The Category Sales that are Eroding Profit
•You have this category where you tend to do a lot of promotions
•Total sales is growing for the category as a whole – so things are looking good, right?
•But as margins decrease, you start to wonder – am I overdoing it? Could it be the case that I am actually eroding category sales?
First, lets take a look of a disguised example of category sales of a major convenience
retailer (below). The category consists of 100-ish products.
So things are basically looking good. But at the same time, you know that the category is getting more and
more promotions intensive. This is where you need some data-driven approach to get answer to the question – is the category actually decreasing, but gets pumped up by the promotional activity?
Whats needed here is an analysis of the category, product by product. Using a mixture of ML, Bayesian and regular regression models, you get the normal sales (i.e. what sales would have been if you didn't promote) and the sales lift. The normal sales + sales lift, by definition add up to total sales.
So if we do this for each and every product in the category and sum it up all together. That gives us a pretty good idea of where things are heading – is the normal sales increasing or decreasing?
There you have it. Things are maybe not as pretty as you might've hoped. Now, of course, there might be zillions of reasons you might want to go this direction anyway. Maybe your short term strategic objective is to achieve sales at any cost. Or the category might be a doomed category for reasons out of your control. But one thing remains clear: your normal sales is dropping at a pretty rapid pace.
Knowing what promotions are really effective and setting the right prices you could be able to turn this negative trend into a positive trend. Magic.