2020 is the Perfect time to reset Customer Terms
We are living through the most economically disruptive period in living memory – and there is no obvious end in sight. Some products and channels have seen 5-10 years of sales growth in a matter of months, while others have dropped off or seemingly sunk without trace, and the forecast accuracy measures for 2020 are the worst they’ve ever been. The medium-term future is also uncertain, not just from the continued impact of COVID-19 but also from the imminent impact of Brexit, from the constant change in retailer promotion strategy, and from the dynamic and frequent changes in shopper behaviour. Given the scale of change in the last 6 months, does it make sense to retain the same Customer Terms that you’ve had for the last 5-20 years?
For most branded suppliers, Customer Terms account for between 20% to 60% of total customer investment, with the balance largely comprising of Promotional funding. Promo funding tends to get a lot of attention, with many hands constantly tweaking the discounts, case rates and display options to get the best return. Yet the approach to Customer Terms is often very different – these tend to get added incrementally over time, sometimes linked to short-term pricing or relationship need, but then left alone apart from an annual review. Even in well-run businesses it is difficult to dedicate quality time to Customer Terms, partly because they are a long-term concern in a world full of short-term pressures, and partly because few account controllers have the confidence and capability to challenge their retailer terms unilaterally.
The result of all this is that investment into Customer Terms becomes less effective over time, and ever harder to justify. Some recent examples we’ve seen are
- ‘Back-to-Front’ investment paid on invoice for an annual promotion plan - in 2020 the impact of higher base sales and fewer promotions means the B2F investment is up to 3x higher than the actual cost of 2020 promotions
- Lack of robust oversight when setting terms with an online retailer many years ago, which now apply to over 8% of sales as the retailer has grown, and the terms are now a major issue
- Settlement terms of up to 4% for ‘fast payment’ – which may have been justified in the noughties, but have little benefit in today’s low-interest environment
- Trade Activation terms with wholesalers that have diluted down into a simple overrider, with additional funding now needed to run the trade activations.
So what should be done – and how? The ambition is rarely to cut out Customer Terms completely – this is funding that the buyer is counting on, and it is difficult to get significant cost savings without a short-term impact. However, it is ALWAYS possible to make Terms investment work harder, and the best approach is to define a robust and consistent Terms Framework, and then set a workable plan for its’ implementation.
A typical project that achieves this has three distinct phases:
- Visibility – an analysis of current terms, including the ‘quantity’ spent on terms both on and off invoice, the ‘quality’ of the conditionality of each term, and analysis on pricing to ensure a common benchmark for trade discounts
- Development – an iterative process to design a Terms Framework, model the options and then review the outcome
- Implementation – development of the sales tools, account plans and the use of capability workshops so that the sales team have the confidence and capability to deliver the change required
In a normal year, the main reasons for not doing this are the lack of a ‘watershed’ moment to provide a rationale for change, and the lack of a burning requirement to manage Customer investment more efficiently. In 2020, there has never been a better ‘watershed’ moment, and the need for managing Customer investment has never been more acute, which is why this year provides a golden opportunity for change.
Don’t waste it!
To understand how we can help you leverage a better return on your Customer Terms, please contact us.