Commercial spend in the consumer products industry
Ready for zero-based budgeting?
In the consumer products industry, commercial spend has historically been "safe" from corporate budget turmoil, but profitability pressures and data analytics are making it an increasingly acceptable lever for cost management and margin improvement. Big data and analytics are enabling consumer product companies to make informed, confident decisions about commercial spend based on specific campaign performance—and opening the door for zero-based budgeting (ZBB).
- Changing commercial spend
- What is zero-based budgeting?
- Applying zero-based budgeting to commercial spend
- The challenges of zero-based budgeting
- Zero-based budgeting success stories
How profitability pressures and data analytics are changing commercial spend
Companies in the consumer products industry are facing significant profitability pressures from many sources:
- Evolving consumer preferences
- Rise of private labels and niche brands
- Influence of the digital marketplace
- Volatile commodity prices
- Growing transportation costs
These pressures on profitability, combined with new insights from big data and analytics, are changing how companies view budgeting strategy for commercial spend. Historically, a typical consumer products industry organization might spend 15-20 percent of revenue on marketing, promotions, and other commercial spend. A large portion of that would likely produce a negative return on investment (ROI), but prior to advances in analytics, it was difficult to gauge which investments were performing well and where to make adjustments. Without clear performance data, few companies in the consumer products industry achieved consistent year-over-year improvements in effectiveness for commercial spend—and most were reluctant to make big changes that might negatively impact sales or customer relationships.
Today, companies can see which commercial spend is successful and shift resources accordingly, making commercial spend in the consumer products industry a viable category for cost management at much lower risk than in the past. Zero-based budgeting is a powerful tool that consumer products companies can now use to be more purposeful about commercial spend investments and ensure that desired returns are being met.
What is zero-based budgeting?
In zero-based budgeting, funding is based on justified costs for the upcoming period, regardless of the previous period’s budget. Rather than making adjustments to a previous budget, each function creates a budget from scratch ("zero").
To learn more about zero-based budgeting, we recommend reading "Zero-based budgeting: Zero or hero?"
Applying zero-based budgeting successfully to commercial spend
While zero-based budgeting for commercial spend requires special handling, for many consumer product industry companies, commercial spend now meets three criteria that make it an excellent candidate for zero-based budgeting:
- Sizeable: Commercial spend typically accounts for 15-20 percent of gross sales in the consumer products industry.
- Measurable: Calculating ROI for performance trade with acceptable accuracy is very manageable.
- Fragmented: Most commercial spend is fragmented by class of trade, customer, category, etc., so various levels of returns are generated.
In general, leveraging the principles of zero-based budgeting methodically and judiciously can help organizations become more transparent, agile, and granular with their budgets. For commercial spend, the budgeting strategy can become more flexible, performance based, and on target for cost management without compromising investments that are performing well.
The challenges of zero-based budgeting: Breaking down the barriers in commercial spend
While it can be powerful, zero-based budgeting also has notable challenges. Specifically, zero-based budgeting:
- Is resource intensive
- Can lead to short-term thinking
- Requires managing a cultural change
- Impacts the art and science of ROI targets
- Requires customer buy-in
These five challenges often dissuade organizations from applying zero-based budgeting to commercial spend. The prospect of jeopardizing important customer relationships with a new budgeting strategy can be hard to justify—but it shouldn't be. Zero-based budgeting does not have to be applied rigidly or without boundaries. Though the challenges do not come with quick fixes, organizations can use a variety of demonstrated methods to address them very effectively and realize the significant benefits of zero-based budgeting.
Zero-based budgeting success stories
Download the full article to read more about how two consumer products industry companies used zero-based budgeting to achieve specific goals.
- Leveraging commercial spend for growth: Transforming trade spends into a lever for customer performance. A $10B+ food and beverage manufacturer was struggling to use its trade investments as an engine for growth. Despite the increased promotional activity, sales continued to decline and management feared that they had run out of options for improving customer performance.
- Realigning trade investment: Deciding on metrics to measure. Facing mounting pressure to improve profitability and rationalize commercial spend, a $3B+ consumer products company initiated a project to assess its trade spend and evaluate the extent to which returns were being measured and achieved.
Insight Driven Revenue with Polaris
To compete in a fast-moving, disruptive world, companies should spend less time collecting data and more time gaining richer insights from that data. The Polaris™ advantage is more agile, effective decision making that helps drive smarter pricing and profitability decisions at many levels—without the need to build new analytics capabilities from scratch. Polaris can help you unlock value potential and achieve an advantage in revenue management. In other words, don't rely on historical information, reactions to competitor behavior, or gut feel to make pricing and commercial investment decisions.