Forrester study reveals a sobering reality of retail promotions

For the past month or so, a startling metric has been gathering buzz in the retail press. The buzz came from a survey commissioned by price optimization and advanced analytics provider, Revionics, and performed by Forrester. According to the one prominent question on the survey, fully 52% of survey respondents claimed they had received a promotion on a weekly or monthly basis for a product for which they would have paid full price.

Base: 1,291 worldwide customers
Source: A commissioned study conducted by Forrester Consulting on behalf of Revionics | September 2017
Excerpted from: Forrester Opportunity Snapshot: A Custom Study Commissioned by Revionics | November 2017

In fact, if the time period of the report’s findings is expanded to include “Daily” (an omission in the study’s content that I can’t explain), the positive response to this question increases to 62%. The implication is that far more than half the time, promotional discounts are wasted on customers that would have consummated the purchase without them.

Take a moment to contemplate the financial repercussions of that finding. What percentage of sales do retailers capture through promotion? 35%? 40%? In some categories upwards of 60%. How much margin do retailers “invest” in promotions? My rough estimate is that average promotional discounts hover around 25% across categories. In fashion apparel, that number is much higher, closer to 40% or 50%. Discounts on items included in these promotions, for which the customer would have been paid full price, represent direct reductions to profit margins.

To get a sense of the magnitude of the problem, assume a billion-dollar retailer with a gross margin percentage of 50% (average unit retail price of $10 and average unit cost of $5). This retailer produces 25% of sales revenue on promotion at a 25% discount. If we assume that 62% of those units sold on promotion were sold at regular price instead, the retailer will capture more than $50 million in incremental profit. That’s an additional 10%.

On top of that, think about the merchant, marketing, ad agency, media buying, and executive resources and costs being expended against what are essentially unnecessary promotions. In a prior Parker Avery white paper, titled, “Promotional Forecasting: Reasserting Control Over Retail Promotional Destinies,” we identified five main reasons why retailers promote their products. These include the following objectives:

When measured against these missions, these superfluous promotions—recall this is 62%—fail almost completely. The only objective that an unexpected, unnecessary promotion may fulfill is the boosting of brand image. On the other hand, profligate promotions may have the opposite effect, eroding loyalty by injecting uncertainty into the perception of a retailer’s pricing—or conditioning customers to increasingly suspend their purchases until they receive a discount for a desired item.

Unfortunately, the corrective to this issue isn’t straightforward—a blanket reduction in promotions won’t necessarily help. For any customer receiving a discount on a product for which they would have paid full price, there may be multiple customers that were enticed by the discount to purchase. In addition, this survey result may be exacerbated by the increasing prominence of email-based coupons and web-based offers, which may be applied against any single item or an entire basket of items. Customers can determine the specific products to which they attach these promotions. Almost by definition, some large proportion of these sales go to customers that would have purchased the item without the discount. The low overhead associated with these types of promotions makes them attractive to retailers, especially those that lack the discipline, data, or analytical capability to better target offers.

In today’s environment, it is quite common for different organizations within a retailer to control different promotional vehicles. Merchants or the marketing team typically control store-based promotions, including those communicated through conventional media (flyers, newspaper inserts, ROP). Television advertising is mostly the sole domain of the marketing group. Digital coupons may be engendered and managed by the marketing team or the eCommerce team, many times without much interaction with merchandising or planning. Web-only promotions are usually the responsibility of the eCommerce team, who, again, may not be collaborating with the merchandising, marketing, or planning groups. The diffused control of these layers of promotion often results in overlapping or competing offers, which present garbled messages to customers and create opportunities for excessive and unproductive discounting. In addition, the layering of promotions makes it extremely difficult to understand the financial impacts of any individual promotion.

This lack of centralized control and accountability for promotions should be addressed by any retailer that faces these conditions. This can be accomplished by reviewing the roles and responsibilities connected to planning and carrying out promotions, as well as a detailed examination and re-engineering of promotional processes.

The solution to unexpected promotion is complex and requires deep understanding of consumers’ needs and shopping behaviors. To accomplish this, retailers must have a mechanism in place to plan and track the promotions that they execute, including the customers targeted and those that responded. In our experience, very few companies have the appropriate supporting infrastructure to capture this type of data across channels and promotional vehicles.  In addition, deep analytical capability, possibly provided by an advanced optimization software tool, may be necessary to not only understand the dynamics and financials of different promotional vehicles but to precisely target and optimize them.

If you have any questions about your own promotions capabilities, please feel free to contact us.

Published On: November 1, 2018Categories: Consumer Behavior, Digital Marketing, Price Optimization, Promotions