249. The Trade Spend Traps: The Biggest Mistakes Brands Make After Getting Into Retail

0:01Welcome to Startup to Scale, a podcast by FoodBevy. I'm your host, Jordan Buckner. Join me as I talk to aspiring entrepreneurs, seasoned industry experts, and everyone in between as we unlock the keys to growing from startup to scale.

0:18Getting into retail is hard, but managing the trade spend and actually selling off the shelf once you get there, that's where most brands stumble. Today, I'm joined by Yuval Selakusa, CEO of Promomash, to break down the costly mistakes that founders are making after the retailer says yes. He has seen hundreds of brands burn cash, misuse promo dollars, or just run blind when it comes to deductions and execution. And if you're ever wondering like why your retail account isn't profitable and where your dollars are actually going, this episode is going to be a roadmap for how to think about promotion deduction spend so that you can actually build a successful business in retail and not just see it as a money sink.

1:00Yuval, welcome back to the show again. Jordan, always a pleasure. Always a pleasure, my friend. So you are, of course, deep into the promo deduction world and really just have this focus of helping brands move off the shelf. And a lot of brands I've seen recently have been launching into retailers, going into smaller kind of chains nationwide. Maybe they're expanding in regions and these retailers and distributors are asking for tradesmen deductions. But a lot of the brands I'm talking to, they don't quite know how to even think about it for their business. And so I'd love to kind of start off thinking about, you know, what are, how should brands think about promotions and deductions and what are the mistakes that they usually make?

1:44Well, the biggest mistake I would say is that they treat trade like a line item, but not a system, right? And the thing is, most founders think, well, just run a few promos, give some discounts and the rest is going to sort itself out, right? That's really the mindset. And I made that mistake myself. I know you made that mistake, right? But the reality is trade is your second largest or biggest line item after cost of goods. You can't say it enough. I think it's just so worn out. Everybody's talking about it, but no one really understands the consequence of not managing your first and second largest spend on the P &L, right?

2:24It's really a hidden P &L that quietly decides your fate. It's common because no one teaches you how this works. You know, you get on the shelf, you're all excited, and suddenly you're dealing with portals, K-Hee, right? Amazon, whatever, promos, deductions. And there's terms that you've never heard before, right? Even if you're a seasoned entrepreneur or CPG founder, there are still terms that most founders just get so complexed over, right? But what if you don't get control early, right? It really spirals. And I think what happens, you end up funding everyone else's margin. I write about this on LinkedIn.

3:08You're funding the retailer, the distributor, your broker. And this whole time, you're thinking you're growing. And that's the biggest problem that we have to face and we have to address, Jordan. It's our duty to help CPG founders address this problem. You know, it's funny because as you said, the last part of funding everyone else's margin, it reminds me of e-commerce brands who are spending hundreds, thousands, millions of dollars on Facebook meta ads, right? And maybe some are successful, maybe some aren't, but meta always wins. If someone buys their product or doesn't, they're making money from it.

3:44And it seemed, you know, this trade spend promotion is kind of similar on the the retailer or distributor side where like a lot of people are making money and sometimes it helps your brand and sometimes it doesn't. One thing I like that you mentioned that you have to build a system and it it makes sense. I want you to kind of go into detail on like what a system could look like. And let's start there. Like what would a promotion or trade spend system look like as brands are thinking about how do I effectively roll this out with my partners? Well, we have, we love acronyms here at ProMesh, and we have two acronyms we really fall back on.

4:19One is CPG. So not consumer packaged goods, but cash flow, profitability, or slash performance, and growth. You do not grow, or you shouldn't, you should not grow unless you understand cash flow and profitability. If you don't have profitability in sight, you're going to raise cash for the rest of your life. If you are going all in, right, and you just raise cash and you don't fix it. I mean, again, the whole point is you got to manage the cash. If you don't have cash, you go out of business. So that's the CPG formula. Okay. Next is we have another acronym called PESO. So you plan, you execute, you settle, and you optimize.

