Exhibit 5: The Tiered Funding Approach Rewards Increasing Performance

That brings us to the tiered CDF approach, in which manufacturers’ trade programs are differentiated in a transparent manner with simple but powerful metrics, such as breadth of distribution, that drive the overall business (see Exhibit 5). Tiers motivate customers to move up and earn more––and if the metrics are chosen intelligently, manufacturers are actually thrilled to spend more.

The benefits are significant, since manufacturers drive the behavior that both they and their customers want, while taking trade dollars out of some accounts and offering other accounts the ability to earn more. Better yet, the program is completely equitable and fully disclosed.

The key to getting the tiered CDF approach right is ensuring that the metrics are simple, fair, and measurable. One company, for instance, made ROI its key metric––and then ended up mired in discussions of how to accurately measure ROI.

Getting the Details Right

Essentially, both the CDF ideas are simple, and although they can be pursued independently,

companies are more likely to reduce complexity and achieve optimal results by pursuing them together. Manufacturers can bring all customer funds, visible and invisible, together to create one optimal master fund. Alternatively, they can start with current funds and tier them to drive the right customer behavior. Ideally, they would integrate all their funds and then introduce tiers into that one fund.

The ideas are clear, but the execution is not easy. The hardest work for manufacturers is making the tough choices on how to structure the solution based on the profile of their business, their strategy, and the nature of the partnerships they want to build with customers. For instance, a company with a lot of business that’s driven by customer marketing––incorporating TV, radio, and in-store signage––would find that including marketing in the integrated CDF and providing incentives related to it would be very helpful. In another example, a company whose profitability is driven by base distribution can use the tiered CDF approach to provide incentives to retailers that provide the right distribution for key SKUs.