Those pesky deductions: how they happen and why emerging CPG brands should care

If you’re working with a CPG company experiencing or planning for growth in your retail footprint, deductions are probably quickly becoming (or have been) your biggest headache. We've heard from so many emerging brands that have felt frustrated, helpless, and downright angry once they start realizing those checks they're expecting from customers (finally) either don't come in the amount they expected, or don't come at all.

But there's good news: you're not alone, and you're in the right place to get some guidance on what to do.

After growing a dedicated deductions team from the ground up, launching a turnkey end-to-end deduction management service, and immersing ourselves in the world of CPG chargebacks and deductions for the past several years, we here at Promomash have started to document all the knowledge and experience we've gathered, and will be sharing it right here in this blog, in a series of posts and publications. While we're working to create the best deduction management platform on the market, we realize not all emerging brands may be ready for it yet. Whether you can use our services or not, we will still share best practices and key learnings that can benefit CPG brands of all sizes. So here we go... 

When it comes to deduction management, emerging brands are generally at a distinct disadvantage when compared to large, established brands.

Managing deductions is tedious, time-consuming, and expensive for any brand, let alone those with less resources at their disposal.

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Here are some of the main challenges that keep emerging CPG brands from having a firm grip on their deductions:

1. Too much data to deal with
2. Customers (i.e. retailers) are not motivated to make it easier
3. A lack of the unique skill set needed on the team
4. Not enough time and/or resources
5. It makes no economic sense to invest the required time

And yet...

On the upside, there is a huge amount of useful information buried in deduction data that can reveal ways to improve your promotion and business processes…if only you could access it.

But let's go step by step and start with the question: what are deductions anyway? If you're an early-stage CPG, pay close attention to the following  - it will provide a timely warning of where you might find yourself as you grow the number of store you're in.

Deductions are, traditionally, the preferred way for CPG retailers and distributors to get paid by brands for marketing and promoting their products. But why wouldn’t they just invoice the brands separately for those services and have them pay with a check?

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Because the brand is actually a supplier to the retailer or distributor, they are typically owed money for the product they’ve put in the retailer or distributor’s hands. So historically, the logic from the retailer or distributor’s point of view might have been "we already owe the brand some money, and the brand owes us some money, so let's just subtract the amount they owe us before we send them a check.”

Not the cleanest way to account for all the transactions that have happened in between, but it is what it is, and it’s been this way for decades. However, if any mistakes are made on either side under this system, it's the brand that pays, not their customer, by default.

What’s important is that volumes of information about your retail sales are flowing in every month through these deductions, with what amounts to an adjustment for almost every single shopper purchase – plus a host of other expenses for logistics, marketing, and commercial non-idealities. Lots and lots of transactions to sort through! It can get overwhelming fast.

To add to the overwhelm and confusion, customers provide deduction information in nonstandard formats, usually in a PDF file that’s neither easy to read, nor scan, nor analyze. This prevents brands from easily combining the data from all their customers for basic management comparisons. The number of invalid or illegitimate deductions is estimated by various industry experts to be anywhere from 10 to 25% of all deductions, which represents quite a chunk of losses that could be preventable.

It's also worth noting that deduction errors almost always occur in one direction – and that’s the direction where the brand pays more than what they legitimately owe.

So now that we've covered a little of the basics on what deductions are, why they are difficult for emerging brands to manage, and why they should somehow be managed, what's next?

Well, there are a few different ways brands can go to try and tackle this problem - whether on their own or outsourcing a turnkey service like ours at Promomash. We've written an entire e-book to help you figure out what works best for you, and you can download it right here:

Download E-book: How to Manage Deductions So They Don't Kill Your Business

Now, if you know enough to realize you DON'T want to try and handle deductions on your own, or not sure what to do next, we're always ready to talk!

To learn how Promomash can help you save money and get your deductions under control, or if you'd like some guidance on the best approach for your company, book a meeting here at a time that works for you. Either way, we hope you find this content helpful and will keep it coming!

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