Is your revenue problem, really a planning problem?

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Many consumer products (CP) companies have prioritized short-term results to satisfy investors’ demands for cost reduction and increased profit contribution from top-line revenues. That approach traps companies in a race to the bottom, using price and promotion tactics that neither sustain brands nor deliver shopper-relevant innovation. Net revenue management is a critical capability that offers a more sustainable route to growth.

CP companies are under unprecedented pressure to meet investors’ expectations for profitable growth in a challenging environment. Complicating this scenario, some of the more significant growth opportunities lie beyond mainstream retail and mature markets and require a new approach to unlock.

Amid these contending forces, CP executives have focused excessively on tactical marketing and sales activation—trade spend is now one of the biggest and fastest-growing lines on CP companies’ P&L. To counter this trend, increasing numbers of CP companies have begun to build their net revenue management (NRM) capabilities.

NRM demands a highly granular, data-driven approach, increased collaboration across the sales and marketing organization, and a strong focus on executing strategy and long-term value creation. That’s a big ask for most CP organizations. But done properly, NRM will reward the effort and investment.

What is NRM and what does it do?

NRM is both a capability and a function. It aims to optimize pricing and promotions, govern trade spend, and coordinate delivery of net revenue and gross profit targets across brands and customers. Implemented properly, NRM can significantly improve trade spend ROI and margins and buy some breathing space for organizations to reorient themselves toward winning with the consumer and creating long-term value.

EY - Net revenue Management

Foundational enablers of NRM

The foundation of NRM is deep insight into how retailer and shopper behaviors differ across channels, and how both channels and customers are evolving. Without that insight, companies are hard-pressed to invest in a channel or market in a way that balances short-term demands with long-term value. To perform as advertised, NRM requires:

  • A highly granular, data-driven approach

    Visibility underpins agility — yet many global CP companies cannot see the net-net prices they charge their customers or the return on their billions of dollars of promotional investment. At leading-practice CP companies, NRM or equivalent functions stitch together external shopper data with internal P&L and operational data, forming a single database to measure margin pools, promotion ROI, and cost-to-serve. This information enables companies to balance share and margin and manage cross-channel and cross-retailer conflict.

  • Collaborative sales and marketing organizations

    Global or regional brand and category teams are now often physically separated from market-based sales teams dealing with unique local market pressures. This distance can decouple strategy and execution, leading local sales teams to hit targets in any way they can — usually by pulling the promotions lever. NRM provides an interface between sales and brand, category, and finance teams, enabling them to operate multiple commercial levers, not just promotions.

Plugging NRM into integrated business planning

NRM is a tool for delivering portfolio and category strategies, so it’s crucial to get those strategies right. To ensure effective delivery, NRM should then play a critical role in reconciling top-down targets with bottom-up plans.

Leading CP companies incorporate P&L metrics into NRM plans, for example by using net revenue targets to help set trade spend budgets. They also use NRM to balance share, net revenue, and gross profit ambitions; set revenue and ROI targets to control promotional spend; and govern trade spend to achieve brand, category, and supply chain objectives. For NRM to fulfil this role effectively, it needs to be integrated into business-as-usual processes and governance.

Building NRM capability

In a world of deep cost cuts and headcount reductions, the idea of investing in building a new capability seems heretical. But building effective NRM capability at speed requires a transformational approach and mindset. Two activities are key to building that capability:

  • Establish analytics centers of excellence (CoE)

    Local sales insight, relationships, and field presence remain core commercial assets. But data-driven activities such as pricing, promotional analytics and point-of-sale (POS) segmentation can now often be better undertaken by dedicated analytics teams—the analytics CoE. On- or near-shore NRM resources translate price, promotional, POS, and shopper analytics outputs into practical direction and guidance and make these insights available to local decision makers at the right times.

  • Define the end state and codify collaborative working

    Given the complexity and scale of implementing NRM, stakeholders need a clear end state and compelling case to galvanize them into action. Some leading companies are building NRM capability as part of a wider integrated business planning (IBP) program, which they view as a means of reconnecting strategy with execution. In effect, IBP integrates planning processes and governance across functions, geographies and time horizons to create more agile, responsive and efficient organizations, reoriented toward winning with the consumer and long-term value creation.

Where to start

Make a compelling case for change to overcome resistance to what can seem an overwhelming challenge.

  • Size the global trade spend opportunity. Trade spend is in the billions of dollars for global CP companies, so minor improvement in ROI can produce material differences in net revenue and profit. But few today can see the size of the prize — or the risks inherent in pursuing it. A quick but credible global scan incorporating adequately granular data can reveal levels of opportunity and risk and identify drill-sites by country, brand, channel, product, and customer.
  • Conduct rapid NRM capability assessment and identify pain points. Many of the pain points in organizations have common root causes. Rapid cross-functional interviews or surveys, desk assessments and headcount or role analysis identify redundant activities and create buy-in to tackle inefficiencies. This exercise will help codify a better business-as-usual. But it will require behavioral and cultural change. In the short term, we advise focusing on one or a few regions or strategic markets to get the details right and reflect reality on the ground. A “narrow-front” approach concentrates the organization’s global resources and effort on making capability breakthroughs in a few priority markets or regions to prove the concept, build the benefits case, and learn lessons for subsequent roll-outs.