Download Why 50 percent of promotions lose money

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]
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