How Much Should You Spend on Trade Spend?
Learn how much to budget for trade spend and how to optimize your investments in promotions, discounts, and retailer support to drive sales for your CPG brand.
Trade spend is a critical line item for any CPG brand business budget. It's not an expense any CPG company can afford to skimp on — especially in those early days. Trade spend can enhance your visibility, build relationships with retail organizations, influence consumer behavior, and drive sales.
That being said, being too keen on trade spend can result in overspending and misallocating funds for efforts that don't move you toward your business goals. This article covers how to set a trade spend budget and optimize it for maximum impact.
What Is Trade Spend?
Trade spend is the amount CPG companies spend on efforts designed to create and support retail partnerships that shore up brand awareness and sales. Examples of trade spend include promotional allowances, funding for in-store promotions, cooperative advertising, slotting fees to encourage optimal product displays within stores, and sales incentives.
You might use trade spend to boost sales in physical and online stores. Some goals of trade spend strategies include:
Driving increased sales: Trade spend efforts should increase brand and product awareness, helping drive sales during product launches, special seasons, or growth periods.
Building strong retail relationships: Your trade spend helps foster strong relationships with retailers who may continue long-term collaboration even after specific campaigns are over.
Improving brand or product awareness: Securing better placement in stores or partnering with digital or physical retailers to manage promotions can increase visibility for your brand or products, enhancing sales in the long term.
How Much Should You Allocate for Trade Spend?
During my experience with FluentStream, Telogis, and as CEO of Balanced Business Group, I've learned there's no magic trade spend budget that applies to all scenarios — but you can rely on industry benchmarks to get started. You can also invest in financial services to better understand what trade spend budget might work best for your business in this particular season and the future.
Typically, benchmarks for trade spend for CPG brands range from 10-20% of revenue. Here are a few examples to help you understand what that looks like:
An established brand with $2 million in revenue annually might spend on the bottom of that range, allocating $200,000 to trade spend annually. In some cases, this type of company may only allocate trade spend when it launches a new product line or sees competitors encroaching on market share.
A start-up may need to allocate a higher percentage of revenue to trade spend to better break into the market. In these scenarios, it may not make sense to base trade spend on revenue figures. In the beginning, marketing is the horse that comes before the revenue cart.
An emerging brand may want to allocate funds based on the higher end of the benchmark range. A small yet growing CPG business with $400,000 in annual revenues might allocate 20%, or $80,000, to support aggressive growth campaigns.
These examples are hypotheticals. Factors like product type, growth stage, and the current nature of your retail partnerships all impact trade spend allocation, and it's important to take a holistic approach to determining the right amount for your business.
Measuring the ROI of Your Trade Spend
To understand whether your CPG trade spend budgets are realistic, appropriate, and healthy for your brand, measure the return on that investment. The right key performance indicators and financial metrics help you understand whether your trade spend is working or if the strategy or budget needs adjusting.
Some important KPIs to consider include:
Sales lift: This is the increase in sales you can directly attribute to promotional campaigns. The formula for sales lift is: (Incremental sales/Baseline sales) x 100. Typically, a sales lift of 5-10% is good for standard promotions, and a sales lift of around 20% or more is an excellent return. If you're running an aggressive promotion, you may want to see a sales lift as high as 50%.
Incremental revenue: This is the additional revenue from a specific promotional campaign (or other effort). By understanding the actual revenue driven by your trade spend, you can more effectively determine if you're getting your money's worth from those efforts.
Gross margin ROI: This is a ratio that helps you evaluate how profitable your inventory is. To calculate gross margin ROI (or GMROI), divide gross profit by average inventory cost. The resulting figure tells you how many dollars you make for every dollar you spend on the inventory in question.
Common Trade Spend Pitfalls to Avoid
In my years supporting CPG brands and growing businesses, I've seen some common mistakes related to trade spend — and even made some myself. Some pitfalls to avoid when setting your trade spend budget include overspending on efforts that don't drive ROI, failing to measure ROI initially, or allocating too much trade spend to the wrong retailers.
The best way to avoid these mistakes is to invest time and energy into financial modeling and reporting. Ensure you have ways to analyze your trade spend and the resulting sales and revenue so you can make proactive decisions to continuously improve your strategies. You need to know when a retailer has a consistently poor sell-through rate, for instance. Then, you can decide whether you need to enhance cooperation to shore up sales in that location or move your trade spend to a location with better sell-through rates.
Optimizing Your Trade Spend Strategy
Data is, perhaps, your best friend when optimizing trade promotions. Being flexible and willing to adapt in real time as you analyze data about trade spend performance can help you improve outcomes and maximize the benefits of your strategy. Some tips for doing so include:
Targeting high-performing retailers: Use analysis to understand which retail partnerships are performing well and allocate more trade spend and effort to those channels. Remember to dig deep into analytics — one retail partner may perform poorly overall, while a single location for that company is an outlier with high performance.
Paying attention to outliers: Look more closely when data tells a potentially odd story. You might learn something about consumers, geolocations, product messaging, or other marketing factors that can help you increase trade spend performance or understand which retailer support programs are working best.
Focusing on data-driven promotions: While it can be tempting to go with your gut or support retailers or other business partners you like, it's important to keep your allocations aligned with data-backed decisions. If you struggle to gather and analyze data in a timely and effective manner, consider working with accounting service providers who can help.
Adjusting trade spend based on performance: Continually adjust your total trade spend and how you allocate it based on performance metrics. Evolving as consumer behavior and markets change is critical to long-term success for CPG brands.
Making the Most of Your Trade Spend
Taking a strategic approach to your trade spend helps you align resources with optimized performance. It also reduces the risk that you might overspend or allocate trade spend in a way that doesn't work for your business. Contact the Balanced Business Group to learn about personalized services that can help you manage your CPG financials, including trade spend.
Author Name: Pedro Noyola
Author Bio: Pedro Noyola is the CEO of Balanced Business Group (BBG), a company dedicated to helping Founders in the CPG food and beverage industry gain financial confidence. At BBG, Pedro combines traditional accounting with tailored financial guidance, providing industry-specific insights to ensure sustainable growth for passionate food entrepreneurs. He is also an angel investor and a mentor to emerging CPG brands via SKU and TIG Collective. Pedro’s career spans leadership roles at FluentStream, where he helped the company achieve recognition as one of the Fastest Growing Companies in America by Inc., and Telogis, where he was part of a team that grew the company’s recurring revenue from $50 million to $1.2 billion in under five years.
Pedro holds a BA and MPA from The University of Texas at Austin and an MBA from Harvard Business School. He is an active member of the Young Presidents Organization, continually seeking growth in both leadership and learning. Outside of work, Pedro enjoys family time and outdoor activities, drawing personal fulfillment from his roles as a husband and father.
