In many FMCG companies, promotion plans have gradually evolved into a patchwork of adjustments, losing their coherence and alignment with clear objectives. Years of incremental changes have left these plans unstructured and inefficient, no longer serving the strategic needs of the business.
Zero-based planning is emerging as a way to address historical inefficiencies and better balance volume, profitability, and competitive positioning. The approach can be applied to promotional planning, as well as to other aspects of revenue management. The principles of zero-based budgeting are rooted in financial management from the early 20th century. In this article, we will explore how zero-based promotion planning can enhance the efficiency and effectiveness of promotional strategies for CPG companies.
The Origins of Zero-Based Budgeting
Zero-based budgeting began as a fiscal practice in the 1920s and 1930s in the United States, where the government sought to start each fiscal year with a clean slate. Instead of building on the previous year’s budget, every expenditure was questioned, and every budget item had to justify its allocation from scratch. The idea gained traction in the 1970s, largely thanks to Peter Pyhrr's influential article in the Harvard Business Review, which popularised the concept.
Over time, however, the complexity of gathering and analysing large amounts of data made the widespread adoption of zero-based budgeting challenging. Since the 2010s, advances in digital tools and data analysis have allowed companies to embrace this methodology once again, applying it across various sectors, including promotion planning within the CPG industry.
What Is Zero-Based Promotion Planning?
Zero-based promotion planning applies the principles of zero-based budgeting to the promotional landscape. Instead of relying on past promotional activities as a starting point, companies must reassess each promotion from the ground up, determining which activities are worth pursuing based on their current objectives and resources. This approach forces companies to rigorously evaluate each promotional campaign to ensure that it delivers value, rather than simply repeating last year’s tactics.
However, there are key differences between zero-based promotion planning and traditional zero-based budgeting. In the world of CPG promotions, objectives can extend beyond pure financial optimisation. For example, a promotion might be designed to boost volume during a period of low demand, block competitors from gaining key in-store displays, or drive category penetration. These non-financial factors are important in determining the promotional strategy, but they must be evaluated alongside profitability.
Steps to Implement Zero-Based Promotion Planning
To implement zero-based promotion planning effectively, it is critical to follow a structured, data-driven approach. Below, we outline the key steps for creating an optimised promotional plan:
1. Identify Planning Levels
The first step in zero-based promotion planning is to determine the levels at which you will build your promotional plans. For instance, if you are managing soft drinks, you may need to create separate plans for colas in grocery stores, juices in convenience channels, etc. Each level may have different goals and performance indicators, so setting clear boundaries ensures that you are targeting the right promotional objectives for each planning level.
2. Setting Objectives
Next, define the primary objective for each level of your promotional plan. While profitability is often a key metric, other objectives may also be important. For example, you may wish to block competitors from securing promotional slots or maintain a strong presence in key categories to retain market share. Objectives will vary depending on market dynamics and company goals, but the clarity of these goals is essential for measuring promotional success. (For more information on objective setting for promotions, see "Key Pillars for a Successful Promotional Plan").
3. Create Promotional "Packages"
Once your objectives are set, you need to define specific promotional packages. A promotional package is a combination of a brand, a pack size, a promotional mechanic (e.g., multi-buy offers), and a discount level. For example, a deep discount on an eight-pack of Coke Zero in a grocery store is one such package.
Each package must be evaluated on several criteria, including its ability to drive volume, profitability, and market share, as well as its impact on shopper behaviour. Some packages might succeed in growing market share but fail to generate incremental profit, while others might perform well financially but lead to shopper downgrading, where consumers spend less overall. When developing the right packages, you will have a range of promotional tools at your disposal to effectively achieve each of your targeted goals.
4. Optimising Promotional Frequency
It is not enough to identify the best promotional packages; companies must also decide how frequently to run each promotion. Running the same promotion too often can lead to diminishing returns, as consumers become desensitised to the offer. A simulation model can help determine how the performance of each promotion changes over time, ensuring that companies maintain the effectiveness of their top promotions without overexposing them to consumers.
For example, the first time a multi-buy promotion on an eight-pack Coke Zero runs, it might score highly in terms of effectiveness. However, by the third or fourth time, its performance may decline, or appeal mainly to loyal consumers, making it necessary to alternate with other packages.
5. Evaluate Promotional Effectiveness
To optimise promotional planning, it is essential to rank each promotional package based on performance. The key metrics to consider include:
Profitability: Does the promotion generate incremental profit?
Source of Business®: Does the promotion drive incremental volume by stealing market share from competitors or expanding the category?
Shopper Spend: Does the promotion upgrade or downgrade consumer spend in the category?
These metrics provide a comprehensive view of how each promotion contributes to the company's overall goals.
Visualising Promotional Performance: The "Elephant Ear" Curve
A critical aspect of zero-based promotion planning is visualising the performance of promotional activities. One effective way to do this is through the "elephant ear" curve, which displays the cumulative incremental sales value on the horizontal axis and the cumulative net supplier profit on the vertical axis. This graph enables companies to identify which promotions are worth continuing and which should be reconsidered or discontinued.
Figure: The Elephant's Ear
In this curve, promotional activities are represented as dots:
Green dots: These represent profitable promotions that generate both incremental revenue and profit. These are the campaigns you want to prioritise.
Yellow dots: These promotions generate revenue but are less profitable. They might still be valuable for strategic reasons, such as blocking competitors.
Red dots: These activities fail to generate incremental profit and, in some cases, even reduce revenue. These promotions should be reconsidered or restructured.
Conclusion
Promotion plans have gradually evolved into a patchwork of modifications, reflecting years of incremental decision making. Zero-based promotion planning offers FMCG companies a structured and data-driven way to remove promotional clutter and optimise promotional spend. By reassessing each promotional package based on profitability, market share, and shopper behaviour, companies can allocate their resources more effectively and ensure that their promotional activities align with both financial and strategic goals.
While profitability remains a critical factor, other objectives—such as blocking competition and upgrading shopper spend—must also be considered. In this way, zero-based promotion planning ensures that every promotional decision is justified, leading to more efficient use of resources and greater overall business performance.
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