The final process in trade and channel promotion management is to settle the cost of the promotional execution from the channel partner. The overall consumer products industry at large is split between the two primary methods of transacting the promotional payment. This has been one of the controversial battles between supplier and channel; but new trends and technology may now decide the issue.

Trade and channel incentives, the broad category within the consumer products industry as a whole goes by a lot of names—Co-op Advertising, Trade Promotion, Market Development Funding, Business Development Funds, Advertising Allowance Programs and so on. But no matter what the name or the description of the process, it is a simple formula:

  1. Manufacturer/Supplier provides money to support local promotion of their products
  2. Channel partner promotes the manufacturer/supplier products in their local markets
  3. Manufacturer/Supplier pays the channel partner

Now is it that simple?

No. It’s not.

But you get the idea, right?  In fact, the two critical missing elements in the above ridiculously simplified formula are the agreement or rules for how much money is offered, and the method and process for how that money is going to be paid.  Well, even THAT is oversimplification, to be sure.

But two things are true here—(1), there is an agreement on how much money is to be paid; and (2), there is a ton of angst between the manufacturer/supplier and the channel partner on the method and transaction of the eventual payment.

A bit of history if you please…

The earliest forms of trade and channel promotion (and let’s use THIS moniker, because most understand we are referring to any promotional allowance offering here, OK?) were very clear and precise as to how this money would be paid. That process looks like this:

  • Supplying (or manufacturing) company offers promotional allowance funds to accrue based on a percentage of net eligible product purchases.
  • That fund amount was made available to the channel company IF and ONLY IF the channel company agreed to the terms and conditions of the promotion program offer.
  • Channel company performs a promotional activity or event as per the program guidelines.
  • Channel company gathers proof of performance documentation (copies of actual ad, invoice from media, etc.) and files a claim with the manufacturer/supplier.
  • The manufacturer/supplier reviews and audits the claim for compliance with the program terms, conditions and guidelines, and makes a payment (A/P transaction, usually a check) directly to the channel company.

Until the early 1960s, this was essentially the way every consumer products manufacturer/supplier and channel company (e.g., Retailer, Wholesaler/distributor, reseller, etc.) managed and executed trade and channel promotion. It was a monumental problem for both sides of the channel, and what prompted Ed Crimmins to write his landmark first book, “A Management Guide to Cooperative Advertising” in 1970. On page 1 of his book, Crimmins nails the essence of the coming storm:

“By its very nature, cooperative advertising places the manufacturer in the position of appropriating large sums of money which will be spent by his customers in a manner with which he may or may not entirely agree. He can specify the conditions under which he will pay for a retail ad, but he relinquishes some measure of control over creative content, media selection and timing.”[1]

You think?

Firestorm is a more likely description than “may not agree.”

The arguments raged on two fronts: the amount of money earned, and the amount of money paid. Also, one of the most difficult areas for both the manufacturer/supplier and the channel partner was timing—specifically how long it took to actually move the money from the “earned fund” to the hands of the channel customer.

We will not get into the legal and federal regulatory quagmire that ensued with the entirety of promotion allowances since soon after the American Civil War but suffice it to say that this became one of the most contentious legal and business relationship issues between manufacturers and their channel customers of all time. From a business management standpoint, this process, which continued in a manner that changed very little since the early 1930’s created one of the most startling and monumental changes in the entire history of promotional allowance management—and remains to this very day.

Deductions.

Nope, not the IRS type, but the transaction that is created when a retailer, wholesaler/distributor or reseller deducts the cost of the promotion directly off the payment for product purchases instead of having the manufacturer/supplier cut a check, as most promotion allowance offerings mandate. How did we get to that?

In the early 1980’s many of the largest consumer products manufacturers struggled with the pure logistical nightmare of receiving, auditing, and paying claims for promotions submitted by the channel customers. The largest percentage of these claims were made by the major retailers.

To help solve this problem, many of the consumer products companies used third party firms to manage and even pay these claims on behalf of the manufacturer. As you can imagine, the volume of claims and subsequent time it took to check and audit every ad, every invoice and every other piece of documentation, then submit to an internal A/P organization to include the payments in the weekly pay runs were both staggering.

