be effective, both sides need to be invested in the success of the promotion.
- Calculating trade spend ROI is not always a straightforward task. The most common method is to calculate the incremental sales lift, which measures the difference in sales during the promotion period compared to a similar period where there was no promotion.
Managing trade spend is a complex task that requires careful planning and execution. A tool like unea can help you with trade spend analysis, tracking, reporting, among other things.
We are reimagining how retailers and brands collaborate on co-marketing campaigns. Either side will have a transparent overview of campaign timelines and planning as well as asset inventory. Everything can be handled in a dedicated workplace that was, up until this point, dispersed over multiple platforms.
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