Cost-conscious Value conscious
The times have changed and the new normal means more focus on cutting costs across organizations. The first budgets that get impacted are so-called “supporting” functions in organizations like Marketing, Finance, Admin, and IT.
While we are all looking at reducing our spending in IT, here is learning from India. Whenever I speak about our India-first approach to building a technology business, one question I am always asked is “Isn’t getting value for your products in India a challenge since Indian enterprises want everything cheap?” My answer to that is “India is not cost-conscious, we are value-conscious”. I have seen that repeatedly while doing this business in India for the past 13 years.
It is an important differentiation we should make while looking at cost-cutting this year. As a tech company focused on the Route to Market (RTM) for CPG brands, here is my view on how to get great RoI from tech in RTM.
How do we measure value in CPG?
In emerging markets, the supply chain is made up of Distributors, Wholesalers, Mom and Pop retailers and others. This fragmentation means that brands end up spending anything between 40-60% of their turnover in RTM. These costs are split between sales teams, trade margins, BTL (below the line marketing) spends, trade schemes, discounts, logistics, etc. A good way to look at value is how are you using your IT spend to channel and control these RTM spends in the right direction. IT spends should be measured in terms of your cost reduction and your sales increase. We even created a framework for brands to measure the outcome of their spending on IT.
The basic principle is that your cost of sales and distribution should be reduced by at least 10% year-on-year by the use of technology. This happens when your spending is more focussed on sales growth. Read how parle agro tripled their sales over the last 5 years while reducing scheme spend per converted case by 70% !!
How to measure costs?
By our estimates, Unilver spends approximately 1.2% of their turnover on digital innovations in RTM. We believe it’s on a higher side. Bizom customers on average spend 0.4-0.5% of their annual turnover for the full stack retail intelligence platform. This includes the digitization of their sales and distribution with AI/ ML-enabled analytics and tools to optimize and target the RTM working and multi brand technologies for expansion. Watch how Unibic decided to clear all payments in advance during the lockdown!!
So if you optimize cost of sales and distribution each year by approx 10% by increasing sales and targeting better while not spending more than 0.5% of your annual turnover on technology, you have the right mix done.