- Posted by Adam Rosenberg
- On February 22, 2018
Welcome back. While we are still covering the basics we are graduating to more complex topics and techniques that can be employed by retailers. With this post we will discuss the fundamentals of Promotion.
Promotion is the sizzle and sparkle of retail, the attention-getting part of retail that shoppers notice. Promotions can help or hinder the retail business depending on whether they are chosen well or poorly. As promotion is an essential part of a successful retail enterprise, making good promotion decisions is essential to the business.
In this paper, we’ll define and describe promotion.From there we’ll give good, strategic, positive reasons for promotion followed by reasons we should be cautious in promoting products. Finally, we’ll explain how retail science can support promotion decisions.
WHAT IS PROMOTION?
In retail science, a promotion is something we do other than a price reduction to sell more of a product. (We make this distinction for several reasons explained in Section 5.1.) There are many reasons to promote in retail most of which boil down to three: increased profit, increased revenue, and increased traffic.
Our term for the unit sales increase of a promoted product is promotional lift.
Some promotions affect all shoppers buying a particular product in a store. A product can have an “ON SALE” sign on it or could be on an end-of-aisle display called an endcap. We put radio, television, and newspaper advertisements in this all-shoppers class because the advertisement was out there and we don’t know which shoppers bought the product because of the promotional ad. I call these general promotions.
Other promotions are restricted in their shopper community. A product can have a lower price for loyalty-card shoppers or a lower price associated with a coupon from a mail flier. I call these selective promotions.
Finally, we have promotions where shoppers choose to participate or not. A five-for-the-price-of-four promotion allows for some shoppers to buy one, two, or three units for regular price. I call these elective promotions.
Promotion is a basic part of retail business. Promotions generate positive response in consumer demand, so a retailer who fails to manage promotions effectively is leaving opportunity on the table. Scientific planning helps retailers realize that opportunity.
WHY SHOULD WE PROMOTE PRODUCTS?
Retailers promote products for a variety of reasons. We can gather these reasons into five general categories, making more money (profit), doing more business (revenue), getting more shoppers in the store (traffic), increasing our share of the business (market share), and getting shoppers to buy something else (affinity).
The most straightforward reason to promote a product in a store is to make more money selling it. A promotion that fits well with this goal is the Every-Day Low Price (EDLP) where we call attention to a product without any discount. If the product is profitable at the every-day price, then it becomes more profitable when its sales are increased.
The second reason to promote products is to increase revenue. If they’re spending more on promoted products, then they’re likely to spend more on other products. Also, getting shoppers to spend more in your store increases their sense of a business relationship.
Third on our list of reasons for promotion is increasing the traffic. The promotion gets people to come into the store, to buy merchandise and to become shoppers. Perhaps these new visitors are only one-time shoppers but they may become longer-term customers.
Our fourth reason is to gain market share over competitors. A promotion may be all the incentive consumers need to choose one store over another, perhaps for a longer term than just one grocery-shopping trip.
Finally, the fifth reason to put some products on sale is to sell associated products. We put hotdogs on sale to sell buns, relish, snacks, and drinks. We call the process where increased sales of one product increase sales of another product affinity.
WHEN SHOULD WE NOT PROMOTE PRODUCTS?
Promotion isn’t always a good thing to do. We can gather the reasons not to promote some products into five general categories, undercutting other products (cannibalization), undercutting the same product later (pantry loading), shoppers only buying promoted products (cherry picking), too many promotions (saturation). and too frequent promotion (training consumers).
Consider a big sale on Pepsi Cola, a big sign announcing a big discount. We expect Pepsi sales to increase due to the promotion. But we might expect sales of other colas, Coke, C&C, RC, et cetera to decrease as some other-cola shoppers decide the price difference is worth the switch. This switch-over component of the promotional lift is called cannibalization.
Promotions not only can undermine sales of different products in the same general area, they can also undermine sales of the same product at a later time. Instead of buying four cans of Dole fruit cocktail each week, a shopper may buy twenty cans on sale this week and none for the next four weeks. We call this pantry loading.
