In this article, learn about:
What trade spend includes and how it’s calculated
How retailers and suppliers share promotional and operational costs
Challenges in trade spend management
Every allowance, price discount, in-store display, or freight credit represents a shared investment between suppliers and retailers—an investment known as trade spend. The global CPG industry is estimated to spend $500 billion a year on trade promotions.
Trade spend refers to the funds a supplier allocates to promote or drive sales of a product through a retailer, encompassing a variety of strategies such as trade promotions, allowances, and cooperative marketing programs. These types of investments can help retailers attract shoppers, improve category performance for suppliers, and strengthen supplier–retailer relationships.
Because of the potential benefits of trade spend, suppliers will often invest a large portion of their revenue in it each year. CPG suppliers often allocate up to 10-20% of their revenue to trade spend each year. However, managing trade spend can also be challenging, with high investments, complex agreements, and uncertain returns.
In this guide, we’ll explore how trade spend works, how it’s calculated, and the importance of trade spend management.
How Trade Spend Works
In short, trade spend is a partnership: the supplier provides funding or incentives, and the retailer executes activities designed to move more product off the shelf (both in-store and online).
Big retailers may have specific programs in place to facilitate trade spend. For example, Walmart utilizes allowances that are negotiated into the Supplier Agreement. On the other hand, Target has Target Vendor Income (TVI), which are contracts that facilitate a variety of trade spend activities, known as vehicles.
Related Reading: How Major Retailers Handle Trade Promotions and Allowances
Because retailers have their own way of managing trade spend, the process can vary widely. In addition, the size of the supplier will also greatly impact the level of planning, flexibility, and types of programs they can participate in.
Timing
Oftentimes, suppliers will build an annual strategic plan for trade spend, outlining budget, goals, target products, promotional types, and key seasonal initiatives. Then, in practice, there may be more fluctuations. For example, a CPG that sells notebooks may have a new line quickly developed to capitalize on a trend. In this case, the supplier may review their trade spend budget to determine what can be reallocated to push the new product during back-to-school season.
Funding
When it comes to funding trade spend activities, there are a variety of ways these payments can take shape. Some examples include:
Percentage of sales: Vendors pay a defined percentage of sales or purchase orders to support a promotion or rebate. This is common in allowances or volume-based programs.
Fixed payments: Vendors commit to a flat fee to fund a promotion.
Shared Cost Agreements: Costs are shared between the retailer and the vendor.
Off Invoice (OI): Discounts or allowances are deducted directly from invoices at the time of billing, rather than applied as post-invoice credits.
Refundable or contingent payments: Payments finalized only if specific conditions, such as sales targets, are achieved.
How to Calculate Trade Spend
Trade spend is calculated by dividing total promotional investments by total net sales.
Calculating your trade spend as a whole—as well as by individual retailer, product line, or promotion type—is key to understanding where your investments are going and how effectively they drive sales. This level of visibility helps:
Uncover promotion strategies with low return on investment
Understand what trade spend has been the most effective
Inform overall promotion strategy
The Importance of Managing Trade Spend Effectively
Because trade spend is such a large investment, it’s critical to manage it well. Things like poor strategy, visibility, or low oversight can all lead to wasted time and money for suppliers. Building an effective trade spend management strategy can:
Strengthen relationships with retailers: Transparent, data-driven collaboration fosters trust between all parties and can even open the door for other trade opportunities.
Maximize ROI potential: Monitoring which promotions truly drive sales and brand engagement helps allocate funds more effectively.
Support long-term growth: Consistent, well-planned trade investment builds brand equity with retailers and consumers.
Challenges in Trade Spend Management
Even the best-laid plans can face obstacles, and trade spend management is no exception. For companies without a formal trade spend strategy, getting started can feel overwhelming—especially when navigating multiple programs, retailer requirements, and performance metrics. On the other hand, organizations with longstanding strategies may feel confined to “the way things have always been done,” making it difficult to innovate or adapt to changing market conditions.
On top of that, many CPGs struggle to connect their trade investments to measurable outcomes. Without clear visibility into performance data or alignment across departments, trade spend can quickly become a major expense with unclear ROI. That’s why it’s key to not only build a trade spend strategy, but also to continuously monitor and optimize the strategy over time.
