1. Net Revenue Management: Pillar 2, 4 & 5
Nice work on pillars 1 and 3. Time to dive into the other three pillars.
2. The 5 Pillars of Net Revenue Management
Let's go back to the example of your cookie business.
3. Price Pack Architecture
You are currently selling packs of 5 at grocery stores. The price is $5 for 5 cookies, so $1 per cookie. You are, however, missing out on all those people that want to buy a smaller pack for a quick snack on the go.
4. Price Pack Architecture
You could therefore introduce packs of 2 cookies at convenience stores, which are relatively higher priced but have a lower out-of-pocket price.
5. Price Pack Architecture
You can also try to push bigger families to buy 10 cookies instead of 5 by introducing a big pack at a relatively lower price. These kind of formats are usually sold at larger stores like hypermarkets. By differentiating your pack sizes, you are able to target more customers and generate more net sales.
6. Promotion Management
The next pillar we'll discuss is promotion management. Promotions are done to increase volume sales and to drive consumption. The problem is that many FMCG companies keep on adding promotions to their promotion calender year after year, without even knowing which promotions are actually working, and which ones are the most profitable. As you can imagine, this behavior can have a very negative impact on profit. It is, therefore, extremely important to calculate the profitability of each promotion to make sure it is effective.
7. Promotion Management
Here are your cookie sales from last year. Every month you are selling for about $50,000 worth of cookies, except for June and October, where you can see a clear uplift thanks to the promotions. It is important to not only look at the size of the uplift, but also at the promotion costs.
8. Promotion Management
The uplift is the difference of the achieved sales and the baseline sales. The baseline sales is the average of the sales of the months where no promotions have taken place.
In our example we can see that the uplift is bigger in June than in October but the associated costs are also higher in June. In the end, both ROI's are positive, but the ROI of October is higher and assuming everything else is equal, more effective. If you want to increase your gross profit with your next promotion, you should repeat the October promo mechanism instead of the June promo mechanism.
9. Trade Terms Management
The last NRM pillar is Trade Terms Management. This pillar means you need to manage your discounts or investments in the most profitable way. You should be investing more in the customers that have a big growth potential, and less in the ones with less potential.
If you see that the hypermarkets have a much bigger growth potential for your cookie business than the convenience store, you should adjust your strategy accordingly. Ideally, to link this topic with the "Mix Management" pillar, you can potentially attribute higher discounts to your most profitable products.
10. Trade Terms Management
Imagine the hypermarkets are selling your 5-pack and 10-pack cookies and the bigger pack is the most profitable one. In that case, you should give the hypermarket relatively more discounts on the big pack to make sure they push this product to consumers, which will result in more net sales and profit.
11. Trade Terms Management
Another way would be to give a sales incentive to the retailer, for example: if they sell 1000 of the big packs, they will get an extra sales bonus. As you can see, you can invest in many different ways in your customers. Optimizing these investments is exactly what Trade Terms Management is all about.
12. Let's practice!
If you haven’t grabbed a cookie yet, I recommend you pick one to analyze these last three pillars! Enjoy!