In the daily operations of your business, certain tasks drive immediate progress, easily justifying the use of your team's time. However, others, like deductions, aren’t as straightforward to prioritize. On the one hand, it can be seen as a priority because it directly affects the bank account and bottom line. On the other hand, the severity of impact and urgency is directly tied to the volume and amounts of deductions we’re talking about.
There’s also the experience factor that comes into play when deciding if and how much time will be dedicated to deductions. Those who have never experienced this uniquely CPG phenomenon may decide to jump in with both feet, not knowing what they’re in for. Before they know it, they’re deep in the weeds, spending too much time grappling with the intricacies of deduction coding, the origins of the deduction-causing promotions, or even the complexities of contractual agreements. On the other extreme of that spectrum, you always have the young brands that didn’t even realize deductions were a thing until they ate up a good chunk of margin (ouch).
So, how do you balance the task of deductions against everything else competing for your team’s time? Here we present 3 different approaches for handling them, along with pros and cons. Ultimately, there are no right or wrong answers – just the right one depending on your brand’s situation.
1. Outsource Deduction Management to a Third-Party Service
At first glance, outsourcing deduction management might seem counterintuitive. And that very well may be true for smaller brands that are still locally or regionally distributed. But for those that have reached national coverage and/or are growing their doors rapidly, the demands of tracking and managing deductions from distributors and retailers can quickly outpace internal bandwidth and capabilities. In fact, at this growth stage founders and execs are likely to realize that they’d prefer focusing limited sales, finance and accounting team bandwidth towards strategic or growth activities instead.
Pros: Outsourcing to a third party can offer a level of efficiency your own team may never be able to achieve based on specialized knowledge and economies of scale. The detailed visibility into deduction data can also reveal lots of new insights into your business. And yes, it does save a lot of time for all teams involved.
Cons: There may be a hefty price tag associated with outsourcing. Justifying the cost would involve comparing it to the man-hours and salaries required to handle deductions internally. That said, the best outsourced services (like Promomash DeductionGenius) pay for themselves with successfully recovered invalid deductions.
2. Designate Someone to Manage Deductions
Another approach to reclaiming your team's time involves appointing a dedicated individual to oversee the deduction management process. By assigning this responsibility to an experienced team member, you can count on deductions being tracked, analyzed, and addressed to the best of their ability. This team member can serve as the liaison between various departments, streamlining communication and ensuring that deductions are resolved internally.
Pros: Designating a specific team member to manage deductions also fosters accountability and transparency within your organization. With a clear point of contact for deduction-related inquiries, your team can address issues proactively, minimizing their impact on day-to-day operations.
Cons: The salary of the individual will likely be 2.5x the cost of hiring an outsourced team to manage this portion of your business. This person must also possess that “particular set of skills” and eagle eye required to efficiently catch and successfully dispute invalid deductions, and that is not an easy skill set to find or develop.
3. Accept Deductions as a Cost of Doing Business
Some CPG businesses opt to not do anything when it comes to deductions, accepting them as an inherent cost of conducting operations. This approach assumes that all or most deductions are unavoidable and don’t add up to a sum that is worth chasing. While a “do nothing” approach may not sound ideal, it may actually make sense for CPG brands that are still small, have limited customers, or enjoy a simplified distribution model. Specifically, if you are a brand generating under $2M in revenue this strategy is one to consider.
Before going down this path, however, be wary of the potential impact this decision can have on your business in the future, strategically and financially. Strategically, you will lose detailed, historical insights on your trade spend that come with tracked deduction data. This information could range from routine to transformational in nature. And financially, you may lose out on precious margin in a business where every point counts. Consider this: based on our own experience processing over $100M of deductions for our clients, we found that an average of 17% were invalid. For a CPG spending the typical 25% of their top line on trade, that translates to over 4% of lost revenue!
Pros: Time and cost saved that can be invested into other strategic or growth activities.
Cons: Potential for significant losses down the line, especially if distribution grows in size and complexity. Also, should you decide to set up a process in the future, that cost could be significantly greater than it is today because of unharvested knowledge, experience and efficiencies.
Which Strategy is Right for You?
Ultimately, the choice of strategy will be decided based on your business's unique circumstances, growth objectives, and financial expectations. We're not here to tell you the “right way”. Instead, our aim is to empower your brand with the knowledge and tools necessary to make expertly informed decisions and avoid costly mistakes in the meantime. If you're unsure about the direction you should go regarding a deduction management solution, we're here to provide guidance and assistance to you and your team.
Ready to explore how Promomash can transform your deduction management processes and help save your team time and money? Book a demo with us today.