During peak promotional seasons, this process could take as long as 90 days.  After more than 30 years of seeing their margin on product sales drop to below 2%, the major grocery and mass merchandiser chain companies were at an impasse. Nothing they seemed to be able to do could change the process and the problem persisted.

This hit the fast moving consumer products (FMCG) retailers hardest.

On top of the massive delays in payment, retailers had to establish huge claim filing departments with people gathering and assembling claims, burning up copy machines and postage to submit what amounted to literally thousands of claims per month to hundreds of manufacturers. Huge filing cabinets full of newspaper ads, direct mail pieces, invoices, and manufacturer published program guidelines and rules occupied large spaces in the corporate headquarters.

Something had to give…and it did.

Like the American Revolution, nobody remembers who fired the first “shot,” but it was fired. A major retailer, frustrated with the efforts to get paid for millions of dollars of advertising began deducting the amounts from the check payments for product. This was a blindsided hit to the manufacturers who promptly began to take actions to recover the amounts deducted and worse, penalized the retailer by stopping his credit and halting shipments.

Then another retailer took the baton, then another, and another, and before long, it was obvious that no amount of legal wrangling, threats, attempts to gain federal intervention was going to deter these retailers. But deducting instead of awaiting payment was not the only change in the retailers’ processes.

They stopped sending claims—proof of performance.

Their response to the manufacturers was simple: “We’re not refusing to prove performance, we only stopped sending YOU the proof. If you want to see the actual documents, we have them here in our headquarters, and you are welcomed to schedule an audit with us.”

Oh boy.

The manufacturers had little recourse. Lawsuits?  Really, sue your top channel customers?

Nah.

So, the only resort was to adhere to the change. CPG companies now had to accommodate this new process. To make a very long and involved story short, they did four (4) things:

  1. Emphasized the planning process to hopefully capture the most detail on the future promotion they could
  2. Get the retailer to agree to the Promotion Plan and sign off
  3. Use external merchandising and broker firms to help with sampled instore verification of compliance with the promotion plan
  4. Establish new departments and functions within the A/R organization to intercept and research the deductions to validate, charge back or write off the deducted amounts.

Look familiar?

This has been the basic process now for more than 40 years, and the level of sophistication in the process and technology has certainly grown and expanded to what it is today. But much of the problem with deductions, proof of performance compliance and planning still exists today, in spite of the remarkable progress made with TPx management technology. We still have to “wait and see” if the planned promotion does indeed execute exactly as planned, we still have to get our best coverage of sampled store compliance and proof of performance, and we still have problems being able to perfectly match 100% (or even 75%) of the deductions to the promotion plans.

Remember, this has been largely an issue within the FMCG industry segment. Other consumer products industry segments including fashion, durables, auto aftermarket, personal care, consumer electronics, toys, hardware/DIY and household products all still manage their trade channel promotions in the earliest forms. There is far more sophistication and technology involved, but essentially, funds are earned as on the basis of product purchases, proof of performance has to be submitted in claim form, and payments are made via A/P transactions. There are some major retail chains that deviate from this standard and adopt the CPG/FMCG deduction management process, but not as much as you might think.

Now, within the FMCG industry, there are some trends that look remarkably like returning to the traditional forms of settlement—payments by A/P transactions instead of deductions. So, how is this working?

I sat in on a conference call recently with one of the TPx vendors and their client. The discussion was around settlement and specifically, functionality requirements around deduction management. One of the CPG executives on the call said that she wanted to “take control of the settlement,” referring to moving from the present deduction settlement process to more of an A/P transactional process. I was intrigued by the statement “take control,” so I did some research with many of the CPG contacts I developed during the research for my book, “The Invisible Economy of Consumer Engagement.” I learned some very interesting things and began to see the trending.

The RGM boss for one of the world’s top brands told me that they were working with many of their largest customers to reverse the 40-year history of deduction taking in favor of what amounts to be an up-front agreement for payment in lieu of their (retailer) taking the deduction off the merchandise remittance.

