Gross Revenue vs Net Revenue: The Trade Spend Waterfall Explained

[00:00:00]All right, guys. Today we are going to be going through trade spend and gross to net management. A lot of people don't even know what this means, but the last video we did, we did a P&L overview, and all of what I'm about to talk about lives outside of your P&L. And what I mean by that is most people's P&Ls start with net revenue. But what you don't realize is you have a gross revenue, and underneath your gross revenue is what we like to call a waterfall, which is a gross to net waterfall of all the deductions that happen before they hit your P&L. If you guys don't know who I am, my name is Don Mavone. I'm the founder and CEO of multiple companies.

[00:00:33]Many of you guys know me for Bum Energy, Rot Nutrition, Onside, Cadence, 3D Energy, Relive Health, Revive MD, and a few others. But what you do need to know is it is a billion-dollar brand portfolio, and it is a mix of service-based, CPG businesses. So, I actually really do know how to read these P&Ls, and I know how to effectively manage them. So, let's jump into trade spend, and gross to net management. All right, what is trade spend? Trade spend is the revenue that you never collect. So what I want to talk to you guys about is again gross to net waterfall, an example with a CPG business, an example with a service-based business, seasonal strategy for that gross to net as well as implementing it with some framework.

[00:01:12]So let's start with what is trade spend.

[00:01:16]So, in a retail environment, trade spend is slotting fees. It's co-op advertising. It's manufacturer chargebacks, temporary price reductions, scandback promotions, and freefills or introductory allowances for stores. So, all of that stuff that I just said would not hit a P&L. And what that means is it's really [ __ ] hard to track if you don't track a gross to net waterfall.

[00:01:39]online DTOC, athlete and influencer discount codes, welcome firsttime purchases, subscription discounts, flash sales, affiliate commissions, all of that lives above. I would argue that affiliate commissions wouldn't live above. I would argue that that would live in a different area. Servicebased goods. This is an industry that most people do not understand how to get gross to net waterfall appropriately.

[00:02:03]But there are two major things in service-based businesses that you really, really need to pay attention to.

[00:02:09]One of them is scope creep, and the other, if I'm being honest, is just clientele that's been in the business too long that you don't adjust their pricing for. So, let's get into it. Why trade spend is invisible on most P&Ls.

[00:02:19]We talked about this. It doesn't live in the normal areas of P&L. It doesn't live in CM1. It doesn't live in CM2. It doesn't live in CM3. It falls all the time above the net revenue, which again, net revenue is where most P&Ls start.

[00:02:33]All right, I'm going to give you a real world example of a CPG brand. This is not my brand. These are just numbers I made up. But we're going to start with a gross revenue of $12 million. You're going to get Amazon coupons for $480,000. You're going to have retail slotting fees at 360,000.

[00:02:50]Co-op MF MDF advertising 240K. temporary scan backs and promos at 300K, DTC welcome discounts at 180K, athlete and ambassador codes at 216K, 270,000 in subscription discounts, and 8% in affiliate commissions. Guys, these are small numbers compared to the numbers that I deal with on a big on a daily basis. So, what you're not understanding is that takes your net revenue from $12 million all the way down to less than $10 million. That's $2 million in swing that you are not appropriately accounting for because you're just not paying attention to it. And I am also responsible of doing the same thing. I challenge my team on a quarterly basis to go through our trade spend waterfall and make it as margin of creative and as useful as we can because this is something that just gets away from us.

[00:03:38]If you guys want some ideal, I guess you could say parameters. Our trade spend, this area in specialty sits at about 20%. In FDM sits at about 10% and club sits at about 5%. So blend all that together, we live somewhere between, if I'm being honest, a 15 and 16% trade spend averaged out throughout the year.

[00:04:00]But as you can see, it is a massive delta and one of the best areas that you can really dissect and take money right from there straight to the bottom line.

