96% of commercial directors we surveyed agree: running promotions that consistently perform is a major challenge. And that’s not the only thing they have in common. Among other things, they shared that:
- Promotions drive between 10-50% of sales and store traffic annually.
- They run thousands of promotions every year, from online display ads to leaflets to loyalty club offers.
- They struggle to analyze and understand which promotions are driving sales and traffic and which are simply costing the business.
Retailers run so many different promotions in so many channels, with so much riding on their success, that actionable insights into promotion performance are essential. One of the most impactful things any retailer can do to improve business performance is to identify and phase out ineffective promotions and double down on those that create real value.
Having worked with a diverse group of retailers helping overcome promotion challenges and measure effectiveness, we’ve seen some definite patterns emerge. Based on that experience, we want to share three typical promotion challenges – and how to solve them.
1. Wrong price. Wrong tactic.
Retailers shouldn’t have to rely on gut feeling when planning promotions. However, a lack of quality data often forces them to do just that. The result is that they either discount too shallowly, missing out on potential sales, or too deeply, sacrificing already slim margins. If this sounds familiar, ask yourself two questions: How often is my promotion suboptimal? And just how suboptimal is it? If you can’t answer these questions — and in our experience, it’s rare to be able to — there’s an opportunity for real improvement.
A/B tests are probably the most obvious solution. Setting up experiments across select stores and timeframes will provide data you can use to model potential sales impact. Another solution, albeit more challenging, is to build detailed models that compare baseline and promotional demand for each item and store. That way, you can see the alternative scenarios and measure the effects of whether you did or did not run a promotion.
2. Too many promotions
Retailers run more promotions than they need to. It isn’t surprising, and it’s easy to understand some of the logic, such as:
- It’s easy to rerun promotions that appear to have worked in the past.
- Doing something is often perceived as better than doing nothing.
- Supplier partners constantly push for new campaigns anyway.
The problem is that promotions can quickly get out of hand without a clear strategy. In fact, it’s not unusual to find that 80% of promoted products account for only around 20% of sales uplift.
The bottom line is that too many promotions generate too much noise. For customers, this can draw their attention away from the products that most likely satisfy their needs. For the business, it creates complexity and uncertainty. At worst, many of these promotions won’t lift sales high enough over the baseline to compensate for price reductions, resulting in a loss.
In an ideal world, you would review every promotion you’ve run in the last six months and ask:
- Does it align with my strategy?
- Is it competing with other promotions?
- Where can I reduce complexity?
It’s best to start with a few promotions and only increase them when there’s measurable ROI. But in our less-than-ideal world, this is an unrealistic approach for most retailers. In that case, the most immediately impactful action you can take is to identify the worst-performing promotions and shut them down. Doing so will achieve three things:
- Provide immediate cost savings so that you can quantify the impact of your project.
- Help you make a case for further investment in your proposed initiatives.
- Encourage proactive ways of working that lead to higher and longer-term payoffs.
3. Balancing promotional frequency
Many retailers struggle with striking the right balance of promotional frequency. They often fall into a pattern where products with solid uplift aren’t promoted frequently enough, and products with weak promotion potential are promoted too frequently. Both scenarios threaten profits and drive margin erosion.
The truth is that without an analytics solution, the solution is an arduous one. Were you to attempt this process manually, you’d have to:
- Compare how each product performs on promotion with its performance off promotion. This comparison must be made for similar periods – you couldn’t compare ice cream’s May performance on promotion with December off promotion – to determine whether it’s worth promoting the product at all.
- For products deemed worth promoting, you’d then need to try promoting them with different frequencies over time to see their impact on performance, as some promotions lose effectiveness faster than others.
- Once this analysis has been completed across the range of products, you can extrapolate those results and apply them to similar products. For example, if a promotion works for a specific brand of ice cream, it should also work for comparable brands.
Beyond the need to continually repeat this process across the entire range, the difficulty arises because you still must figure out how to put the insights into an actionable format. Further, in today’s world of pandemics, economic shifts, and environmental disruption, it is rare to find truly “comparable” periods.
To get a realistic analysis, you’d need to create regressors to account for the impacts of external variables on promotion performance.
Considering the rapid pace that retailers need to keep staying competitive, the amount of time and resources required to run complex, manual experiments make them cumbersome and unrealistic. Automating is the only way to process such a high volume of information at speed and output actionable plans.
Retail is a margin game where even incremental improvements can result in significant payoffs in the long run. Promotions, as challenging as they are, play a considerable role in winning that game and retailers need to be able to meet that challenge head-on. While the strategies listed above will help, integrating a dedicated promotions tool will unlock even more potential and provide a wealth of insight and analysis.