Digital Marketing

Moving from unconditional spending to conditional investing

Has your business expense become the cost of doing business? Are you getting enough return on your investment? Are your terms driving sales, consumption or market share for your brand? For too many consumer goods companies, the growing list of fees paid to a retailer shows up in profit and loss as a gap between gross and net sales that doesn’t generate appreciable value.

In truth, your terms should provide mutual benefits for you and your client. You can only achieve this result by negotiating better terms. The “pay to play” approach is toxic to your bottom line. So let’s purge that mentality.

What are unconditional terms?

A term that has a condition attached to it (if you do, you get this) provides some control for the provider. Unconditional terms are those fees that are paid to a retailer regardless of outcome. These “pay to play” expenses: listing and assortment fees, merchant discounts, shelf fees, mailing, to name just a few. If you want to access shoppers in a particular store, you pay the price. And the bigger the customer, the higher the fees, based on the assumption that (a) they have more buyers and (b) they operate more efficiently.

Take the listing fee, which you pay a retailer to produce space for your product in the store. What costs does the retailer incur to list? it is marginal. The systems are all in place. It certainly doesn’t cost the retailer the amount he charges, but the businesses pay out regularly. In return, the retailer gets a bottom line boost, while their “investment” has created no change in their business performance. Without positive change, you don’t get ROI.”

Even some terms that pass for “conditionals” are actually unconditional because they are so loosely constructed. A manufacturer might agree to purchase 100 gondola ends. While that sounds like you have a measure of liability on the part of the retailer, the retailer is only committing to the gondola itself, not guaranteeing the location. Your shampoo, for example, could be co-located with pasta sauces, just to keep up with the deal. This position does not add value to your brand.

Agreeing to a specific number of ad slots for the year also seems conditional. Once again, however, the manufacturer has no control other than to commit to the number of spaces. The retailer dictates the price, date of shipment, and distribution. And these shipments will be made with or without the manufacturer’s involvement, so the actual cost of listing a product is negligible.

An outsider to the industry would see this practice as a waste of money, and they’d be right, but they can’t see the underlying cause. The fees exist because the system is flawed. As retail has consolidated, larger retailers have used the growing demand for in-store visibility as leverage to drive higher levels of other revenue. Willing manufacturers have fanned the fire initially inadvertently and more recently to maintain close relationships with large retail customers. As a result, the gap between gross and net sales will continue to widen unless manufacturers find new ways to negotiate terms that are more effective.

Change to true conditionality

We’re currently seeing 50 to 80 percent of business spending being paid on unconditional terms. Best practices guide you in striving for the top 10 percent. Transferring from unconditional to conditional terms requires the manufacturer to require that the terms be tied to the execution of activities that enhance mutual business performance: Invest in things that increase your revenue by changing buyer behavior, which influences buyers to buy more products and more often. . Invest in availability, communicating your brand message and presenting attractive offers.

Then you must work on the bottom line. Find ways to do business more efficiently and commit more to those terms that are conditional. We see companies that have a return override but still accept returns, or pay early payment discounts even when payments are not made early.

Take your trade spending money and make two things happen:

1. Apply them to activities that are mutually profitable for you and your client; and

2. Attach more conditions. If your retailer wants you to pay a listing fee, put in writing what you want (for example, guaranteed amount of space per store, a specific number of storefronts, a final aisle for the launch, placement of promoters in the store, access free access to the CRM database and targeted messages to key buyers). When those conditions are met, the listing fee will be paid. If you don’t get the schedule for those articles, you will prorate the listing fee.

When you switch to conditional terms with a clear set of expectations in writing, you focus your money on those actions that will produce results.

Sell ​​change to your retailer

Naturally, a retailer accused of unconditionally charging fees might balk at a sudden change in the system. Start by understanding the needs of the retailer. They have no interest in building your business. Their only goal is to increase their income. But if you can show them how your plans bring more shoppers to your store, where they’ll spend more money and expand the category, you’ll get their attention. Focus on the strategic and commercial benefits for your client. By investing time in preparing a strong buyer-based sales proposal that is tailored to the customer, you not only increase profitability with that customer, but you also build a stronger relationship.

And once you negotiate conditional terms, stick with them. Strictly comply with the terms. If you agree to 100 end of the shelf with a retailer who then gives you only 50, prorate your bill. By monitoring compliance, you show that you are committed to the agreement and the relationship.

The change process will take time. Guide your retailers through this system step by step. Prepare a plan for your negotiation, one that clearly outlines the key benefits for your client. If you view the two businesses as a joint venture, seeking mutual interest, both parties will win.

For more information on building effective trading investment frameworks or negotiating better trading terms, please contact me.

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