5:00And then you go back and you plan better, you execute better, you settle better, and you optimize better. And you just keep on doing that over and over and over again. That's the system. There's a lot to it, but that's the system that I would recommend that folks at least look into. because if you don't do it in that order and you don't have the full line of sight, meaning understanding all the complexities in the Swiss cheese and the holes that are out there, you're never going to get the right reporting, which means you're never going to have the right metrics and what you don't measure, you get the rest of the story, right?

5:33I like that system and the acronym for it. One problem that I ran into, I know a lot of brands do, is developing a system across multiple retailers and partners who all have different promotional needs, strategies, and customer base, right? Where like one retailer, maybe BOGOs perform better. Other retailers, maybe you're selling at Whole Foods and they're doing their 20 % off plus 10 % for Amazon, right? And so how do you start thinking of, can you figure out like this one type of promotion applies best across most of my retail partner? Or do you really have to take it like retailer by retailer and develop a specific system for them.

6:14It's not even retailer by retailer. It's promotion by promotion. If you don't analyze your lift assumptions, if you don't analyze profitability, if you don't understand the cost of that promotion, the total cost of the promotion, you're never going to figure it out. There's no, what I hate in this industry more than anything else, it's my pet peeve. Hey guys, we ran a whole promo calendar last year. Let's just copy it this year. It's easy. Copy, paste, change the dates. You're good to go. I hate that. Because that's, I mean, there's a reason why 80 to 90 % of brands fail. There's absolutely a reason.

6:50They don't have to, but they fail because they're mismanaged. And they're mismanaged because no one looks at the detail. The brands do not understand what they're spending total, not just what the promotion spend is, but total spend and what the return on your investment is, which means where should you promote? How should you promote? That's really important, right? I mean, there's also a cost to running a promotion. And I think that this cost that we're talking about is dramatically underestimated by the founders. And the thing is, we spoke a little bit about this. They underestimate two things.

7:25They underestimate the operational chaos first. And then they underestimate the deductions that hit weeks later. Because a promo isn't just a$2 off discount. It's submitting in portals. It's uploading proof. It's hitting timing windows. It's managing inventory. It's chasing down compliance photos. If a shelf tag doesn't go up or the UPC is wrong and it happens all the time, you're still paying for that promo. You just didn't get the lift. You know, even when I was selling T-Squares and Whole Foods, I remember we were going on promo at a couple locations. This is even like, you know, five Whole Foods locations, right?

8:03It was completely manageable. I remember showing up at the store. We're going to do a demo. I'm super excited. And the shelf tag wasn't up. the sale wasn't being promoted. I had to find the, you know, the floor leader for grocery, talk to them. They were busy and backlogged. And I think literally like I had to go back there with them. They print out the labels and I had to stick them on the shelf. And this was a store that I happened to go to. And this happens like if you're in hundreds or let alone thousands of stores, you know, you literally can't do that. And so just even making sure the promotions are showing up is a big thing.

8:38Yeah, but I mean, you also then after that, you have deductions, you have off invoices and billbacks and unsaleables and these random line items, right, with no backup. And it's really death by a thousand fees, I say. And the thing is, most founders, they don't know how to validate them. So they just eat it. It's like the cost of doing business as a GL fund needs to stop. Like you just cannot have that as a GL fund. And that's how you turn a$10 ,000 promo into an$18 ,000 loss. And so how should brands start analyzing whether promotion actually worked or if it failed? Like how do they start, what are some of those metrics that you recommend they're tracking?

9:15I know we learned in Lyft earlier over kind of what time period generally and kind of what are some of the other metrics? Well, let's talk about what a good promo and a bad promo is. So a good promo is planned, it's funded and tracked. And a bad one is reactive and invisible. So let me explain. A good promo has a clear ID. So you know exactly how to find it right later. It has dates. It has items, right? Products. You have an expected lift that you're hopefully understanding based on historical data, right? And somebody owns it start to finish. And I'm going to say that again. Somebody owns it start to finish.

