Types of Trade Spend

Understanding Trade Spend in FMCG

When I started working in KAM, I didn’t think it made a big difference as to how I was giving money to the retailers. I just worried about the % investment I was making. But over time, I realized, whether fixed or variable, upfront or retrospective, the way money flows to retailers can significantly impact both operational control and financial outcomes. And its also important to have discipline around which bucket we classify the trade spend under: some expenditures clearly fall into the trade spend bucket, others may be categorized under Advertising & Promotion (A&P) or Selling & Administrative expenses.

Types of Trade Spend

The following spend types are distinctly trade spend in nature:

1. Promotion Retros (Price Down Promotions)

This is a per-unit amount aimed at margin maintenance for the retailer when running a promotion (after I came to the UK, I realized why my retailer in Pakistan had been so keen to run promotions on my brand; I had been margin enhancing them). To calculate this, simply multiply the % discount on promotion by the invoice price. For example, if a 20% discount is offered on a SKU sold to the retailer for AED 5, the margin-maintaining retro will be 20% x AED 5 = AED 1. Ensure that the invoice price is net of any other guaranteed long-term unit payment provided to the retailer.

2. Promotion Retros (Multibuy Promotions)

Multibuy promotions require shoppers to buy more than one unit to receive a discount. The calculation method remains the same as above but is applied only to the "redemption rate" of the promotion. The % discount is determined by the multibuy offer:

• 3 for 2: 33% discount

• BOGOF (Buy One Get One Free): 50% discount

• BOGSHP (Buy One Get Second Half Price): 25% discount

The retro payment applies only to the units purchased on deal.

3. Coupon Redemption

Coupons are typically valid for a set period, and their spend calculation is similar to multibuy retros—paid only on the number of coupons redeemed.

4. Non-Promo Retros

These are long-term, per-unit payments linked to volume (by SKU) that remain constant regardless of ongoing promotions.

5. On-Invoice Discount

Unlike other variable spend types that depend on shopper sales (EPOS volume), on-invoice discounts are linked to retailer purchase volume. Typically time-bound, they prevent the need for a direct invoice price reduction. In rare cases, a fixed discount may also be applied on the invoice.

6. Gate Fee

This is a fixed absolute amount paid for secondary space placements. While many retailers have standard rate cards, these fees are usually negotiable.

7. Shelf Space or Distribution Fees

While prohibited in most developed markets due to regulations, in some regions, manufacturers may pay retailers for listing products or securing shelf space. These fees may be structured as a fixed amount or a percentage.

8. Over-Rider

A target-based bonus paid upon reaching a volume or value threshold (sales-in or sales-out). Over-riders can be highly beneficial for P&L, particularly when structured in tiers to incentivize higher performance.

There is another bucket of spend which is not necessarily money flowing to the retailers directly but it is a discount nonetheless and needs to be captured. This is the discount between the list price and the invoice price.

The list price is an internal, standardized price for selling to retailers. It took me a while before I understood the true utility of a List price. It serves as a benchmark for tracking the discounts offered to different accounts. 

Trade Spend vs. A&P Spend

Promotion and discount retros differ from other trade spends as they do not directly contribute to the retailer’s bottom line if margin maintenance principles are followed.

Trade spend is often distinguished from A&P by its direct link to sales performance. While some investments yield immediate sales effects, others impact brand equity over the long term. Shopper marketing and category development are typically classified under A&P:

• Shopper Marketing Activation: These are fixed expenses, usually categorized under A&P. However, certain investments (e.g., retailer-integrated shopper marketing) may warrant classification under trade spend. For discount coupons, issuing and printing costs fall under shopper marketing, while redemption costs are considered trade spend.

• Category Development: Investments such as fixturization, shopper research, or category-led in-store messaging benefit the category as a whole and are typically considered long-term A&P expenses.

  
  

Additionally, some logistics costs, such as transporting products to retailer warehouses, may be classified as either trade spend or selling & administrative expenses, depending on the business.

Categorization of trade spend into respective buckets really helps manage the portfolio and relationship better. In developed markets it is often bigger than any other investment in the business P&L and hence can be the difference between a well and poorly managed P&L.