Are Promotions Destroying Your Margins? Let AI Figure Out the Truth.

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This fall, retail sales broke new records throughout Single’s day, Black Friday and Cyber Monday. This should be good news for retailers, but the reality is that there’s a dark side to these triumphs. A large part of the growth is driven by an increase in promotion spending, which is eroding the margins of many retailers. What could have been a growth opportunity has instead been turned into a race to the bottom; escalated by price comparison sites and well-funded e-commerce players fighting fiercely for market share.

Our data suggests that more than 70% of all supplier promotions and well above 40% of all retail promotions are unprofitable, even after adjusting for supplier funding. The good news; there are concrete actions you - as a retailer or supplier - can take to start fixing your promotions. First step is to truly evaluate your promotions. Here’s a high-level guide on how to go about analysing the TrueLift of all your promotions.

1. Focus on Your Incremental Sales Lift – Not on Volume Sold on Promotion

One of the most common mistakes in retail is to focus on the total volume or value sold on promotion, rather than on the incremental lift generated by the promotion. This in turn leads to overestimating the promotion’s importance and profitability.

A short example; assume that you have a normal sales of 100 units for a product. During your promotion period you sell 140 units whereof 60 were sold on promotion. The incremental lift from the promotion is 40 units, not 60. In addition, we should account for the loss from the 20 units (60 unit sold on promotion minus the incremental lift of 40 units) that would otherwise have been sold at full price. To conclude; we must always account for the effect vs your regular sales when we evaluate the impact of a promotion.

2. Quantify Switching, Halo and Stockpiling Effects - Only Looking at Promoted Items Won’t Tell the Whole Story

Effects on other products, categories, and sales periods should be accounted for when evaluating a promotion.

First of all, the Switching effect between products should be calculated. Say you want to evaluate a Coca Cola promotion, then you should not only take into account the incremental lift of those items, you must also quantify the sales loss from competing brands such as Pepsi. Depending on the margins of these brands the switching effect can be either beneficial or detrimental to your business. Furthermore, you might accept negative promotional margins on products, as long as they drives sales of other products. This Halo effect has to be identified, measured and included in the promotion’s profit calculation. Last but not least, promotions tend to move sales from periods with regular price to the promotion period, we call this effect “intertemporal substitution” or in plain english Stockpiling. For example, if you cut the price on a product in March and this leads to lower than sales at regular prices in April, that’s a problem.

Hence, when you evaluate your promotions make sure you are supported in accounting for Switching, Halo effects, and Stockpiling.

3. Help Your Suppliers to Help You - Choose Thoughtful Transparency

The supplier-retailer relationship has been one of tough love. Retailers own the consumer relationship and sits on all the juicy data. Their job is to get the most out of their suppliers’ budgets and plans, to strategise, withhold analysis and data, all not to lose any advantage. At least how that is how it used to be.

Today, successful companies (e.g. Amazon, IKEA, Walmart shares analysis, data, and knowledge in order to enable suppliers to do as good a job as possible. The cost of keeping your valuable suppliers in the dark it too high. Thoughtful transparency will accelerate your improvements, and the advantage lies with the one who leverage the analysis into action. You should have support in sharing the right level of information to the right parties to secure that the true effect of promotions are known to all.

Makes Sense, But How Is It Done?

It’s inhuman - literally - to do what’s outlined above without some powerful technology by your side. Our service, Retail DecisionCloud, provides the retail sector with AI based analysis of the true effect of promotions. If you want to discuss how it’s being put into practice, we’d love to talk!

Cheers / the Formulate team

Arvid Stenback Lund