9:49The problem is no one owns their promos at the brand, right? Or very few brands have those folks. And so you run the promo, you close the loop and you do a post event analysis and that's on a good promo, right? But a bad promo, you have, see, this is what happens. Sales, they email a discount. They forget to submit the proof. And then deductions are showing up. Two months later, three months later, there's no tracking or worse, the event didn't even run the way you thought it did. And if no one's comparing what you planned versus what you actually got deducted, you're not running trade. You're gambling.

10:25And I think that's, again, I failed because I had no idea what my brokers were doing, what they were submitting. Was it effective? And then I was just getting these chargebacks over and over and over again. I see this with large brands, 100, 200, 300 million dollar brands. They're any chargebacks. They have no idea who even planned it in the first place. And so because they don't know and no one's owning up to it, cost of doing business, cost of doing business. And it's a write off. So that's what it is. So I love that. I mean, I think you're right. Like most people, they're not playing, they're not tracking, they're not managing over time.

10:56And the day to day of just running the business and making new decisions, usually overways pausing, reflecting and analyzing what's worked in the past, you know, like two, three months ago and having to go back and find that information to say like, oh, yeah, we did plan this last year. It ran two months ago. And now these are the results that we're getting in two, three months after to be able to go back and look while you're still planning for next year. That's wild. So then what I know we mentioned Lyft, are there other metrics that brands should be tracking along with promotions? And is it kind of like making sure the deductions are hitting correctly?

11:31Anything else? I think that when you're looking at how brands should analyze whether a promotion actually worked or failed in terms of metrics, the term worked. It's really all about isolating the impact, right? So the first thing we look at is incremental sales. What's the extra volume sold because of the promotion, right? Above what we would have expected about it without it, right? So if there's no incremental lift, the promo likely didn't drive new behavior. You may have just shifted timing or cannibalized base sales, but that's about it, right? So that's the first part. The second is profitability.

12:05Did we actually make money from that lift? That's where incremental gross profit comes in. You know, we look at profit from those extra units minus the cost of goods. And then it's about efficiency. So how well did we convert our trade spend into profit? That's what promo ROI tells us. And it's a big one, right? Because you want to know if you spend a dollar and you got$3 back or you got back 30 cents, right? Finally, I think we need to ask, did it execute this plan? This goes back to what I was talking about earlier. You know, where's the volume? Was it spent on track, right? Was spent on track?

12:43Did we hit our display or feature goals, right? So to sum it up, promo worked, right? If it drove incremental sales, delivered positive profit, showed really strong ROI and executed close to plan. And if it missed on one of those, that's where we go deeper. That's where the metrics come in. That's where you really need to have somebody knows what they're talking about. Do we understand what VBE is, what LE is, what actuals are versus your plan, right? That's what we teach in that full loop that I spoke about, the plan, spend, you know, the peso, plan, execute, settle, and optimize. Because without that, you're just flying blind.

13:21That's really the key. Yeah, I think that's so key on that. I love that. One thing I get from brands all the time is like, how much should I be spending on trade spend? And I think there's maybe two approaches that I've seen. One is like a percentage of sales, right? So when I say 20%, 30%, and then the other method might be looking at it from like an ROI perspective, right? It's less about the total number as a percentage of overall sales and maybe a look at, you know, is this individual promotion returning what we're expecting? How do you think about kind of trade spend and how brands should be thinking about like how much to spend on it?

14:01I've seen so many brands. It's so all over the place. I got to be honest with you. There is an average, which I'll talk about, but I've seen trade as high as 40 plus percent. Very, very rarely do I see trade under 10. And I think even trade under 10 is a falsehood because they're not counting other spent in their calculation. I don't think you can be in retail under realistically 25 to 30 percent. But 15 to 25 percent of gross sales is if you look at the average. Again, I think it's underestimating it, right? It also depends on the category, the strategy. Where the goal of the rails, though, is thinking that more spend is or equates to more growth.