This was not to be confused with making a payment in advance, rather a time-based process that enabled the manufacturer to have 10 days after the final day of the promotion to verify compliance. As opposed to the traditional co-op advertising program with terms, conditions, and rules for settlement, the “rules” are established based on the actual promotional plan created between both the key account manager and the retailer’s buyer and marketing teams. An agreement was reached to pilot the program for a series of promotions performed during the early part of summer, 2022.

The process required that the customer sign an agreement form which doubled as the promotion plan. The form contained the relevant offer information including wholesale price with the appropriate discount, lump sum payments, if any, and the joint agreement to pay within 10 days following the last day of the promotion.

While this seems like a typical promotional plan, the difference was that the information on the form was shared via upload to the procurement and order management systems to avoid an automatic default to the base price for all orders within this agreement. There was some work required to update the O/M systems to ensure against overriding the new price, and that was an important step, because many deductions are caused simply because of invoice price errors such as a system’s failure to recognize and apply the negotiated discount.

In addition, the manufacturer agreed to provide direct compliance and instore audit data to the customer for immediate intelligence on retail locations that failed to comply with deal terms. If the percentage of non-compliance exceeded an agreed threshold (which varied with the deal terms), payment would be adjusted accordingly, BUT with the agreement to review proof of performance documentation in case of disagreement.

During the pilot, there were some discrepancies with the instore audits but through rapid collaboration between the trade marketing and retail promotion teams, issues were quickly addressed and remedies applied. Overall, the pilot was a success and only a few promotions were actually adjusted based on non-compliance.  However, what both the retailer and the manufacturer agreed worked was the stronger controls and the fluidity of the process to get paid.

Of course, the manufacturer gains the most value from this, as the retailer can take the deduction and move on, only dealing with relatively low disruption to their ongoing business when challenges, charge-backs and other threats to ongoing open-to-buy status take place. And for many of the people we surveyed, this was a non-starter due to the perception that no retail organization will give up their ability to openly deduct promotional costs from the merchandise remittance to the manufacturer. Perhaps they are right.

Perhaps not.

Brick and mortar retailers are under heavy pressure right now because the huge gains made by ecommerce retailers during the pandemic have not totally subsided, as many analysts forecast. So, there are some potential “open doors” to the idea that many small to medium-sized CPGs are beginning to explore. With the ability to quickly introduce new products and a more agile ecommerce business model, major retailers are not so hardened against an A/P settlement option, providing it is done within the acceptable scope of time during and immediately after the promotion.

Other than the potential work involved in making changes to the O/M systems, there is little that is required to make this A/P process work.  Some people are tagging this process with the moniker, “bill pay” versus deductions. But it’s essentially an A/P transaction versus an A/R process. For the retailer, there is a value proposition in that the specific payments for a promotion could be made in lump sums, but with the appropriate details to ensure that proper accounting and item assignment to the ledger has strong backup. It also seems to be a tighter, more specific audit trail, and in fact, one that might do very well within a blockchain or DAG ledger system.

The very fact that this issue is now being brought up and debated, tested and put in place in many cases tells us that the trend toward a different settlement process than retail deductions may not be so difficult to imagine. Considering the amount of time and cost to manage deductions today, and the sometimes high percentage of write-offs and lengthy open financial liability issues, this is going to be something to watch.

[1] Crimmins, Edward C., A Management Guide to Cooperative Advertising, 1970, Association of National Advertisers, pages 1,2

Rob Hand

Author Rob Hand

Consumer products industry domain expert specializing in trade promotion management and execution. Experienced data and analytics professional focused on how your company can improve the ROI, reduce failure rates and improve overall value for the money you spend on trade promotion, co-op advertising, consumer marketing, demand planning and retail execution. When your company is ready to move to a new vendor, develop a more advanced data and AI capability, improve the collaboration with your marketing department and retail accounts, I am the best contact you can make. Independent, reliable domain knowledge and a long history of success will ensure your own successful results.

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