The last few weeks, consumers have been switching to less expensive brands and those that they perceive as better value. This includes consumers switching to low priced brands and products on promotions.
During times like these, i.e economic recession combined with decreasing disposable income, companies often turn to promotions as a means of increasing revenue. However, as more companies turn to promotions and the number of promotions in stores increase, consumers begin to factor in these lower prices.
They get so used to it that they become reluctant to purchase products at the regular shelf price. This also results in margin dilution. However, promotions can also attract new customers, boost sales volumes and generate awareness, if planned and executed effectively.
‘If planned and executed properly’ is key, as according to a paper by promotion optimisation institute, 72% of promotions do not break even. Not only do 72% of promotions not break even, but 22% of them also perform worse than if no promotion had been implemented at all.
Lets look at why
Most promotions run year after year, with only slight changes, if any, to the promotional mechanics. Given the fast changing times we live in, it can be dangerous to assume that the same promotion will be effective year after year in the same store.
This assumes that socio economic factors and the demographics around these stores do not change and competitors will react the same way as they did previously. And we all know that this is rarely the case. We have all changed jobs, houses, where we live, the restaurants we frequent, the brands we buy, when and where we shop and in general, our life routine.
So why do we assume everyone else remains the same when we analyse promotions for effectiveness? I have been a victim of this thinking as a commercial finance person, early in my career, too. We assume the same conditions and uplifts as the year before when assessing promotional effectiveness for future periods. Also, we assume that all consumers react the same way regardless of the neighbourhood and their socio-economic make up. Again, this is rarely the case.
Example, a 50% off promotion for a consumer staple generates a lower sales uplift when implemented in an affluent neighbourhood than in others. This is either because consumers would have bought the product without the promotion anyway or because a lower price is unlikely to motivate them to switch from competition. So it is key to understand the demographic and socioeconomic make up of shoppers at each store or each cluster of stores (stores can be categorised for socio economic make up) when promotions are evaluated. As this changes over time, it is important to re-visit the calculations and assumptions each time a promotion is considered.
Store level data needs to be considered
Companies should review store level data to understand the best promotions to implement.
Other factors such as store level weather forecasts, social media sentiment/mentions, traffic data and so on, influence the effectiveness of these promotions. So take these factors into account too, to evaluate promotional effectiveness. For example, the overall revenue uplift from implementing a promotion for a beer brand when it’s raining will be far lower than when implemented when its warm, sunny and dry. Weather conditions around each store may vary and so need to be evaluated individually or in clusters. In fact, in this case, consumers are far more likely to stock up for a warm sunny day anyway, which means you lose a full price sale in the future.
The promotional uplift often results in fewer sales in the days that follow. Finance and sales teams at companies often consider cannibalisation of other SKUs that the company sells, during these promotional periods. But they rarely consider how the promotion impacts full price sales of the same product in the future.
Timing of promotions is another important variable to consider. Most companies know they should run promotions for special occasions like Black Friday or Back to School month. But in some countries, pay week is a very important time. If your target consumers are cash-constrained, then receiving a pay check means it is “shopping week”. That’s when promotions make a big impact.
Evaluate promotions over a longer period than just the promotional period
When looking at promotional uplifts and incremental value generated, look at both the specific promotional period and the impact across the next 6 months. Also, the incremental volume from these promotions should ideally come from competition or through increasing the category volumes.
If the aim is to reduce stock levels or deplete stocks that are close to expiry, you may not need to look at this. However, it is still important to know the impact of the promotion implemented to understand what you can expect in the next few weeks and months.
In the next few months, an increasing number of brands and supermarkets will be rolling out promotions on their SKUs to meet customer expectations of value. When evaluating promotions, check to see which quadrant they fall into.
Stay away from the red quadrant! If you are seeking to drive volumes to get rid of excess stock or stock close to expiry, the orange quadrant is the place to be as promotional initiatives in this space drive volumes at the expense of profitability. However, if you are looking to increase value for the business, the right hand side is the place to be (the two green quadrants for those who are right/left hand side challenged, like I am!).
It goes without saying that the top right hand corner is the place to be and is home to the winning promotional mechanic(s).
If you have any questions or comments on how promotional initiatives should be evaluated or would like to learn how store level evaluations can be done at scale, email me on firstname.lastname@example.org.