14:41Right. So what they do is they stack promo after promo across every retailer with no guardrails and they never track what worked. And the smart brands that I work with, they don't just spend less, they spend with intent. And I think that's really the goal. You have to spend with intent. You have to. The biggest problem with brands, I got to be honest with you, you know, we talk about TPM systems. We talk about software. We talk about Excel. We talk about all of these things. And I own a TPM platform, a management platform. I own a software. And you might be shocked that I will say software doesn't work.

15:14Okay? Software is a tool. Okay? Just like a hammer. Just like, you know, an axe. It's a tool. And you can have better tools and worse tools, but it's still a tool. Right? Is our platform better than any competitor's platform like Vividly, you know, Excedra? is, yeah, I mean, there's different features, different things that you can look at. They're all going to do the job. Problem is that almost every brand I speak with utilize the wrong folks to manage trade. They're utilizing sales folks who are busy running around trying to get doors in, you know, open doors and promote because volume is all they care about, right, to manage trade.

15:55And then they're using accountants and founders and CFOs and bookkeepers to manage deductions. Not the right folks. They don't understand trade. Trade is a specialized skill. I've seen specialized trade people. They're worth their weight in gold. And not everybody that says you're a trade manager or a deduction manager is a good one. You know how I know? Ask me how I know. I hire these people and I have to go through 100 people to get one really good one. And they all say the same thing. I have 10 years experience. I'm running trade. I'm running deductions. Bullshit. They don't know what they're talking about.

16:33Just because you have a title doesn't mean you're great. They're going through the motions. What was the difference between a good person managing trade or an effective person managing trade and an ineffective person? The number one criteria that I look for, did you have a bullseye in your head to report up to the CFO, the CEO on the P &L. Like, did you own that P &L? Do you understand that P &L? Most founders don't understand the P &L. Most CFOs don't even understand the damn P &L. So that's a problem, right? So do you understand how the P &L is, and this is gross to net. This is not your company P &L.

17:05We're not talking about your employees and your lights and the office space expense. I'm talking about gross to net, above the line, below the line. I'm looking at terms like plan versus volume-based estimates. I'm looking at volume-based estimates versus latest estimate versus actuals, right? How are we looking at each dollar spent? Can we look at a promotion and understand the velocity, the incremental, how it gets affected based on historical, based on future projections? Did you own a forecast, right? These are the things that folks need to understand so well. And in terms of deductions, do you know every code?

17:43Not GL fund. Do you know every charge code? Do you know what it means? Do you know how to fight it? Do you know what kind of backup you need to support a recovery? You know, if you don't have that experience, that's why the biggest joke in this industry is you ask 10 people and nine out of 10 will tell no matter what TPM system they use, I hate my TPM. I hate Excedra. I hate Blue Planner. I hate Vividly. I hate ProMatch. I hate like they just hate it. Why? Because they're not managing it correctly. So when they need the data and when they need the information, guess what? That's why we did something about it at ProMesh.

18:20We hired the best damn team. And we don't just have platform and support, right? That's what everybody has, platform and support. I'll onboard you. I'll get you on. I'll show you. I'll train you, show you how to create a template so you can upload your data. But it's up to you to manage your trade. We actually have platform, support, and then service and the actual trade team. We call it trade as a team. So T-A-T. And it's really designed to help brands navigate without having to hire internally. Because if you hire internally, you're looking at$40 ,000,$50 ,000,$60 ,000 a month of expenses to hire qualified people because they're not cheap.

19:00First, you can't find them. Second, they are not cheap. They're very, very expensive because it's a specialized skill. I mean, I think, too, right, just like the nuance of knowing all that information is so key. And it probably takes a certain type of person who is like detail oriented, almost has that accountant mindset in terms of being able to audit back, go back and review and enjoys it. Right. Like enjoys finding the errors, enjoys tracking what's working that isn't. And most people, especially like salespeople, hate that. Founders don't even like they can't even have the time to process it.

