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WHITE PAPER Why 50 percent of promotions lose money: And what you can do about it By John Marron, Sr. Solutions Specialist, JDA Software One thing the Great Recession accomplished was to permanently change consumer attitudes toward price and promotions. Consumers have come to expect a ‘deal’ on every item they purchase. As a result, the increased use of promotions that retailers used to survive the downturn has become a permanent fixture of revenue plans. Even eight years after the 2007 recession began, RSR Research found that the biggest pricing challenge retailers experienced was the increased price sensitivity of consumers, although the increased pricing aggressiveness of competitors and price transparency made significant gains in 2015 compared to previous years.1 The problem, however, is that despite the importance of promotions to retail success, approximately half of all promotions fail to generate the overall revenue lift intended, either losing money directly through improper pricing or cannibalization, or through lost opportunity from poor item selection, ineffective marketing or failures in execution such as insufficient inventory. The question is: What can you do about it? Align your pricing The pricing challenges of the consumer-driven, price transparent omni-channel retail marketplace are creating havoc for pricing and promotion decisions. The top challenge of increased consumer price sensitivity, expressed by 55 percent of the RSR survey respondents, is forcing retailers to keep everyday and promotional prices low, which decreases margins. The second biggest challenge, at 48 percent, is the increased pricing aggressiveness of competitors, which also drives down prices and margins. The third biggest challenge cited, at 47 percent, is increased price transparency. This makes retailers’ jobs more difficult because it reduces pricing flexibility. It seems, when it comes to pricing, retailers are caught between a rock and a hard place. Adding to the challenge is the fact that retailers’ pricing objectives may also be misaligned. In the RSR survey, the top objective (49 percent) was to maximize gross margin. While this is consistent with their second objective of conveying their value proposition, it is in conflict with the third and fourth objectives of driving demand and increasing sell-through. With conflicting challenges and misaligned pricing objectives, it is no wonder that pricing and promotions show a disconnect between actions and expectations. In the RSR survey, only 14 percent of laggards say they measure the impact of their promotions and only 21 percent say they regularly identify and eliminate ineffective promotions, yet 71 percent say they think their promotions are effective. How would they know? Clearly, a more structured approach to pricing and promotion management is needed. Choose the right offer Due to the large volume of promoted items today, the selection of which items to promote is often done without a great deal of careful analysis. The items chosen for promotion may simply be those promoted last year at the same time, or frequently those for which a supplier has offered trade funds. But will these items actually contribute to the highest possible revenue lift and grow margins, or will they just cannibalize other items in the category or your own private label products? Do you truly understand customer buying behavior and how they react to promotions and pricing changes? Are there other items that may drive greater total lift due to current consumer demand or through the halo effect? Does the potential lift vary by region or locality? What will be the impact on inventory levels and will the supply chain be able to execute the promotion with appropriate stock levels at all impacted locations? These and many more questions are too detailed and labor-intensive to handle manually or with spreadsheets considering the volume of items typically promoted at any point in time. Extensive, data-driven analysis is required to determine the true potential of each possible item to be promoted across each market or locality. Not only will automation through advanced pricing systems make this detailed analysis possible, the results can be stored in a database for use in future promotion analysis. The result will be the ability to select the most profitable promotional offer for each category and location on an on-going basis. Price optimally A key part of selecting the right promotional opportunity is to understand the impact of price on consumer demand and your demand forecast. Each category and product may have unique price elasticity considerations, that is, the degree to which changes in price drive changes in demand, and these may vary by region and locality. It makes little sense to offer a price promotion on an item that is relatively inelastic to price. On the other hand, for an item with large price elasticity, what is the optimal price that best balances demand with margin objectives? And how does this impact market share and financial goals? How do various price points correlate with inventory levels, lead times and supply chain costs? The answers to these questions are not simple. They require careful analysis of many factors coupled with modeling against various business and financial goals, often referred to as multiple objective optimization. This type of sophisticated optimization is only feasible with price optimization software designed for this purpose. Otherwise, promotional pricing will not meet intended objectives and may result in lost opportunities and revenue, unacceptable margins, and financial loss. Consider halo and cannibalization effects When deciding which items to select for promotion, and at what price, it is critical to understand the halo and cannibalization effects between the items within the category and across related categories. For example, how much will a sale on peanut butter increase sales of jelly, and what is the relative lift for grape jelly versus strawberry jam? Does this also lift bread sales? How do the increased margin dollars on the halo items offset reduced margins on the peanut butter? On the other hand, how much does the sale on one brand of peanut butter cannibalize sales of other brands, especially your private label brand? How much do trade funds for that brand offset the lost revenue for the other impacted brands? All of these internal and external category relationships must be continually mined to understand the revenue, margin and market-basket impacts of pricing alternatives over time. This dataand labor-intensive process is not scalable manually. It requires continuous analysis, modeling and selflearning capabilities only feasible through advanced pricing solutions. Without this level of analysis, promotions and pricing will inevitably be less than optimal, leaving money on the table. Spread the word Promotions will be less than effective without effective promotion. This sounds trite, but it is critical to the success of any promotion. Consumers need to know what is being promoted in a way that best engages their interest and prompts action. But with so many potential avenues of communication—online, print, TV, radio, email, social channels, mobile—understanding which medium or combinations of mediums