Trade Spend 101: An Introduction
Trade spend is a major financial consideration for CPG food and beverage companies. Understanding your trade spend helps you make more viable marketing, pricing and business growth decisions. Learn more about trade spend below, and then check out our information about financial metrics for wine and food businesses so you have a holistic understanding of how to approach accounting for your winery.
What Is Trade Spend?
For a food and beverage CPG company, trade spend refers to the money you invest in promotions and certain types of marketing. These expenses are traditionally held separate from your cost of goods sold, so you have to add them into certain profitability formulas to have a holistic understanding of overall business financial health.
Trade spend might include special pricing, rebates, discounts and other promotions. BOGO offers, merchandising support, in-store displays and spending related to incentives all fall under trade spend.
Here are some specific examples of trade spend:
A $10,000 discount incentive if a store puts your goods on an endcap display
Subsidizing a BOGO offer so retailers will push your product
Providing display materials for retail stores to help drive sales of your products
The Economic Impact of Trade Spend
Trade spend influences the economics of your business and niche, leading to trends in pricing and the overall competitive landscape.
Trade Spend's Impact on Pricing and Profitability
Trade spend has an obvious impact on pricing and profitability. If you have $10,000 in trade spend costs relative to $50,000 in revenue, for instance, it can substantially lower your profits.
Consider a hypothetical example where a winery offers $5,000 in incentives for local retailers to display bottles in advantageous locations. If the winery has $20,000 in sales within the same period and $8,000 in CoGS, a profit calculation that considers trade spend would look like this:
[Revenue - (CoGS + Trade Spend)]/Revenue
[$20,000 - ($8,000 + $5,000)/$20,000
That's a gross profit margin of 35%.
Without the trade spend, the same scenario would result in a gross profit margin of 60%.
To account for this difference, CPG companies may need to create pricing strategies that reflect trade spend to some degree, which can elevate prices. This is typically only necessary if you need to engage in trade spend for long-term sales. Most businesses know they will take a hit on profit margins for short-term sales meant to drive long-term brand awareness and business growth. In short-term cases, raising prices to account for trade spend can actually work against your strategy.
If you're not sure how to balance pricing and trade spend strategies, find out more about our business services, which can help.
Some Economic Benefits of Strategic Trade Spend Allocation
Some long-term economic benefits of strong trade spend allocation strategies include:
Increased sales and revenue: Trade spend helps ensure customers connect with your consumer goods via channels you might otherwise not have a lot of control over.
Better brand loyalty: Strategic trade spend lets you build rapport with retailers and support awareness for your brand.
Greater market share: These strategies help even smaller, boutique wineries enhance their market share.
Stronger profit: While trade spend initially negatively impacts your profits related to a specific promotion, strategic use of this tool allows you to grow your business and create stronger profits long term.
Trends in Trade Spend Allocation
Trade spend is not a new concept — it's been around in some form since people began to trade goods with each other. However, current trends are important to understand, as they help you remain competitive in your space.
Here are a few trade spend allocation trends in 2024 and beyond:
Data-backed decision-making: Even boutique CPG businesses can access plenty of data today, so no one needs to make gut-based promotional decisions. By basing your strategies on data, you can continuously improve them to support business growth and profitability.
Targeted promotions: Today's consumers are used to personalization, and 43% are willing to share their data to ensure targeted experiences. Targeted trade spend promotions help enhance overall performance.
Collaborations: From collaborations with retailers to promotions with influencers, modern marketing is relational. Consider how you can use trade spend to support those relationships.
Leveraging Trade Spend for Business Growth
However you implement it, the goal of trade spend should be to support business growth. Here are some specific ways you might leverage trade spend to enhance growth:
Move into new markets. Trade spent strategies can make it easier to move into a new market. Retailers in new areas or new-to-you stores may be more likely to take a chance on your products if you offer discounts or other promotions.
Reestablish dominance or consumer connections. When you find product performance falling off in certain channels or locations, you might leverage trade spend to reestablish dominance. Trade spend allocation can help ensure your products are properly promoted and stand out from the products of competitors.
Promote new products. Allocating trade spend to new product lines can help you launch them with a bigger bang that attracts consumer interest and translates into stronger future sales and product awareness.
Implementing What You Learned
A big takeaway here is that trade spend is a necessary expense for CPG companies. If you're not considering it in your budget, it's time to do so. Check out our guide to budgeting in wine and food finance for more information about managing accounting and financials for your company.
Another takeaway is that trade spend isn't just a cost you have to grin and bear. When you leverage it strategically, it becomes a powerful tool for business growth. Contact Balanced Business Group today for personalized consultancy services that can help you take your trade spend game to new levels.