19:37Accountants and they're like, that's not their world. And so I understand how specialized it is. And I can totally see like that is the number one thing is like finding a good person to actually do this. And here's the problem. Again, we're talking about software providers because everyone's going to want a 2026. I need a platform. I need a tool. Think about SaaS software, especially if you raise VC funds. So the first thing everyone needs to ask, did you raise VC funds? If you did, you have to know that the most important thing for them is gross margin. If they have a lower gross margin, they can't sell for the multiples that a VC fund wants them to sell for.

20:13So guess what? What's the number one thing that's going to reduce your gross margin? People. And so now they have to do software, automation, AI, ChatGPT as your team. Like, you know, like you have Claw, ChatGPT, and Grok as your trade team. No, that doesn't work, guys, right? Our gross margins are nowhere near what a VC would want. Why? Because we know that in order for us to help a brand succeed, they need a team of very expensive people who know what they're doing to help them. So either you brand go hire those people or work with somebody that brings those people to the table. And if they do bring those people to the table, they can't be a VC funded company because they won't have the margins to be able to sustain that, you know, that journey with the VC.

21:01The best part is that I find when you have those right people, they're expensive. And it's probably the hardest is getting to those right people, but they can bring down your costs as from trade over time or at least optimize it where you are getting that margin, building that profitability. because as you see, right, like millions and millions, hundreds of millions of dollars are being lost in these mismanaged promotions, even when they're legitimate, let alone the ones that are illegitimate expenses. And so it can add so much money into your cashflow from it, right? Yeah, I mean, dirty little secret of a problem, Ash.

21:35When we first started building trade and deductions, we had folks that were in the CPG industry, but they were not experts. We couldn't afford them. We're just starting out, right? And so we had folks that were helping clients out, Almost like, you know, there was support, but it was not helping them manage their trade and deductions effectively. So as we continue to grow and scale and added, you know, brands like Poppy and Siete and, you know, Lumberg and those big brands, we had to be forced to hire more experienced, right, trade people, deduction people in order to service these demanding clients.

22:10And that's, over time, the cost of my team quadrupled because you can't spend the same for somebody that's entry level to somebody that's been around for 10 years. And that's a difference. That's the one thing we always try to optimize. Can we optimize the day-to-day work of our team? Because we're never going to get our margin, gross margin, up to like 90%. It's not going to happen. Impossible. Yeah. I love that. I love ending with people because I think so much is going towards automation and AI. Having the right people either in your team or with a great partner is going to be the number one thing that determines if you have a successful trade management program.

22:52And the thing about AI, I will say this. I love AI. And I think AI has a huge future ahead of itself. Right. But unless you really understand the day to day management of trade and can analyze across multiple different metrics and numbers and tools, you're not going to be successful as a pure AI. It's just not there yet. And I don't think it's going to be there for the next few years. At the earliest. So you still need people who have been there, done that and have the scars to understand what the next step should be. Yeah, absolutely love it. Because you need the, like, that's not common information that can be scraped to just put into these systems.

23:32I just think a lot of folks are being sold a, you know, a bad deal because they think that AI is going to solve their problems. And I wouldn't let AI manage my trade spend, my second largest expense. No way. Not right now. No matter what kind of AI and what kind of tools you're putting in front of me. It's just I'm going to, I won't do it. So love that. Well, Yvonne, thanks so much for being on. As always, we, you know, I always appreciate learning about this stuff because I have gone a little bit into deductions with my experience, but you are in it all the time. So to our listeners, if you are launching a retailer, if you are having to manage deductions, think about the people process and plan tracking to make sure that you are building an effective program to grow your brand and you're not just burning money.

24:16Yvonne, thanks for being on. Pleasure, Jordan. Thank you so much.