08 Oct 2015

Optimizing promotions: Why retailers don’t get it!

Raj Bhatt

Promotions are an important driver of sales for most retailers. In any given week, most retailers have a range of offers/ discounts being given on a range of products across categories. The offers vary from a straight percentage discount, a certain dollars off, a freebie (Get Product A free with Product B), Buy X Get Y, Mail-in rebates, etc. These offers can either be applicable to all customers, restricted to loyalty program customers, or available only to those who produce a paper/mobile coupon. The objective for any promotion could include driving sales for the promoted products, driving traffic which leads to higher sales for other products, or promoting sales on a major shopping event(Christmas, Thanksgiving, Back-to-School, etc). Some of these promotions are funded by vendor funding, and the remainder are funded by the retailer.

Each offer impacts not only the sales (and margins) of the item being promoted, but also impacts the sales of all other items in the category….and broadly impacts the sales of all items in the store. As most merchandisers know, these ‘cannibalization’ and ‘halo’ effects are significant in the retail business.

Given this background, one would think that most retailers have a good understanding of the sales (and margin) impact of each promotion and optimize the promotions to be run across products. Unfortunately, most retailers across verticals (grocers, office products retailers, home improvement retailers, discount stores) do not optimize retail promotions.

There are a few reasons why this happens:

  • Promotional programs of most retailers are driven by historical precedent. They plan the year’s promotional calendar based on previous years’ calendars.
  • Retailers often rely on their ‘category champion’ vendor for merchandising analytics support. Unfortunately, the objectives of the category champion vendor are not aligned with those of the retailer. The analytics produced by the vendor is designed to optimize assortment, shelf space, placement and promotion of its products. Although the vendor would use ’trade promotion optimization’ to optimize the impact of its trade programs, it does not have the means (or the interest) to maximize the retailer’s sales.
  • Most retail merchandising functions are category-oriented. Analyzing the cross-category impact of promotions is not possible due to data sharing issues or due to the cross-category nature of decision making required. E.g., If promotions in the Modular Kitchens category of a home improvement retailer lead to sales benefits for Paint and Kitchen Appliances, the merchandisers of these categories should plan their promotions in co-ordination.
  • Minimizing the impact of negative margin promotions requires cross-functional co-ordination between the Finance team and the Merchandising team. These promotions need to be re-negotiated with the vendor to get more vendor funding support. This cross-functional co-ordination is often lacking in retailers.

In my next article, I’ll describe how retailers can optimize their retail promotions.

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