The Hidden Costs of Trade Spend: What Small Businesses Need To Know
If you’re in the consumer packaged goods (CPG) space, you likely know something about trade spend. The problem is there’s so much to know, especially for new businesses—and what you don’t know can hurt you.
Trade spend refers to the complex, multilayered costs of promoting and selling CPG. This includes partnerships, coupons, supply chain issues, and, most importantly, fees.
While larger brands typically have dedicated teams to manage trade spend, smaller brands often lack the resources and know-how to do so effectively. This can lead to crippling cash flow problems because trade spend is often the second-largest business expense after the cost of goods sold (COGS).
To help navigate this minefield, we spoke with Jennifer McCoy, the Senior Director of Trade Spend at Propeller Industries. She explained the key considerations for effectively managing trade spend, and how brands can better protect themselves from its hidden costs.
Why Smaller Brands Get Burned By Trade Spend
Cash flow is the lifeblood of every business, and most small businesses are already bleeding out. Mismanaged trade spend just makes the hemorrhaging worse.
Jennifer warns that new CPG businesses are “often so eager to work with new manufacturers or launch promotions that they overlook the fine details. Sales and marketing teams might push for deals and discounts without considering the long-term financial repercussions. This can result in unexpected fees and costs that severely impact the company’s profitability.”
Smaller CPG brands can be particularly vulnerable because they often lack the expertise or personnel to analyze terms and conditions properly. Additionally, excitement about new partnerships can quickly lead to decision-makers overlooking critical details that could impact their bottom line.
The Crucial Trade Spend Questions You Should Be Asking
If you want to manage trade spend effectively, you have to start by asking the right questions:
- How much volume and velocity do you expect to sell?
Having a clear outlook on expected sales volume and velocity is crucial for planning promotions and managing inventory. Any surplus or deficit at the wrong time can sink ships. - What is the long-term value of your promotions?
Promotions can temporarily boost marketing and unit sales, but you must evaluate the potential return on investment for each promotion to ensure it justifies the short- and long-term costs. - What are the total costs of all coupons and promotions?
A common mistake a lot of new companies make is not anticipating the cumulative impact of all promotional activities on your budget. - What are potential penalties from clients?
Be wary of any stipulations that could result in unexpected penalties or additional fees from clients or distributors.
By answering these questions, you’ll get a better baseline understanding of how your trade spend impacts your bottom line. The last thing you want is to be hit with unexpected costs that can erode profitability—yet this is all too common.
The Hard Truth About Trade Spend Fees
Trade spend fees can have a significant impact on cash flow and profitability. According to Jennifer, “These fees are 15–20% of gross revenue, on average. But they can go as high as 30–40%, especially if the cost of raw materials is high.”
Consider what this might mean for your bottom line.
For example, if you’re making $1 million in gross revenue, you could be easily incurring $200,000 in trade spend costs and fees (or more).
It’s also important to understand how fees correspond to your product and target audience. Trade spend can be more substantial for certain categories, such as frozen goods, where promotional and supply chain costs are typically higher. Or that selling to distributors, rather than directly to consumers (DTC), can also incur significant costs. Executives need visibility, traceability and meaningful reports to make strategic decisions on the how to promote, when to promote and when to execute.
How to Protect Your Business From High Fees
Smart, diligent accounting is the best way to keep trade spend fees low. Many fees and deductions can also be contested and recovered, but this requires the type of expertise and bandwidth smaller companies often lack.
It’s not uncommon for 1–2% of trade spend to be invalid or inaccurate. But with the right knowledge, companies can reclaim a significant portion of these costs.
Fortunately, trade spend experts can help you identify and recover preventable deductions. They can also navigate complex fee structures and prevent potential issues by steering you away from costly pitfalls.
Real-World Examples of Trade Spend Challenges
Let’s say you run into regular situations where you bill a client for $500 worth of goods, but the client claims they only received $200 worth. Getting to the bottom of these types of supply snarls can be a time-consuming nightmare—unless you have a dedicated expert who can identify the problem and recover any lost revenue.
Or maybe you’re running a buy-one-get-one-free (BOGO) promotion to boost sales. But without proper planning and analysis, the promotion could actually end up costing you more money than it brings in.
Similarly, hitting shelves in a large retailer like Target or Walmart without being fully prepared for the associated fees and logistical challenges can be financially disastrous for any CPG brand.
Imagine a small beverage company trying to break into a major retail chain. Excited about the opportunity, they agree to various promotional activities without fully understanding the associated costs.
As a result, the company faces high fees for shelf placement, promotional discounts, and supply chain logistics. These costs eat into their margins, and they struggle to break even.
Or imagine a small snack brand that runs a series of aggressive promotions to drive sales. While the initial boost in sales is encouraging, the cumulative cost of the promotions and the additional supply chain fees result in a net loss for the quarter.
Without a thorough understanding of trade spend, the company fails to anticipate these costs and is left scrambling to manage cash flow.
With Trade Spend, Know-How is Half The Battle
Managing trade spend isn’t just about balancing numbers on a spreadsheet—if it were that simple, small CPG brands wouldn’t go out of business as often as they do.
Now, imagine making more informed decisions, optimizing all your promotional strategies, and confidently deciding what products to sell, and where. Hiring a reliable trade spend expert can provide you with the knowledge and expertise you need to protect your business from hidden costs and maximize profitability.
Don’t let the hidden costs of trade spend catch you off guard. At Propeller Industries, we offer trade spend experts to help you navigate these murky waters and arrive safely at your destination—long-term business success.