are most effective for each type of promotion and each customer group by category and product is daunting. Most companies have no systematic way to evaluate the causal relationships between the many mediums available even on a national level, much less by region or locality. But without this detailed level of analysis, it is impossible to know which marketing strategies will be most effective at driving traffic and lift. Or as department store pioneer John Wanamaker put it, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Unfortunately, a century later many retail executives still don’t know either, severely hampering marketing effectiveness. Unlike in Wanamaker’s time, however, today there are systems to analyze the mountains of available data, provide visibility to category and item seasonal demand patterns and marketing causal coefficients, decompose historical demand patterns and systematically apply regression analysis on all marketing activities to understand the relationships between causal factors and sales lift. Today Wanamaker would know which advertising spend was effective by media type, category, product, customer group, locality and vendor. Armed with this information, intelligent marketing decisions can be made to optimally support promotion success. Collaborate within your organization Supply Chain collaboration is a hot topic these days, but a lack of internal collaboration is preventing many companies’ promotions from being as effective and profitable as they could be. Too many companies still operate in organizational silos, often with conflicting goals, multiple spreadsheets, disparate systems and the absence of enterprise workflows to facilitate cross-functional business processes. For example, the efforts of merchandising and marketing are frequently misaligned around promotions, and nobody communicates with the supply chain group to ensure the right labor and quantities of inventory will be available and staged in the right areas to support the promotions. To generate the most value from promotions, the entire enterprise must be aligned through a single, centralized promotion planning process and supporting technology. Cross-functional workflows by media type should drive pricing, promotion and marketing strategies down to the local level to maximize customer engagement, promotional lift and profitability. Goals must be set to reward contributions to overall promotion success. Only when the organization is completely aligned can the full benefits of promotions be realized. Execution determines success or failure No promotion can succeed unless the promoted items are available on the shelf when customers come to buy them. It sounds simple enough, but with lapses in internal communication and collaboration as just discussed, oftentimes the supply chain implications are overlooked. Is there enough inventory to cover both base demand and the expected lift? Is it positioned in the right locations to match local demand patterns for promotion variations? Have lead times been factored in for production, distribution, transportation and setup based on item attributes and locations? Is sufficient transportation secured to transport initial promotion inventory and replenishments to the right locations? Is enough labor available, budgeted and scheduled to set up and stock displays and replenish inventory at each location, as well handle the expected increase in foot traffic? Failure to consider these and many more execution questions, or failure to provide sufficient lead times, can spell the difference between a promotion’s success or failure. Thus, supply chain execution must be part of the promotion planning process. However, too often there are disconnects in the planning process. Merchandising has its forecast for base demand and expected lift; marketing has its forecast; and supply chain has its forecast. Seldom will these align or be integrated with store labor forecasts, resulting in mismatches between plans and execution that can rob promotions of their effectiveness. Supply chain execution functions should instead be part of the promotion planning process from the start. Planners need to know what inventory will be available, or can be made available at what cost, the costs and timing to transport and position it in the right locations, the labor availability and costs to handle the promotion activity over and above other daily functions, and so on. Supply chain teams need to know what demands will be placed on inventory and their resources with enough lead time to prepare and execute the plans without exceeding capacities and budgets. It all gets back to the fact that you need a single, endto-end enterprise planning process for promotions that is collaborative, provides visibility to all associated factors (a single version of the truth), and is supported by a single, integrated set of pricing and promotion optimization technology. This technology will enable you to: • Select the best items to promote based on careful analysis of customer buying behaviors and all causal factors including price elasticity and the halo and cannibalization effects for each category, item and location • Set optimal pricing based on multi-objective analysis and modeling • Plan effective marketing campaigns based on systematic regression analysis of all media types, markets and customer buying patterns • Collaborate across the enterprise on a single promotion planning process with built-in enterprise workflows and shared objectives • Execute all promotions efficiently, flawlessly and profitably with optimal quantities and positioning of inventory and labor Promotions have become too important to retail success to risk their planning and execution to manual, siloed and disconnected processes and technologies that lack the detailed analysis necessary to understand customer buying behaviors and capitalize on the huge number of causal factors involved. With competitive and financial pressures being what they are today, only optimal selection, pricing, marketing and execution of promotions will ensure success, and prevent your promotions from being the ones that lose money. John Marron is the Sr. Solutions Specialist for Lifecycle Pricing and Promotions at JDA Software. 1. Nikki Baird and Paula Rosenblum, Pricing 2015: Learning To Live In A Dynamic, Promotional World, RSR Research, June 2015 Experience shows that when you can consistently plan and execute promotions at this level, the benefits are substantial, including: • Achieving sales lift of 1-12 percent • Improving margins 5-20 percent • Significantly reducing promotional out-of-stocks • Increasing returns on your inventory investment jda.com [email protected] Copyright © 2015, JDA Software Group, Inc. All rights reserved. JDA is a Registered Trademark of JDA Software Group, Inc. All other company and product names may be Trademarks, Registered Trademarks or Service Marks of the companies with which they are associated. JDA reserves the right at any time and without notice to change these materials or any of the functions, features or specifications of any of the software described herein. JDA shall have no warranty obligation with respect to these materials or the software described herein, except as approved in JDA’s Software License Agreement with an authorized licensee. 09.30.15