Promotion Optimization

“May you live in interesting times”
-Old Chinese Curse

Although The Yale book of Quotations claims there is no actual Chinese phrase to this effect, the retail industry finds itself in, to put it mildly, said times for sure. With the National Retail Federation reporting weak August sales as the lingering economic downturn continues to put pressure on family finances, many retailers reported their business decreased in September as well. Earlier predictions for this holiday season expected a below average growth rate of 2.2%; and this was before early October’s financial turbulence. Looks like “interesting” may be around for a while.

While no one can predict with absolute certainty how long the current economic environment will last, the current consensus is it will likely linger into the foreseeable future. Retailers have faced challenging economic conditions before and know how to react accordingly. Cost savings are absolutely critical via inventory reductions, slowing store growth, and controlling other expenditures. While cost savings are imperative, retailers must still concentrate on driving traffic, profits, and increasing their competitive position.

 

How can retailers make the most of this holiday season and beyond? There is no doubt consumers are much more sensitive to price as they delay spending due to the uncertainly caused by market conditions. Chain Store Age’s Editor Marianne Wilson spoke with Fox Business News’ Money for Breakfast on Thursday, October 9th, and she summed up the holidays like this; consumers will be price conscious this season, so retailers must put value front and center in the consumer’s mind. performance.

The best way for retailers to get shoppers into the stores this holiday, and well into the recovery, is to make price a leading driver of traffic. While across the board reductions on all items is not possible, promotions and promotional pricing are the best tools retailers have to get shoppers into the store. While this is seemingly obvious, few retailers are prepared to manage promotional price properly through the slowdown, and most importantly, how to adapt promotional pricing for the inevitable recovery. Nearly 60% of retailers use insufficient metrics to gauge promotion effectiveness. According to the Aberdeen Group in their 2007 report The Changing Dynamics of Retail Promotions retailers that optimize their promotion strategy are:

•  3.2 times as likely to have better than average gross margins,
• Three times more likely to have better than average customer
  retention, and
• five times more likely to see an increase in average transaction
  value.

Promotions are more temporary than list price changes allowing retailers to maintain their long-term price and brand image. Promotions also offer the greatest flexibly as market conditions change. When consumers become more confident in the overall economy and have the ability to spend more, retailers that can change their promotional mix quickly will recover faster than their competition. The retailers that will come out on top will be the ones that best know what products to promote, at what price, where, in what channel, using which promotional vehicle, and to what customers.

To effectively manage promotions, and promotional pricing, requires a retailer to have three elements in place:

• A comprehensive understanding of past promotional value and how price influenced business in the past.
• A method to plan optimal promotions that accurately predicts lift, inventory, and return on marketing investment.
• The ability to execute promotions successfully throughout the entire organization.
  

Analytics provides the answer to the first two items above and provides guidance for the third. With the use of analytical technologies like the SAS® Promotion Optimization solution, retailers can understand how past promotional activity impacted revenues, inventory, and demand patterns. This forms the basis of good promotional decision making going forward.

Only with a proper understanding of past activity can retailers determine what items, or group of items, to promote. For maximum effectiveness retailers must segment promotions into different regions, locations, and market channels. Promotions at the chain level will not be effective enough. Analytical technology helps retailers understand all the complex relationships between product, price, location, promotional vehicle, customer, and time. This understanding helps design a promotional strategy that provides the maximum impact on margin and revenue.

Promotional systems, based on properly modeled historical data, let retailers experiment with different products, prices, location, customers, etc., and predict the impact a promotion will have on the business. This eliminates the need for time-consuming field tests using less than optimal values. These systems also aid inventory planning, not just for the promoted items, but for items that will see a residual impact due to the promotion, allowing retailers to manage inventory costs and avoid over and under stocks.

The best analytic systems are able to quickly reconcile the performance of promotions against merchandising plans. As market conditions change, a system based upon sound forecasting and optimization technology will see the emerging consumer trends quickly and adjust its recommendations accordingly.

The full benefits of promotion optimization are realized when a retailer has the flexibility to vary promotions by region and customer segment. Although many retailers are still hampered operationally and can only promote at a national level, promotion optimization can show where the regional and customer differences are. This gives retailers guidance how to modify their operations to take full advantage of their promotional activity. The bottom line is that retailers must reach this point quickly to get the most out of their promotional activities.

Even with the rapid approach of the holidays it’s not too late to start. According to the Boston Consulting Group’s Rapid Results in Retail October 2007, taking a strategic look at promotions can contribute towards a 4 to 6 percent improvement in EBITDA,a measure of profitability, in just a few months. It is a competitive disadvantage to delay implementation of promotion optimization, especially during these challenging times. Without the insight gained
from a promotion optimization solution, retailers will be guessing if their promotions are having a positive or negative impact on business. For many retailers, this is a make or break holiday season, not a time for guessing. The sooner retailers implement a promotion optimization solution the sooner promotional pricing becomes a competitive advantage..

If you’re interested in discussing your specific promotional optimization needs for this holiday season and beyond please feel free to  contact me

Regards,

Robert Signore