[00:04:08]When you're looking at CP a CPG business like mine, you're going to evaluate what we should do. So, do we keep it? Do we test it? Do we cut it? And do we audit it? There are certain things that you can't get rid of. Slotting fees, there's no saying what you can do with them. The good thing about slotting fees is you can advertise them across the year. So, if you do take them as a hit in one month, you can actually take that and put it across the year as this is what it costs me to get into this store. So, do not keep it in the month that you pay them. Avertise them across the full year. Subscription discounts. Obviously, it gives you a high lifetime value. You want to keep those. Amazon fees, there's no choice. You're paying them. There's no way around it. Amazon is not going to give you a deal. Test, right? These are things that you want to test and move around to see if it's going to make sense or if it's not going to make sense. Welcome discounts are one of those things. Does it make sense to do it? Is there a better way to attract it so you don't turn into a discount brand?

[00:04:59]And affiliates, right? Audit whether the traffic is making sense. Are you paying enough or is the affiliate making you enough money to warrant paying them out?

[00:05:08]What I always like to audit is athlete codes and co-ops. Co-ops are the opportunity that you can go back to a retailer and ask them to co-und a discount deal, right? For example, we do dollar energy drink days. We do 50% off sometimes in our retailers for big sales. I'm going to go back to them all the time as we grow and as we get bigger and as we become a more important piece of their business and say, "Hey guys, we've been taking the burden of this for quite some time. Are you willing to now co-op or co-und these things with me?"

[00:05:37]One thing that you can cut all the time is TPRs. TPRs, unfortunately, are usually due to a a product not selling well, so you have to put it on a temporary price reduction to move the product or get back into the velocity windows you need. But learning from your mistakes in the past, you can absolutely take this and learn from it and not have to do these as often. So really, scanbacks and TPRs are something that you absolutely do not want to have in your gross to net waterfall. A real world example of a service-based business, right? You have discounts like anyone, right? You're going to give 10% 15% off, but long-term client rate freezes. This is the one where you need to pay attention immediately to.

[00:06:17]Sometimes in service-based businesses, you have clients that you've had for 5, six, seven years. You do not change their pricing because you don't pay attention to it. And as you grow, your pricing gets higher and higher and higher with cost of goods. So, what you were paying $10 for four years ago, you may be paying $30 for now, but that client is still on the same price. So, it is very, very important on an annual basis or a quarterly basis to audit your cost of goods coming in. Audit your cost of employee, your hourly rates, and make sure those things are not increasing without the service increasing at the same time. Very, very common mistake that most service-based industries make.

[00:06:52]The second most common mistake that service-based industries make and probably the biggest one on this list is scope creep. And what scope creep is is if you're a service-based company and you charge 10 hours of service for a job. Okay, that's great. Goes to the bottom line. What if that job takes 14 hours of service? If you do not readjust the bill and you bill incorrectly at the beginning, you just lost four hours of pay to that service. So, this can add up massively in a month or a yearly basis.

[00:07:22]4 hours turns into 10, turns into 40, turns into 400. And that is one of the best ways that you can pay attention and drive that bunny right back into the P&L. So, service base creep, right? And then obviously that long-term client rate freeze. Pay attention to your long-term clients. You obviously don't want to consistently increase their pricing if you don't have to, but you also have to maintain that profitability and that takes it right away. Next thing we're going to go into is how to create a gross to net waterfall that is accreative to your business. Now, what do I mean by that? If you have a gross to net waterfall and it's 17% and it's 17% every month on the dollar, you're not doing anything good for your business. You're basically just giving a all all at once discount, right? It's basically understanding that you have a discount running all the time for your business. No one's buying unless they're getting a discount and that's how your business is going to run forever. So, the only way to increase your value is to offer more of a discount. Now, most people don't understand that trade spend doesn't need to be the same every month.

[00:08:24]What the goal is is to equal that 17, 18, 19% by the end of the year, but doing it in ways where you have acquisition months, you have retention months, and you have overhead months.

[00:08:36]So, for example, what would you think Black Friday is? Black Friday is absolutely an acquisition month, right?

[00:08:42]You're going to spend a [ __ ] ton of trade spend in that month. You may go to 30 or 40% in that month to drive new clientele into the business to acquire new customers, but then after that month, you're probably going to go into that retention mode for a few months to kind of get back that marginality and get back down to that average of a 16 or 17% trade spend value. So using your trade spend wisely is extremely important. In my business, we do it three times a year where we go heavy. We go heavy in a new year, new me. We go heavy on Black Friday, and we go heavy at the 4th of July. Everything else between the year is really pulling back and really making sure that we're catering to those new clients that we got, but we're not overspending on new customer acquisition or trade spend because we want to make sure that we focus on those three times a year to really drive new value and new member.

