These commercial directors also have a lot in common:
If so it’s a shame because phasing out poor promotions and doubling down on those that create value is one of the most impactful things any retailer can do to improve business performance.
In that spirit, and based on our experience working with dozens of retailers, here’s 3 promotions challenges (and how to solve them).
Retailers shouldn’t have to rely on gut feeling, but lack of quality data means they’re often forced to. Because of this they typically discount too shallowly (and miss out on potential sales) and too deeply (and sacrifice too much margin) more often than they ought to. If this sounds familiar, ask yourself 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.
One solution is to set up set up experiments or A/B tests across stores and time and model the impact on sales impact. Another more challenging solution is to model baseline and promotion demand on each item and store. That way you get a view on the alternative scenario: what if I did / didn’t run a promotion?
Retailers run more promotions than they need to.
This isn’t surprising.
And without a clear strategy, promotions easily get out of hand. In fact, it’s not unusual to find that 80% of promoted products account for around 20% of sales uplift.
The conclusion? 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. Worse, many of these promotions won’t lift sales high enough over baseline to compensate for their lower price, resulting in a loss.
In an ideal world, just hit reset. Review every promotion you’ve run recently and ask: do they align with my strategy? Do they compete with each other? Where can I reduce complexity? It’s best to start with few promotions. Only increase them when there’s measurable ROI.
But in our less-than-ideal world, this is likely unrealistic. If so, the first and most impactful action you can take is to identify the very worst performing promotions, and shut them down.
This will achieve 3 things:
Products with strong promotion uplift may not be promoted frequently enough. Products with weak promotion potential may be promoted too frequently. Both scenarios can drain revenue and profit.
When deciding on optimal promotion frequency for products in the assortment, strike a balance between lift potential (how much do the products lift on promotion?) and frequency. Often there are high-lift potential products that have untapped frequency potential, leaving money on the table. Similarly, there are low-lift products that are sometimes promoted beyond optimum frequency. Shifting towards products that perform relative to their size, giving them more “airtime”, can substantially impact sales and profit.
Promotions are challenging. But retail is so much a margins game that even incremental improvements pay off in the long run. Some of this can be achieved using the strategies listed above alone. Integrating a dedicated promotions tool can unlock even more potential
If you’d like a free promotions strategy consultation with the Formulate team, schedule one here.
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