Embracing the multichannel opportunity requires a rethinking of “trade investments,” a vital pricing issue. Many manufacturers think in terms of “trade spend”—or the rebates, bonuses, and payments they give to a retailer for specific activities such as in-store promotions, advertising, shelf space, and adherence to defined performance targets.
We use a broader definition. At the simplest level, we see trade investment as the sum of the full trade margin—the difference between what a retailer sells a product for and what it pays for it, including all discounts, rebates, and bonuses—together with all the monetary investments such as logistics services, as well as nonmonetary trade investments such as training and merchandising that are not necessarily reported in the retailer’s P&L. Exhibit 1 shows a simplified view of the various components of retailer margin.
To fully capitalize on the multichannel opportunity, companies must differentiate their trade investment, rewarding retailers that increase brand support with discounts and nonmonetary investments. It’s important for manufacturers to answer four questions in order to make differentiation work.
With which customers do we want to win? At a basic level, companies should create a brand strategy that focuses on consumer segments offering the best growth and profit opportunities and that targets those segments through a particular set of channels. Effective companies combine similar trade customers—for example, discounters, hypermarkets, department stores, specialist chains, and e-tailers—into the same segment.
Antitrust rules and regulations require that a company treat similar trade customers alike. That means that the manufacturer must apply the same objective criteria to like channels and customers as a guide for differentiated trade investments by segment or company. For example, a company cannot arbitrarily decide that Safeway belongs in one channel and Kroger belongs in another simply because it wants to treat Safeway differently.
Segmentation allows manufacturers to define the priority channels for their business, in part on the basis of the channels’ strategic importance and in part on their economics. Each channel requires different levels of trade investment to be successful. For instance, a website that specializes in triathlon sporting goods may offer content and advice that could help a shoe manufacturer’s brand, warranting its inclusion in a channel that receives preferred trade investments.
How do we direct our trade investments toward the right channels? Companies should next rebalance their trade spending by channel. A manufacturer may want to invest a greater proportion in a high-priority segment, such as channels that help with the acquisition of new consumers. For example, a toy manufacturer must sell in brick-and-mortar toy stores where kids of the target age can examine the merchandise. A big-box retailer may not be as highly targeted. Naturally, a company may be more interested in investing in certain individual trade customers within a channel than in others, regardless of the overall channel priority.
It helps to group channels into strategic categories—for example, those that help a company grow the core at one end of the spectrum and those that require only opportunistic investments at the other end. (See Exhibit 2.) Then companies should map customers to each segment, depending on both the level of brand support provided by the channel and its strategic relevance.
How shall we best spend our trade investments? Third, manufacturers should look at the “currency” they use to compensate retailers for the services that help reach consumers and grow the business. Effective manufacturers pay for performance. They avoid passive or unconditional trade investments that are not tied to results.
The more specific, measurable, and achievable the investment, the easier it is to secure the retailer’s upfront agreement; and the more the investment is paid only after completion, the better. For example, a manufacturer and retailer might agree on the number of pages per year the manufacturer’s products will receive in the retailer’s catalog. The retailer would be paid only after all of those pages had been published. Without precision, there is the risk that the money could go somewhere unwanted. For example, an investment could contribute to the retailer’s general trade margin pool or, in the worst case, it could erode the brand’s price positioning. Now, with e-tailers frequently adding and changing new forms of trade spending programs, manufacturers must make as much effort to understand what is working for them online as they do offline.
How can we make our new approach stick? Finally, manufacturers need to roll out the new pricing and trade-investment strategy. They should start by looking at the list price, as this already includes a large part of the margin that goes to retailers. Then they need to restructure the full range of margin components presented in Exhibit 1 by channel, all the way down to the so-called net-net price, including all discounts and rebates. Manufacturers must ask themselves: On the basis of the support that a channel provides to the brand, which discounts and rebate elements should it get? How much should it get for each element to compensate for its efforts?
Manufacturers also need to put in place simple yet adaptive pricing capabilities that enable them to excel at multichannel pricing. This involves major adjustments to people, processes, and tools that will, among other results, make data understandable and helpful. Manufacturers have to equip their salespeople with the right messages—in a format that is easy to understand. In particular, manufacturers must also be prepared to design a pricing and trade investment scheme that works for themselves, as well as with the differing economics of their multichannel trade partners—for example, hybrids of brick-and-mortar and online channels, or wholesalers that service both mom-and-pop retailers and price-aggressive e-tailers and marketplaces.
Consider the experience of a European manufacturer of consumer durables, a maker of a globally known product perfectly suited to online retail. The manufacturer faced tremendous growth in its own online channel, but price discounting—as high as 20 percent—by some dominant online retailers was starting to erode brand perception and cause severe channel conflict with brick-and-mortar retailers.
The company decided to create pay-for-performance mechanisms that would reward a retailer for the support it provided in representing the brand and acquiring new consumers in the main target group. The rewards were based on a clear channel strategy that prioritized trade investments for the most strategic customer segments. The manufacturer then increased the list price for all retailers. Retailers that were completely in sync with the strategy ended up with about the same trade investment as before—in some cases more—but the investment was more closely linked to performance. However, those that were not fully in sync either had to live on a lower margin or had to be less aggressive in consumer price discounting to maintain margin levels. As a result, the manufacturer created profitable growth in its highest-priority and most brand-supporting channels, and it also resolved increasingly threatening channel conflicts.
Retailers are moving quickly to compete in today’s multichannel environment, and some manufacturers are seeing compelling results from their efforts to regain pricing control. Smart manufacturers will act now to recalibrate their platform for growth. They cannot wait until they see proof that their brand and price perception are suffering. Manufacturers that lag behind risk destroying the very heart of their business and leaving significant money on the table.
To Contact the Authors