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Published: November 27, 2012
 / Winter 2012 / Issue 69

 
 

Kicking the Sales Promotion Habit

Addiction to discounts is costly for retailers, but in moderation, promotions can boost profits and brand value.

It’s a tough world for retailers. New technologies enabling consumers to compare products and prices online have permanently changed the in-store shopping experience. Meanwhile, a sluggish economy and rising competition are testing consumers’ brand loyalty. Many retailers are responding with price promotions in a bid to keep people coming through the doors. But this short-term fix often exacerbates the very problems retailers aim to remedy. Over time, promotions train consumers to buy only when there’s a sale, and each new round of discounts must be deeper than the last to get their attention. As prices fall, margins suffer. Any incremental revenue gains from promotions eventually shrink as the sale sign becomes a fixture in store windows. Most troubling is the long-term damage to a retailer’s brand when consumers come to see it as a place that always has sales.

In short, the overuse of promotions can become an addictive behavior that can deeply damage a company’s brand identity. Yet a drastic change to eliminate promotions is not the answer: Witness the J.C. Penney Corporation’s failed attempt in early 2012 to purge the word sale from its marketing playbook in favor of everyday low pricing. Customers conditioned to expect frequent, heavily advertised discounts at J.C. Penney stayed away. In the three months following the change, sales fell 20 percent and store traffic dropped 10 percent. It cost the executive overseeing merchandising and marketing his job. (As of August 2012, CEO Ron Johnson continued to support the retailer’s transformation toward everyday low pricing, despite these early setbacks.)

Promotions are a reality in today’s marketplace, but they don’t have to hurt your business. Like so many other potentially addictive behaviors, promotions can be healthy in moderation. Used judiciously, they can boost sales and profitability, while enhancing a brand and creating a competitive advantage. The following five steps can help retailers build an effective promotions capability, consistent with their brand positioning and customer expectations, and in support of their company’s long-term goals.

Step 1: Acknowledge the problem. Accept that the current approach isn’t working, and must change. More retailers are coming to this realization as their financial results continue to falter. They’ve also been disappointed with new digital promotional options, such as Groupon-style “daily deals” that flood retailers with shoppers who seldom become repeat customers.

Step 2: Evaluate current promotions. Take stock of existing discount methods, such as in-store promotions, coupons, loyalty cards, discounts for credit card users, and markdowns, as well as the frequency with which each is used. These discount methods can be good or bad, depending on the retailer’s overall objectives. Enhancing awareness of the differences between types of promotions and how each affects critical factors such as profitability and brand perception enables retailers to choose those that best serve their goals.

Identifying such differences requires a rigorous approach to categorizing promotions and determining the incremental impact each has on key drivers of profitability, such as units sold, store traffic, conversion of traffic into sales, units per transaction, and average gross margin per unit sold. First, retailers need to understand the key characteristics that differentiate promotions — for example, eligibility (is the promotion available to all customers or only a subset?), product inclusion (which products are included in the promotion?), and merchandising support (is the promotion supported by advertising, either in stores or through general media?). After considering these key characteristics, retailers should match promotions with results, adjusting for various effects. In specialty retail stores, for instance, traffic varies by time of year (it is higher between Thanksgiving and Christmas than during other times of the year) and day of the week (during an average week, traffic is highest on Saturday and lower at the beginning of the workweek). Next, retailers should use regression analysis to calculate the incremental impact of the different promotions on each driver of profitability and estimate what that driver’s level would have been without the promotion. This analysis shows which types of events bring more shoppers to the store, which ones cause more shoppers to buy, and which ones lead them to put more items in their baskets. Finally, retailers need to compute the profitability of each type of promotion, basing it on incremental gross margin.

 
 
 
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