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