Is anything sold at full price these days? Anything? Anytime? Anywhere?
You can’t click a link, touch a mobile app, or set foot inside a bricks and mortar store, without being confronted by some kind of promotion or other – BOGOFF here, 70 percent off there. As long as you keep your wits about you and shop wisely, it’s great a great time to be a shopper.
And the shop? Ask a retailer if a promotion is working and you come away with the distinct impression that their answer is based on guesswork rather than deduction. And although they might be measuring its effect on sales of that particular promoted product, will they also be considering the impact of the promotion on their business, overall?
A recent survey by the Boston Consulting Group discovered that around half of all promotions create no noticeable lift in sales. And something like another third dilute margins.
Why run so many promotions?
The thing is, promotions can be counter-productive. Take a Fresh Chicken promotion, for instance. Naturally, you’d expect fresh chicken sales to increase. All well and good, but how’s that going to affect frozen chickens? Or, even worse, what if you promote frozen chickens and the sales of fresh chickens drop, leaving you with a stack of not-so-fresh fowls which you’re obliged to discount or cart off to the dumpster?
Or how about a promotion on toilet paper: 33 percent extra – 12 rolls for the price of 9. On the surface, a pretty good deal. But will customers visit the lavatory more often just because they have three free rolls? Not very likely is it? And, in the weeks following the promotion? Sales go right down the toilet – and full-price sales, at that. So, in the long run, does the promotion help the retailer sell more toilet paper? No.
Mmm… apple pie and cream
Cannibalization and pull-forward of demand reduce overall promotion profitability. There are positive examples, of course – if you promote apple pie, you sell more cream (halo effect). But, in general, if promotions have such a negligible effect on sales and dilute margins is there such a thing as a truly profitable promotion?
If we understand the relationship between products and customer shopping behaviors, we can start to detail what constitutes an effective promotion. Some relationships are straightforward like apple pie and cream, or fresh and frozen chicken. Some aren’t. Pasta and tomatoes, for example.
Which brings me to spaghetti Bolognese
Imagine we’re putting together a ‘Taste of Italy’ marketing theme, in-store. There are lots of products we could promote; pasta, Italian sauces, garlic bread, prosecco, and so on. So what should we promote? Pasta and Italian sauces? Two different buyers, two different categories. Why not? Both have targets to meet.
Well, if we knew that promoting pasta would also increase the sales of full-price Italian sauces, we need only promote the pasta. By the same token, would promoting Italian sauces increase the sales of pasta? How do we decide?
It pays to know your customer
Let’s take a wider view. My wife makes everything from scratch and wouldn’t be seen dead with a ready-made sauce in our trolley (yes, we grocery-shop together but I call it research). So, would promoting Italian sauces make her buy more pasta? No. But promote pasta and guess what? She’ll buy minced beef, chicken livers, tomatoes, tomato puree, mushrooms, garlic, basil, onions, and red wine, to make a Bolognese sauce.
Now, imagine advanced analytics giving you that kind of insight on a grand scale. Recognizing how different products relate to each other in a customer basket, and the potential cross-category impact of promotions. Being able to predict the overall affect that promoting a single item will have on the sales of related products, and the impact this will have on overall sales and margin.
This advanced analytics (‘Spag Bol’) approach to promotion management generates more effective promotions. In other words – as the Boston Consulting Group pointed out – advanced analytics improve promotional margins by between 2-5 percent.
The point is, you already have the recipe for successful promotions.
It’s in your data analytics cookbook.
John Malpass – Supply Chain Practice Lead, Teradata International
John has worked in the retail industry for more than 30 years, moving from warehousing and distribution implementation, through IS and business-operational roles, to senior supply-chain management for a global optical discount retailer and, currently, finding new data-driven solutions to retail challenges at Teradata.
Studying maths and computer sciences at Birmingham University provided John with the perfect grounding for developing innovative solutions to business problems; practical ways businesses can benefit from data and technology. Over the years, he has worked for a number of UK-based retailers – both independently and for consultancy organisations – providing business consultancy throughout the world.
John is quick to point out that he’s a competitive and passionate sportsman, although his sporting activities are largely limited to spectating, these days. That said, he’s still an active runner (with a couple of half marathons under his belt) and an occasional golfer. Born, bred, and based in Manchester UK, John travels widely and regularly – and luckily, his family (wife Rebecca and two sons) is very understanding… most of the time.