Promotions Should Reward, Not Discount

by Bob Welch, Jun 13, 2012, 8:00 AM

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Promotions can be a powerful tool to relevantly reward shoppers and drive long-term brand loyalty, but many businesses lack a strategy to deliver the right promotions to the right shoppers. Today, trade promotions are typically a manufacturer's second-highest item in cost, representing as much as 30% of gross sales, according to research by Booz Allen Hamilton. Yet even with billions of dollars invested annually, ROI remains a largely elusive figure.

While promotions appear to generate positive sales gains, this lift can largely be attributed to cherry-pickers -- the shoppers who only buy on discount without the intention to repurchase. And as promotions continue to escalate, shoppers are becoming more accustomed to cherry-picking, searching only for discounts. Just assuming a “shopper-centric” position will not ensure long-term success. It takes a disciplined approach to change the way promotions are evaluated, planned and measured. Shopper-based promotional planning requires a four-step cyclical process.

Build a promotional database library that improves in quality over time

A 12-pack of soda on promotion for $1.99 will likely generate a huge sales lift, but tells us little about future performance. Sales lifts must be analyzed in the context of the shopper segment that was targeted, and then tracked over time to understand how it varies. To determine the effectiveness of a promotion, marketers need more than data -- they need a database that can improve over time.

Businesses need to build a category-specific promotional library with shopper-level data that enables longitudinal analysis of how a shopper responds over time -- as well as basket-level data that informs success at a trip level. The promotional database should include metrics that evaluate the percentage of shoppers that purchased the item, as well as those who are likely to repeat the purchase and other products in their basket. With this insight, promotion strategies can be developed to determine the correct price point or depth of discount to drive the desired shopper behaviors.

Determine an objective that benefits both retailer and manufacturer

Part of the challenge is that promotions satisfy different objectives for the retailer and the manufacturer. The two parties need to align on the promotional strategies that address mutual shopper-focused objectives:

• Are we seeking to reward loyal shoppers, drive trials, and build broader engagement in the store?
• Is this promotion creating the appropriate investment balance across all shoppers?
• Will the promotion drive a sales lift for the category?
• Does the promotion plan for the category skew too heavily to a shopper segment?
• If so, what are the right brands, products, discounts and promotional tactics to meet the needs of the underdeveloped shopper?

Match the right product with the right promotional tactic and price point to the right shopper

Understanding which products appeal to which shoppers can help to match the right tactic with the right promotion. If a product has a broad appeal across segments, placement at an end cap could achieve five times the lift as a niche product in that area with a steep discount. Products that are “expandable consumables” are often prime targets for a deeper discount because they drive an increase in the repurchase rate. For example, promoting a laundry detergent as 2 for $15 is not an expandable promotion because it does not change the usage of the product for the shopper. However, a shopper could purchase their favorite soup on a promotion of 10 for $10 and still come back the next week and purchase the normal amount of the same soup.

Measure, learn and adjust

Results from each new promotion should be fed directly into the promotion database and then analyzed. If the objective was to target loyal shoppers, were they rewarded? Did the promotion drive a sales lift among that segment of shoppers? Did the depth of discount engage loyal shoppers or did it attract cherry-pickers? As the promotional library becomes more robust, determining the right product, tactic and price becomes easier, more relevant and more effective -- giving both the brand and the retailer a greater return on their investment.

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