Since the economic downturn began in 2008 retailers’ reliance on promotions has been steadily rising. In 2011 the volume of products sold on promotion reached nearly 55% in the UK, with an average discount in excess of 25%. While promotions have become an important means for retailers to achieve sales targets, the danger is that if only applied tactically they can result in:

  • Reduced margins and profitability
  • Stock and availability challenges
  • Eroded brand values and loyalty
  • Reduced new product development, due to budgets being swallowed up to fund promotions.

If executed effectively, promotions can have clear financial benefits, not least through driving customer engagement and loyalty by heightening the perception of value.

Four key levers drive promotional effectiveness

Kurt Salmon research has shown that best in class businesses achieve effective promotions by performing well in four areas. They have:

  • A price and promotions strategy and customer plan to define how they will engage with their target customers
  • Close working relationships within category teams and with key suppliers
  • Complete and accurate information to produce accurate forecasts and track performance
  • Responsive and agile supply chains.

There are many retailers who may be good at one or two of the levers, but few are true pioneers in all of them. Excelling in these four areas allows these retailers to:

  • Optimise their promotional mix so that sales targets are consistently hit, brand value is enhanced, and cost to serve is properly controlled
  • Produce accurate plans leading to better alignment of stock to demand to maximise the rate of sale
  • Optimise distribution of inventory across channels and improve product availability; an ECR Australasia study found that for every 1% improvement in on-shelf availability gross sales increased by 0.5%
  • Have a better understanding of promotional performance, enabling successful promotions to be repeated and issues to be corrected.
  • Steps to unlocking the benefits of effective promotions

There are 4 key steps to follow and embed within the organisation if the benefits of promotions are to be realised.

1. Optimising the promotions mix:

The aim is to achieve a mix of promotions that drive sales growth at acceptable margins and minimise the cost of planning and delivering them. This requires a price and promotions strategy and customer plan that stipulates, by product category:

  • Customer strategy
  • Pricing strategy closely linked to the tactical plan for driving average basket size
  • Category positioning relative to key competitors
  • Margin strategy
  • Vendor collaboration strategy

2. Producing accurate plans:

Promotions tend to cause greater variability in the business. ECR Australasia’s report Winning with Promotions highlights that on-shelf availability typically decreases by 3% when products are on promotion. Forecast accuracy is vital to achieving the right balance between high availability across sales channels, on the one hand, and inventory efficiency, on the other. Best practice forecasts should be within +/- 20% of actual sales. This requires having an excellent forecasting methodology, comprehensive management information, suitably sophisticated IT systems, and a collaborative culture to ensure plans are co-ordinated.

3. Optimising the distribution of inventory:

It is crucial to maintain high availability across all sales channels from Day 1 of the promotion. Accurate forecasting at the customer touch point alone will not deliver this. The entire distribution network must be considered to ensure that stock is available in the right place at the right time. Doing this badly will either result in lost sales or the need to transfer inventory between DCs, which will greatly increase the cost to serve. Many retailers do not do this today because they need better methodologies or improved data to make it feasible.

4. Understanding promotional performance:

The commercial and operational performance should be reviewed, root causes for significant issues identified, and any important lessons learned discussed. Findings should be recorded so that they can serve as management information to feed into the planning of future promotions. In this way, the strategy and planning stages of the process should form a virtuous circle of continuous improvement with the execution stage.

7 May 2012