Retail Promotional Forecasting

Even prior to the highly fluctuating demand driven by recent business disruptions, competitive pressures and the inability to efficiently manage inventory have driven retailers to increase focus on promotional forecasting and management. Further complicating matters include an over-stored industry, easier access to competitive pricing and promotional information, and the rapid consumer demand for omnichannel capabilities across the retail industry.

The combination of promotions engendered by merchandising and the multiple layers of digital and customer-direct offers has muddied the water further. Merchants carefully plan their promotions during the pre-season, purchase inventory to support those events, and work with their marketing counterparts to prepare the appropriate communication vehicles. At the same time, the e-commerce team, operating on a shorter lead-time, may be reacting to business performance by adding and changing offers on a daily, even hourly basis. On top of this, the customer relationship management (CRM) team develops e-mail and social media offers to drive traffic to the store and the site. The net result of these interacting promotions is that retailers are in danger of losing control of their pricing and their margins, not to mention confusing and frustrating their target consumers.

Unfortunately, many retailers are seeing their financial performance suffer as a result of the competitive promotional melee. One of the reasons for the degradation in the effectiveness of individual promotions and the resulting margins is the lack of ability to predict the outcome of these stacks of promotions.

CONTENTS

Promotions Objectives and Assumptions

Five Tenets of Effective Promotions

Promotion Optimization Solutions

Promotional Forecasting Call to Action

Final Word

It is time for retailers to reassert control over their promotional destinies. In this point of view, we will explore the complexities, challenges, and leading practices in planning and executing effective promotions, as well as accurately predicting (and even optimizing) promotional outcomes. We will consider both the art and science of promotional forecasting and management, along with a strong dose of basic execution and even some advanced predictive capabilities.

Promotions Objectives and Assumptions

To get started, let’s outline the fundamental reasons why a retailer promotes their products. These include the following objectives:

Capture Market Share

Increase the portion of the market controlled by the retailer by luring transactions away from competitors

Encourage Trial

Entice potential customers to buy with the intent of converting them into repeat customers

Drive Unit Sales

Sacrifice margin $ and/or rate to increase unit sales, with the expectation that customers will buy higher-margin items at the same time or in the future

Boost Brand Image

Feature items that best represent the brand, demonstrate the relevance of the assortment, and/or provide differentiation from competitors

Liquidate Inventory

Stimulate demand for items that have excess inventory

Almost all retailers utilize some form of promotions—print advertising, mailers, emails, social media campaigns, and more. In today’s ultra-competitive retailing market, the goal of standing out, being noticed, and influencing behavior is indeed a challenge, but also a necessity and an opportunity.

There are some assumptions that must hold true for even the most basic promotion to be relevant to the target consumer:

The timing of the promotion must be aligned with the personal needs of the customer.

Depending on the geography, promoting winter coats in December is likely to be more relevant than in June.

The offered price of the product must be compelling.

The customer’s evaluation of the price impact may be based on knowledge of the competitive marketplace or on a comparison of prior prices from the same outlet (i.e., “was/now” pricing).

Appropriate inventory to support the promotion must be available.

Retailers have a tacit (and legal) responsibility to make sure that promoted products are in stock in all SKU variations. If a customer cannot find a promoted item, that customer is only more frustrated than she or he would have been without the promotion.

Five Tenets of Effective Promotions

While seemingly rudimentary to some, many retailers continue to struggle with the basic underpinnings of effective promotion. These include:

Clear Brand Positioning

Marketing and merchandising activities are anchored in a clear overall brand positioning that defines the overall value proposition, distinguishes the company from competitors, appeals to customers’ emotions, builds on the brand’s heritage, and can be operationalized across all customer touch points.

Industry Challenge: Promotions do not contribute to long-term success due to lack of coordination with a set of competitive differentiators that have been cultivated over time.

Marketing Innovation

Processes for developing promotions and methods of analyzing and measuring promotional effectiveness lead to innovations from event to event and year to year.

Industry Challenge: Too many retailers suffer from “last-year-itis,” following the same promotional cadence year after year, including over-investing in older marketing vehicles that lost their broad appeal or do not reach the most desirable customers. When promotions grow stale, companies struggle to replace them.

Strategic Planning

Promotional planning begins with an annual or semi-annual strategic planning process in which marketing and merchandising review prior year performance, market trends (including competitive activity), and proposed merchandising programs. This information is then synthesized into a merchandising strategic plan that includes high-level financial targets (including the amount of promotion), promotional themes, space allocations (particularly flexible display space), and major merchandising initiatives.

Industry Challenge: Retailers are notorious for not paying sufficient attention to strategy, opting instead to be reactionary. As a result, investments in promotions may not drive to the overall goals of the company.

Event/Offer Management

Merchandising, e-commerce, CRM, and marketing teams can easily plan, manage, and report on all promotional offers across all channels by:

Establishing a single repository of all information about offers and events, including: item details, valid event dates (as well as calendar of pre-event activities), participating locations, vendor funding allowances, and specific promotional elements for each event
Simplifying the creation of multiple versions of ad offerings

Industry Challenge: Representing a clear gap in retail software offerings, promotions management applications fall short of delivering necessary functionality. Most retailers resort to Microsoft Office or comparable tools to track and report on promotions.