[00:09:28]And we audit all of it, right? We're auditing everything we're doing to make sure it's making sense. If we're flat discounting, right, that's not doing us any good. But if we have those acquisition months, those retention months, and then we're being able to say, "Okay, hey, great. In that retention month, we got,00 new customers. We're up 37.5%. We're going to do that again in January. We're going to do that again in July. There needs to be a reason why you're doing what you're doing. All right. Implementation framework. This is exactly what I would do if I were you and you had no clue what you were doing until this very moment. One, you're going to audit everything and you're going to build your first waterfall. Pull every discount, every fee allowance, every credit for the last 12 months in all of your retail portals, Shopify, Claio, QuickBooks, and categorize them by purpose. Was it an acquisition? Was it retention? Or is it overhead? This tells you which spend is working and which spend is just habit. Set annual targets by category. Decide your acceptable annual blend. 15% of gross, 18 to 28% in specific months, whatever you want. But make sure you have two to three months a year that you're really driving higher acquisition. And that means higher trade spend. Build a 12-month trade calendar.

[00:10:36]Map acquisition months, standard months, marginal recovery months. And each channel, retail, DTC, Amazon gets its own calendar. No ad hoc discounting without budget assignment. If you guys don't pay attention to this this gross to net, you guys are wildly wildly mismanaging your P&L. Even though this doesn't fall in your P&L, these numbers drastically affect your P&L. Measure net revenue, not just gross. Okay? I love when you talk to someone and they tell you they did 200 or $300 million in revenue and when you ask gross to net, they say no gross and then net is half of that. That's not a business. That's just a the gross revenue number is an ego builder. It doesn't do [ __ ] for you.

[00:11:14]It doesn't make you better. Everyone gives a [ __ ] about net revenue and IBIDA. So pay attention to those numbers first and then review these quarterly, right? Ideally, what you want to do is just replicate the same thing quarter by quarter by quarter by quarter and figure out what works and just keep doing those things. One thing that I will say that's very very very important here is when you're looking in the gross to net area, you have to look at your products in a CPG world which have margin. For example, right now in my world, protein has no margin. Protein prices are through the roof, right? So, what am I doing? I can't do any trade spend on protein because it makes me margin decretive. it makes my CM1 go negative and I can't do anything about it. So, what I'm doing now is I'm taking all the trade spin that I used to allocate to the proteins of the world or whatever in your business is a very low margin skew and I'm putting it towards my highest margin SKs and hopefully retargeting them with easier offers or cheaper offers to get them to buy our higher margin SKs. So, for example, in the retail world, protein does not get discounts. Pre-workouts and creatines are going to get the discounts. But what I am going to do is retarget that protein buyer with an SMS or an email, which doesn't cost me nearly as much as it would cost me to get someone off of Meta or Google or Tik Tok, right? Makes sense. The the lower margin SKUs you want to use the cheapest way to get to get them. So the core principles of managing gross to net efficiently, measure net, report net, plan your trade calendar. Lifetime value justifies acquisition costs. Right? If you can understand how long someone is with you and how much that lifetime value is, figure out how much it's worth to buy them or to get them to switch over to you. Discounts are for acquisition only.

[00:12:54]Do not discount loyal people. That's not worth it. Track ROI line by line. Track that revenue and build it into your systems. Guys, this is literally the most foolproof way to be successful. If you want to start this week literally today and you want to figure this out, pull your last 12 months of discount data, tag every trade spend line and add net revenue to your weekly reporting.

[00:13:18]And the brands that win on margin don't discount less, they discount smarter.

[00:13:23]Does that make sense? The brands that win don't discount less, they discount smarter. Use these things to your advantage. Make sure the back end or the second half of this is driving more attention into the business and ultimately you'll be built for success.

[00:13:36]So, I hope you guys like this. This is a very, very packed video, but there's a lot of information in it. And if you haven't watched the P&L management video, I would highly recommend you watching that video, too.