This year retailers and shoppers are braced for a discount season like never before.
Unsurprisingly everyone predicts COVID-19 will have a major impact on holiday-season shopping. Deloitte, for one, expects household spending to decrease 7% year-on-year as families feel the pinch of the pandemic. Research by Mckinsey shares this view, but also projects that consumers will spend more than ever on blockbuster shopping days, especially Black Friday and Cyber Monday. And Adobe Analytics’ annual e-commerce report anticipates “2 years of growth in 1 season” as online sales increase by a whopping 33% year on year.
We asked a category manager at a large Swedish fashion retailer what they make of it all.
“This is usually a really fun period because we’re rolling out major promotion campaigns and our sales are booming. At the same time you have that nagging feeling that you might have over-promoted stuff. Or that you didn’t promote as much as you should have.”
An analyst at a large UK grocery retailer shared this ingsight:
“2020 hasn’t been an easy year for forecasters or for analysts. We’ve seen online sales increase steadily throughout 2020. This year we’ve run Black Friday sales over a longer period than past years - in part to make the logistics of it easier”
In this post we will shed some light on how retailers can optimise their promotions mix, even during an exceptional shopping holiday season, even during an exceptional year.
Promotion events in general, and major shopping holidays in particular, incentivise consumers to shift their purchases over time: from periods with higher prices to periods of lower prices.
Check out the graph below to get a sense of this effect with an example from a fictitious online watch retailer.
Initially the promotion delivers a massive sales lift. But straight after the lift comes a deep drop. It’s as simple as you might expect: consumers buy more watches when they’re cheaper. When the price returns to normal, they buy less of them. This is stockpiling.
Promotion-driven stockpiling negatively impacts promotion profitability because it pushes back brand sales that would have otherwise occurred at full margin. Typically stockpiling is measured in % points of total sales lift. For example, a promotion with a 23% stockpiling effect implies that 23% of the sales from that promotion were actually taken from future sales. For long-life goods, like canned food, coffee, or beauty products, this is an especially important phenomenon.
Black Friday is a double-whammy for retailers. Consumers know in advance that major shopping holidays are approaching and they modify their purchasing behaviour accordingly.
Why purchase a new webcam in October when there’s every chance it will be discounted in November?
This is known as lead effect. The graph below incorporates lead effect into our watch example.
The promotion sales lift is now not only followed by a sales drop; it’s also preceded by one. To measure the true lift of your promotion, then, you need to try to account for both these drops.
Alas, this can be tricky to do in the real world. Some products have irregular sales patterns. This can make it hard to tease out a promotion-induced lead effect from a natural drop. Some products are new to the market. They lack past sales data from which accurate baselines can be estimated. Some products get outshone by new products to the market, making the data noisy and complicating attributing performance to effects. Some retailers simply have stronger brands or run better campaigns, giving their sales a boost at the expense of their competitors.
If these are everyday retail challenges, shopping holidays like Black Friday and Cyber Monday amplify them greatly.
We’ll finish by emphasising that stockpiling and lead effects do not by default make your promotion unprofitable; only that some promotions may be significantly less profitable than first appear.
It even makes sense in some scenarios to run campaigns at a loss; such as to drive site traffic or grow the customer base.
Whatever the case, it’s critical to account for all these effects to accurately evaluate the overall success of your campaign.
Happy Black Friday-ing!
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