One of the good things about promotions is that they bring in shoppers who would have gone someplace else to fill their grocery cart as described earlier. Once these people are in the store, we hope they will buy their other merchandise, not just the products on sale. When shoppers come into the store only to buy the products on sale, we say they are cherry picking.
The promotional effect works because shoppers perceive the promotion as special. When most of the store’s merchandise is marked “ON SALE” shoppers lose the sense of novelty and urgency that promotions depend on for their lift. Finding the appropriate fraction of promoted products is a human decision for a retailer to make, deciding how to achieve that fraction of promoted products is where retail science can help.
A final reason not to promote too many products too often is that shoppers become used to the idea that any product they wish to buy will be on sale fairly soon. I want promotion to lift sales of selected products, but I don’t want shoppers deferring purchases in anticipation of a promotion. The airlines learned a hard lesson when people would wait until a favorable fare was announced. “Sure, I would be willing to pay 500, but why should I? Sometime between now and departure date they’ll have some kind of sale and I’ll be able to fly for 250.”
PROMOTION AND RETAIL SCIENCE
Promotion is a basic part of retail business and promotion is a delicate mix of opportunity and pitfalls. A well-engineered promotion can reach for strategic goals of profit, revenue, traffic, and market share while increasing sales of other products through affinity. On the other hand, less-well-chosen promotions can cannibalize sales of similar products while shoppers buy only the promoted products now and in the future. We need to quantify promotion effects scientifically so we know what we’re doing when we promote in retail.
Separation of Price and Promotion
A basic issue is separation of price and promotion. We sell 100 units a week of a product at a regular price of 1.49 and sell 300 units a week of the same product on sale at 0.99. Two things happened at once, promotion and price change. When multiple things happen at the same time, it’s hard to see which effect is causing which change in sales.
If we’re going to sell this product for 1.49 regular and 0.99 on sale forever and always, then we might not care how much of that three-fold increase was due to promotion and how much was due to a 50-cent price cut. The statistical analysis part of retail science can tell us which cause is generating which effect so we can consider other choices. Moving the regular price to 1.39 or 1.29 might be a good thing, or putting the product on the same promotion for 1.09 or 1.19. In either of these cases, we need to separate promotion from price in our sales analysis.
How Much Promotion?
Knowing how promotions affect sales can help retailers decide how much to promote. Stores with too little on sale can give shoppers a tight-fisted impression while stores with too much on sale train shoppers to wait for sales rather than to pay regular price. Creating the right balance of regular price and promotion is as much art as science, but the science part can take advantage of knowledge and expertise about promotions.
The choice of which products to promote depends heavily on why we’re promoting as described in Section 3. Some product promotions make more profit, some create more revenue, and some increase traffic by creating more shopper baskets. Retail science can identify which products do all three, which do two of these, which do just one, and which product promotions don’t generate any overall benefit. In and around the individual product promotion assessment is the big-picture view. Products can be promoted individually or in connection with other products in combination offers.
Promotion Offer and Price
Along with which products to promote, the promotion decision includes how to promote each product. There are various offers, percents off, discounts, prices, and combinations, and most of those have price-point choices. While these decision possibilities can overwhelm a category manager, retail science can make those decisions in a consistent manner so each product is promoted towards the same business goal.
How Much Inventory?
Inventory planning around a promotion is essential. Running out of a promoted product creates a terrible, negative impression in shoppers, something they remember for a long time. It is important to forecast how much inventory is required and then to replenish stock from vendor to warehouse and from warehouse to store far enough in advance that product is on the store shelves when shoppers show up eager to buy it. Merchandise replenishment is important all the time but is particularly vital for promoted products. It is also the most difficult because of the large change in the weekly demand caused by the promotion.
Promotion is the sizzle and sparkle of retail, the ten percent of the business that shoppers pay attention to. While promotions can aim a retail enterprise towards strategic goals such as profit, revenue, or traffic, promotion pitfalls exist such as cannibalization, pantry loading, cherry picking, and promotion saturation. Retail science helps us decide what to promote and how to promote it.