Analysis and Reporting

The company has the ability to measure and report on the impact of promotions on sales, margins, and inventory to evaluate their effectiveness. Ideally, more complex metrics are available that capture:

Cannibalization and affinity effects
Return on resources expended such as production costs, display or space in printed materials
Impacts on traffic and conversion
Market basket relationships

Past performance of promoted products (or model-after items for new products) can be used to predict the lift on new promotions and the impact on the overall category. Forecasting models take into account sales history as well as causal factors such as pricing differences, channel differences, duration changes, etc. The resulting forecast can then be used to plan promotional volume and allocate/replenish inventory.

Industry Challenge: While most retailers have some mechanism for reporting on promotional effectiveness and forecasting future planned promotions, these typically require a great deal of human intervention to pull numbers from disparate systems and manually create reports/projections. Very few can take advantage of the kinds of advanced statistical analysis that can produce the more complex and meaningful metrics.

Most retailers have solid business processes and systems to support some of these capabilities, but virtually none can boast of being strong in all of them. Nevertheless, in today’s promotional environment this list does not represent advanced functionality—these are simply table stakes. If a retailer struggles with any of these elements, then a corrective investment is warranted.

Promotion Optimization Solutions

Looking beyond this foundation, there are exciting developments that allow retailers not just to predict the results of promotions but to model and optimize promotions to attain desired outcomes. This advanced functionality is offered by several software providers—including Parker Avery’s demand analytics platform—and the results are compelling. These applications combine data from multiple sources, including marketing, CRM, e-commerce, merchandising, planning, and finance.

Inputs to promotion optimization solutions include any combination of the following data sources:

Offer

% off, BOGO, % off highest price item, free shipping

Net Price

$26.99

Impacted Products

jewelry, dog food, sofas

Offer Placement

store, digital site, social media, catalog

Promotional Vehicles

social media, circular, radio, email, banner ad, catalog, TV

Targets

% of best customers, pet owners, prospects

Duration

morning only, weekend only, one week only, month-long

Reach/Circulation

specific geographies

Financial Performance

sales, margin

Collecting this data and making it available for promotional optimization is no doubt a significant effort, but the resulting performance improvements can be astounding. Consider the amount of time and effort retailers put into planning, managing, executing, and measuring promotions. Add to that the amount of margin wrapped up in promotional markdowns, and ultimately, even slight improvements in the effectiveness of promotions can drive substantial business results.

Case Study: New Promotional Offer Optimization Solution Accelerates Results

Consumers in today’s retail market have high expectations of their brands and shopping channels. Beyond quality products, enticing assortments, and engaging shopping experiences, when considering pricing and promotions, these expectations include clarity of messaging, competitive pricing, product feature information, and available inventory (including specific locations). These are not unreasonable expectations—failure to deliver against them is to court disaster with your assortment’s performance objectives as well as your consumer’s brand loyalty. Moreover, when executed successfully, customers will reward a retailer’s efforts with quantifiable results, including improved margins, increased traffic and trial, higher sales, and strengthened market share.

Even slight improvements in the effectiveness of promotions can drive substantial business results.

Promotional Forecasting Call to Action

What can retailers do to confront these challenges and effectively manage promotions and related demand signals? We offer the following recommendations:

Maintain the art.

While there are sophisticated tools to assist retailers today, nothing can replace the eye and heart of a strong merchant. Fundamentally, retailing is still all about the product, and leading processes and policies should be driven by the initial brand strategy and reflect the marketing strategy. The process cannot be turned on “auto-pilot” without the guiding influence and oversight of accountable merchant leadership.

Consider the science.

This is where retail leaders are truly starting to differentiate themselves. Leverage the best available market data, along with historical performance, aligned with the master sales and event calendar, to generate a predicted sales demand, as well as options and scenarios for promotions and promotional impact. Managing the science can be an art itself, a tricky orchestration of configuration, input gathering, data preparation, analysis, and interpretation—supported by advanced analytical solutions and appropriate skillsets.

Solidify basic blocking and tackling.

This balances the art and the science with execution. Retailers must deeply consider and design key execution tactics to successfully determine, communicate, deploy, and process promotional transactions. Included here are back-office merchandising management and marketing, as well as in-store execution. These, coupled with channel convergence collectively address highly varied consumer shopping behaviors. Essentially, retailers must identify and communicate the right promotional messages to the best target consumers—at the appropriate time and in channels that will resonate—and then complete the circle with efficient transactional execution and informed, consistent customer-facing touchpoints.

Final Word

Today’s retail promotional forecasting and management complexity is not for those who yearn for simplicity and ease. It is not for the faint of heart, nor is it a strategy to be taken lightly. However, when done well, with the appropriate balance of process, solution, and merchant intuition, promotional forecasting will provide competitive differentiation and financial rewards for retailers willing to take it to the next level.