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  • Improving Margin, Sales, and Customer Loyalty White Paper

    Escape the Promotional Vortex: Create More Profitable Promotions

    Table of Contents

    Escape the Promotional Vortex: Create More Profitable Promotions . . . 1

    So what created this damaging vortex? . . . . . . . . . . . . . . . . . . . . . . . 1

    How to Escape the Downward Spiral . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

    Answer the Big Questions First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

    What is the companys value proposition? . . . . . . . . . . . . . . . . . . . . . 3

    Test promotions with simulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

    Crawl Walk Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

    Organizational Inhibitors to Success . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

  • White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 1

    Escape the Promotional Vortex: Create More Profitable PromotionsIt should come as no surprise to even the most casual observer of retail trends that promotional activity has increased substantially over the past few years . What may not be as apparent is that the increase in promotional activity has not had the desired results . The frenzy of promotions may, in fact, be driving retailers into a downward spiral, a vortex of increasing promotions and decreasing sales and margins .

    The Christmas season of 2013 is a case in point . Retailers took the traditional Black Friday sales events and moved them up in some cases right into Thanksgiving Day . Rather than increasing sales, it simply moved the transactions to an earlier time and, no doubt, cost the retailers margins because of increased selling costs due to being open on a day when most, if not all, major retailers were traditionally closed . Consumers spent an average of $407 .02 from Thursday, November 28 to December 1, 2103, down from $423 .55 during the same period in 2012 (source: NRF) . Black Friday (or Thursday) saw the first year-over-year decline since 2009 . In short, the promotional event starting the holiday shopping season was a failure (source: Time) . Not only did the promotional activity not produce additional sales, it may have reduced overall sales dollars by over-promoting . The shopper was definitely the winner in this scenario, the retailers the losers .

    In addition to the overall promotional activity, the increasing growth in on-line shopping created more uncertainty around customer behavior and price sensitivity . The small, yet high-growth online channel has an effect on promotions through the bricks and mortar channel but no one has yet figured out what or how impactful that effect is . While Black Friday was moved forward into Thanksgiving Day, the Cyber Monday deals extended into Tuesday . Nowhere in this scenario was there any indication that forecasting was used to determine the best mix of tactics . Results of the two promotional events revealed lower revenues, thus indicating an epic failure .

    So what created this damaging vortex? The growth of promotions is rather like the old fable of the tortoise and the hare . The hare, in this case the over-promoting retailer, surges ahead in the short term, taking away sales from competitors and achieving short-term top-line sales targets, while the tortoise, the more disciplined retailer moves along at a more sedate pace, focused on the long term goals of brand image and customer loyalty .

    Pursuing the hare-like tactics of unrestrained promotions has created an unfortunate customer mindset . The deal is not so special anymore, according to Alison Jatlow Levy, a retail strategist at consulting firm Kurt Salmon . The deal has become the norm . And if the deal is the norm it actually just trains the consumer to never buy at full price (source: USA Today) . Even more compelling is the fact that a couple of weeks before Christmas [2013], nearly half of all shoppers said they were waiting until the arrival of 70% off sales before theyd buy (source: Time) .

  • White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 2

    Clearly, the current promotional frenzy is training shoppers to wait for multiple and deeper discounts . Retailers have trained shoppers behavior to their own detriment . The promotions frenzy is not going to increase profits or margin for anyone . In short, this focus on sales and revenues while disregarding profit and margin leads to a downward spiral of increasing price competition, which further reduces margins . This is the dangerous vortex in which retailers now find themselves .

    Given this reality, it is startling to find that many retailers are incapable of quantifying the effectiveness of promotional events and are hard-pressed to adapt historical campaigns utilizing factual strategic insight into shopper response and promotion effectiveness . A good starting point would be to consider promoting products that customers actually want .

    Furthermore, the presumably same retailers do not use analytics widely available today . Other such disturbing revelations came out of a research study, Promotions in the Retail Industry by Simon Kutcher & Partners . The study revealed that a small minority of companies are measuring elasticities of the products being promoted and even fewer measure the effects of promotional prices on other products (cross-elasticities) . These two components, in conjunction with price thresholds, are part of the calculation for value pricing, without which a retailer cannot optimize promotions .

    How to Escape the Downward Spiral Use promotions offensively rather than defensively .

    Some basic tenets of good promotions must be followed if success is to be achieved:

    Promote the right products for the right consumers. Promotions should be designed to appeal to the highest value and most price-sensitive customers.

    Measure incremental sales and profit from individual promotions. The goal is not to maximize sales on deal, but to generate sales, acquire new customers and increase profits all results that a retailer would not have been able to get achieve otherwise.

    The advertising exposure of some promotions is as important as the redemption effect. That is why it is called a promotion and not just a temporary price cut.

    Excerpts from Retailers, Heres Why You Shouldnt Skimp on Promotions by Kusum Ailwadi, PhD. (Tuck) and Paul Farris, PhD. (Darden)

  • White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 3

    Answer the Big Questions First

    What is the companys value proposition?If you can answer this question, then you are well on your way to creating smarter, more effective promotions . Overall, a retailer needs to focus on the value proposition they are presenting to the market . Factoring in the service component of the value proposition will move a retailer further away from competing on price . With the brand image factored in to your planning, your promotional strategy and tactics should perform better .

    While it will provide strategic guidance and a tactical discipline, determining a value proposition and adhering to a consistent brand image will not, alone, make for better promotions . So what to do to become the smart tortoise of the fable? Take advantage of tools available that enable retailers to plan, optimize, measure and analyze promotions in a virtuous loop .

    Define your goals

    Plan your promotions

    Execute precisely

    Measure the results and adjust going forward

    Revionics Promotion Optimization is one such tool . The SaaS solution enables retailers to plan and execute optimized promotions with science-based analytics . Effective promotions require effective planning through science and analytics . The solution supports this activity through a user friendly, interactive environment that:

    Supports cross-functional planning, on-going analysis and effectiveness measurement

    Simulates uplift and forecasting performance of alternative offers and vehicles in a highly visual and user-friendly interface .

    Creates optimal offers across the promotional matrix of channels, media markets, touch points and shopper segments .

    Test promotions with simulationsBlack-box optimization solutions are a thing of the past . Revionics solution provides transparency into the optimizations, enabling users to understand the why behind the recommendations . Just as post-event analysis is important so is pre-event analytics . With our simulation capabilities the user can generate multiple scenarios to enable better planning by comparing and contrasting the results of different promotional strategies and tactics prior to execution . With the solutions forecasting and measurement tools, retailers can finally create and execute promotions that improve margins, profitability while strengthening brand image and building customer loyalty .

    Define your goals

    Plan your promotions

    Execute precisely

    Measure the results and adjust going forward

  • White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 4

    Crawl Walk Run

    Partnering with Revionics allows the retailer to remain in control of the implementation process. This is a journey and, in keeping with that reality, the software permits a process we call Crawl. Walk. Run. The retailer can g

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