In recent years, Consumer Goods companies have navigated through an era of unprecedented turbulence. This period has been marked by a series of challenges, prompting companies to adopt short-term initiatives aimed at protecting profits. Initially, the focus was on managing volumes and optimizing supply chain efficiencies in response to the disruptions caused by the Covid-19 pandemic. Afterwards a sole focus on passing through cost increases in years of extreme inflation.
In the wake of the storm, Consumer Goods companies are left grappling with extensive cleanup efforts and a compelling imperative to establish robust revenue growth management capabilities, essential for fostering sustainable growth.
What is Revenue Growth Management?
Revenue Growth Management (RGM) is a relatively new concept, especially in the realm of Consumer Goods companies. In essence, RGM is a comprehensive, consumer-centric strategy aimed at placing the right brand, product, price, location, and activation strategies in front of the right customers.
RGM originally took shape in the airline industry, where airlines faced limitations on the number of available seats. As a result, they needed to rethink their approach to business, focusing on maximizing profits per seat available rather than only maximizing the number of tickets sold. Today, an increasing number of Consumer Goods companies are adopting this model by forming dedicated RGM teams with a primary focus on increasing revenue and profit margins. These RGM teams go beyond merely adjusting prices; they delve into a broader understanding of overall customer demand. They address questions such as identifying when and where customers make purchases, deciding which products to promote in specific locations, and choosing the most suitable brands for different customer segments.
At Simon-Kucher, we define RGM as a flywheel of different levers. There is no particular order in which to tackle these levers, but they must work together to form holistic and successful strategies and capabilities.
The 6 Revenue Growth Management levers
Brand pricing is about the right positioning of brands through consumer pricing. Consumer pricing should be based on consumer willingness-to-pay, which is dependent on the channel (e.g. retail vs. out-of-home) and target segments. Generally, different brands cover different price tiers that are relevant for certain shopper segments. Although nuances in prices can exist in local markets based on market dynamics and competition, certain price rules of the brand should be set centrally to ensure a consistent brand positioning.
Pack Price Architecture
Detailed and data-driven shopper insights are the core of determining an optimal portfolio at the right price points. It is key to gain a profound understanding of customer needs across different occasions, understanding specific shopper goals for each distribution channel, and aligning your product selection with the appropriate price points in the category. Techniques like shelf-based conjoint analysis can be applied to predict how changes in price and packs (or products) will result in what kind of volume migrations in the category. Best in class companies have clear roles per pack with a value-based price ladder that covers different price tiers.
Active Mix Management
Active Mix Management involves determining clear actions to drive an optimal mix on all different levels. Define the role of each channel and select an appropriate product assortment. Determine the profit and growth potential of each category to guide resource allocation and trade-offs. Assess the value and strategic importance of your customers to further differentiate the assortment by customer segment. And finally optimize the right mix of SKUs within a retailer based on rate of sale and net margins. Utilize levers such as promotions, assortment breadth, marketing, and trade investments to actively drive mix management.
Promotion pressures have continued to increase over the years and promotion costs are often a large chunk of the P&L. But companies also often use promotions to drive short term topline growth, without a sustained long-term impact on the bottom-line. Establishing a forward-looking and data-driven strategy is therefore essential, which starts with having clear objectives per brand and product group. Only then you can evaluate based on KPIs as penetration, uplift and Return on Investment if a promotion has been effective to realize those objectives. Continuous post-event analysis with standardized tooling will feed the optimization of strategies and design of promotions, such as the discount mechanism, discount depth, frequency and supporting investments. With a strong selling story to the trade, promotion management is an excellent lever to drive win-win initiatives with the retailer.
Trade investments should be in line with the value a customer delivers in terms of revenue, assortment, visibility, activation and efficiency & collaboration. Generally, a lot of trade investments are not conditionally linked to any counter performance. Effective trade term management starts with full transparency on currently provided trade terms and triple-net prices to assess real customer profitability. A consistent internal trade term system should be in place with pay-for-performance elements including objective customer evaluation. With an increased pressure of buying alliances, a harmonization of triple-net prices within acceptable corridors is a burning platform to mitigate large exposure risks. That requires clear guardrails, a reduction of trade term slippage and a clear action plan per retailer to comply with the trade term structure and price corridors.
The RGM organization
Optimization of the RGM levers is not a one-off exercise. It is a capability that requires the right resources and should be enabled by effective processes and tooling. The way how RGM organizations are set-up is highly dependent on the size and complexity of the business. But the most important criterion for an effective organization is that it has dedicated full-time RGM functions that have a real mandate and are not only supporting, but leading commercial activities. The RGM function plays a pivotal role in this commercial process as a linking pin between sales, marketing, finance, supply chain and management. In addition, they need to equip local teams with standardized methods and tooling, and foster a culture that embraces growth.
Growing the RGM capability
Consumer Goods companies are massively investing in RGM capabilities. Other industries like durables are setting first steps towards revenue management functions. Even private label companies are transitioning from sales driven organizations towards more holistic revenue management functions. As with all growth, a controlled and sustainable approach is required. Therefore, the following approach is suggested:
- Understand the current state of your organization's Revenue Growth Management and the ambition for the mid-term.
- Know your RGM maturity. Assess the current capabilities of individual levers per country to develop a roadmap with prioritized actions to improve the maturity.
- Conduct local projects on individual RGM levers that generate success stories for the organization and fine-tune strategies.
- Use these local projects to develop new and improved playbooks, to ensure learnings are documented and methodologies are consistent across markets.
- Continuously monitor the right KPIs aligned with your RGM strategy to track the success of RGM and provide effective and timely steering.
RGM is a critical capability to make holistic business decisions in a time that is characterized by high volatility in costs and demand, with rapidly changing consumer behavior. An effective RGM organization is necessary to thrive in this environment and stay on top of competition.
Upcoming Manage for Profit Seminar
To help Consumer Goods companies succeed in their quest for more sustainable growth and building the right RGM capabilities, we organize the Manage for Profit Seminar with a dedicated consumer-industries program on April 18, 2024.
During this seminar, we will reflect on how to grow profits in times of potentially stable revenues. Today’s challenges will be addressed from a macroeconomic perspective by Hermann Simon, a commercial perspective by Simon-Kucher experts and from a practical perspective by Air-France KLM.
In addition, our industry experts will discuss new insights related to "Revenue growth management" and "Go to market strategies" in a specific Consumer Industries program. You can find the complete program here.
The authors wish to thank Joy Machool (Consultant) for his contribution to this article.