A version of this article originally titled, “How a True Net Cost Analysis Helps Retailers Maximize Promotions,” appeared in Retail Touchpoints. Article updated May 8, 2025.
During the global COVID-19 pandemic, retailers faced numerous challenges due to consumer demand and spending and supply chain disruption. And while some companies experienced an overall increase in sales, such as those in the grocery business, it remains difficult for retailers of all sizes to maximize the performance of their source-to-pay cycle. With more shifts in consumer behaviors, omnichannel retail, and tariffs that add new complexities to the supply chain, there continues to be more factors to consider when we think about margins, revenue, and the future of retail.
This is especially true when it comes to tracking the success of rebates, promotions and discounts. These increasingly complex programs provide a much-needed source of revenue and customer engagement, while also opening the door to potential margin erosion.
We developed a true net/dead net analysis for retailers to scrutinize their costs and margins. This analysis offers a deeper, more accurate view into the effectiveness of vendor promotions, and examines how increased sales can even mask root cause issues within the source-to-pay cycle.
How to Accurately Account for Direct and Indirect Costs in Retail Promotions
Retailer promotions and discounts are constantly evolving and adapting. Oftentimes, retailers enter into hundreds — perhaps thousands — of vendor agreements, all of which have their own different time frames and scope, including invoice allowances, billbacks, scan-downs, flat funding, and so on. Thus, accurate tracking and accounting of indirect spend and promotional application is invaluable and can have a consequential impact on the dead net cost of a product.
Without the right data model or platform, it is difficult to accurately calculate individual funding and margin at the category, vendor and product levels. Pulling all of the data into a comprehensive cost and funding analysis, however, provides retailers a deeper view into how a particular promotion impacts costs, sales and margins, so they can leverage a mix of promotions and regular-priced items at the right timing.
A comprehensive cost and funding analysis helps retailers pinpoint which categories and vendors are providing the most value, empowering more informed decisions.
Use Cases for Cost and Trade Funding Visibility
Once retailers have full visibility and access to all products’ sales, cost, promotions and margin performance, they can accurately measure and compare the impact of each individual program. This also allows retailers to forecast promotion results based on past consumer behaviors.
Click the image to try our Funding Calculator
Consider this example: At the beginning of the COVID-19 pandemic, consumers rushed to stores and stockpiled food, toilet paper, cleaning supplies and other essential goods. This caused a significant spike in sales — an almost 23% increase over the first five periods of 2020 versus the same periods in 2019.
As sales increased, so did overall promotional funding. However, although the overall dollar value of the promotional funding increased year over year, the rate was much lower than the increase in sales. So while on the surface an increase in sales may appear wholly positive, the lag in promotional funding increase shows there may be underlying inefficiencies or operational gaps.
The following graph offers an introductory view into funding that is critical in comparing year-over-year funding rates for each product, vendor and category. Whereas dramatic changes in sales can hide actual changes at the unit or dollar amount level, accurate insight into promotional allowances can highlight where to focus attention.
All In Funding Rate / courtesy of Retail Touchpoints
There are a variety of ways to highlight problem categories and vendors, but a quadrant chart is a highly visual, easy-to-explain tool to highlight key areas of interest. The below graph demonstrates the relative rate change of each category from one year to the next, regardless of any large shift in sales.
Category rate change / courtesy of Retail Touchpoints
The categories in green represent products with a higher margin rate than the year before. In red, lower margin rates. The top side of the graph represents promotional funding rates higher than the year before, while below represents lower funding rates. The circle size represents the size of sales.
It is readily apparent from the funding and margin analysis that two large categories in Quadrant 3 saw a decrease in both funding and margin rates. Using this information, retailers can explore which vendors and UPCs are included in these categories to identify exactly who or what is contributing to these changes.
Where Do Retailers Go From Here?
Consumer buying habits, sales strategies, promotions and the retail industry as a whole are experiencing a period of rapid change. Shoppers are more digitally enabled than ever before, and retailers’ increasing use of technology to engage them only adds to the complexity of their operations. While a cost and funding analysis is no silver bullet, it does provide insight into what promotions are working (or not), particularly during times of uncertainty.
Featured Resource
Margin Insights ROI Calculator
Read more
