Gross revenue refers to the total amount of income that a CPG food company receives from sales. Meanwhile, net revenue refers to the final amount after adjusting for certain expenses, including promotional spending and other channel costs. For many companies, these costs take away about 18% of the gross revenue. This is a big part of the money and can really affect how profitable a company is, especially if their profit margins are already tight, around 25% to 45%.
In this article, we’ll focus on this gap between gross and net revenue, specifically on costs allocated for promotions. We’ll synthesize key insights from the discussion by Luke Abbott on Vdriven’s free masterclass, “Maximize Profitability: The Art & Science of Promotions and Channel Costs”, designed to help provide an overview of the ways to effectively strategize on promotional costs.
Effectively optimizing your promotional efforts requires understanding several interconnected factors that influence both short-term results and long-term brand building. These considerations form the foundation of any effective promotional strategy.
Here are the most important considerations in designing effective promotional strategies for maximum profitability:
The way you choose to promote your product decides how well the discount reaches customers and how it affects your profits. Each way gives you different amounts of control, efficiency, and how well it works.
Understanding how well your products sell in stores is important for seeing how they normally do and how well your promotions are working. Category managers typically focus on two key metrics:
Both unit velocity and dollar velocity contribute to these metrics. For example, if a product sells for $4.99 and 4 units are sold per store each week, that’s $19.96 in weekly revenue. But if a product sells for $7.99 and 3 units are sold per store each week, that’s $23.97, which is 20% more money even though fewer units were sold.
The best promotion plan tries to get people to try the product by selling more units, while also keeping or increasing the total money from sales to help the category grow. Knowing what retail sales numbers your stores expect helps you decide how big and how often your promotions should be.
When and how often you have promotions greatly affects what customers do and how strong your brand is in the long run. How often you promote should depend on:
For new brands, the focus should be on getting a steady level of sales before starting promotions to get people to try the product. For brands that have been around for a while, promotions should be spread out so people don’t only buy when there’s a discount.
A good promotion schedule leaves enough time between promotions to:
Be very careful about having promotions every month in a row, as this can quickly lower your profit and make people think your product isn’t worth the full price.
Without clear measurement metrics, promotional dollars can become wasted spending rather than strategic investment. Establishing a systematic approach to evaluation ensures accountability and continuous improvement.
One good way to see if a promotion for your food product is working is the “promo effectiveness score.” It gives you a standard way to compare different promotion methods. For this score, anything above zero is okay; above one means the promotion is worth doing. You get this score by looking at:
Key things to look at when checking promotions, which help with this score, include:
Beyond direct promotional spending, several other factors impact the critical gap between gross and net revenue. Managing these effectively is essential for maximizing profitability.
Free fill—providing initial inventory to retailers at no cost—represents a significant expense that can be strategically managed to improve profitability. S
For new brands, the free fill costs can be really high. Working with stores to find other ways to support them while lowering how much you invest upfront can save important money when you’re trying to grow.
Normal payment terms, especially the common “2%/10 net 30” deal, are a big part of the difference between gross and net revenue that many brands don’t think about enough in their financial planning. This means stores get a 2% discount if they pay within 10 days, but the full amount is due in 30 days.
Understanding that this discount is basically built into the system helps you plan better instead of being surprised by how it affects your cash flow and profits.
Product shortages and deductions for orders that aren’t complete can really hurt profits, especially for smaller brands that don’t have a lot of people to argue against wrong claims.
Having a system for keeping records and managing deductions can get back a lot of money that you might otherwise lose.
Making the most profit by managing promotions and store costs well takes both careful data analysis and an understanding of people. The data part is about looking closely at numbers, tracking how well promotions work, and carefully managing store costs. The people part is about understanding why customers buy, building good relationships with stores, and creating offers that shoppers find appealing.
Also, think about using services that help manage deductions (from V-driven or another company), as about 10% of deductions tend to be wrong because the systems are complicated.
At Vdriven, we’re committed to helping CPG food companies build a business that delivers long-term value to consumers, retail partners, and shareholders alike. Our years of experience and knowledge in the CPG food industry can help you create a plan that makes your promotions work best while lowering unnecessary store costs.
Let’s work together to make your brand as profitable as possible in the increasingly competitive CPG food market. Contact us today for a full review of your current CPG brand strategy and to learn more about our services.