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 / Winter 2012 / Issue 69(originally published by Booz & Company)


Kicking the Sales Promotion Habit

The most effective promotions tend to be targeted to selected customers; such promotions include “friends and family” events, loyalty club discounts, and other discrete efforts to reach particular groups. These tend to drive store traffic and often give a bigger boost to sales and profits with less risk to the brand. Giving coupons to shoppers to use the next time they come to the store also tends to drive conversion. By comparison, promotions open to all customers and trumpeted in store signs and media advertising (for example, across-the-board “percent-off” discounts) typically provide less incremental gross margin benefit while posing more brand risk. The more frequent and widespread such a promotion is, the more it cheapens the brand in consumers’ eyes.

Step 3: Lay out a path to recovery. Retailers should first ensure that a unified plan that aligns their promotions and brand image is in place. Neiman Marcus and Nordstrom have accomplished this by bolstering their brands and bottom lines through tactics such as targeting discounts to loyalty club members and offering only infrequent storewide sales that encourage shoppers to stock up.

Increasing coherence requires collaboration between business units that often operate in silos. But if a retailer’s sales and marketing staffs work together, they can develop reinforcing capabilities to create synergies between promotions and brands. Effective promotions activate brand messages and support consumer strategies. For example, promotions can jump-start a product launch by giving customers an incentive to try the new offering.

Start slowly; consumers don’t like sudden changes in familiar practices. J.C. Penney learned this the hard way, as did Walmart when it added more deep “rollbacks” (temporary price reductions) to its longtime strategy of “everyday low pricing” in the summer of 2010 in an effort to stimulate sales. Customers were confused, which led Walmart to return to its original strategy just a few months later.

Gradually phase out the promotions that are most harmful to your brand and that resonate least with consumers, while emphasizing those that serve both your brand and financial objectives. Using the knowledge and techniques developed in Step 2, sketch out a range of options for your new promotions strategy.

Step 4: Track your progress. Monitor “healthy” metrics that show how your new promotions strategy affects your long-term goals. For example, tracking profit growth tells you whether promotions are driving enough additional gross margin from selling more units at lower prices to offset the lost gross margin from not selling at the higher original prices. Tracking baseline sales shows the strength of your brand by measuring sales made without promotions. It’s one of the best signs that investing in your brand is paying off. You should also keep track of the frequency of promotions: How many days each year do you offer them? The higher the number, the greater the risk to your brand. One leading specialty apparel retailer didn’t realize how serious its promotion addiction had become until it began to track all its discounting activity. It was running promotions on more than 90 percent of the days its stores were open. Finally, monitor the percentage of sales at different stages of the pricing life cycle — at regular price, at promotional price, and on markdown. The higher the percentage of sales at earlier stages, the better.

At the same time, ignore “unhealthy” metrics that could lead you back into a promotions strategy that can hurt your brand and bottom line. For example, focusing on revenue growth reinforces the “sales at any cost” mentality that retailers need to shake.

Step 5: Persevere. Recovery is a marathon, not a sprint. As you examine the key metrics, remember to measure success from a long-term perspective rather than fixating on the immediate impact of individual promotions. Short-term metrics capture neither the potential brand damage from promotions nor the benefits of brand building, which bears fruit over time. Companies that try to change their promotional habits often panic when short-term sales drop, and they revert to their old ways. They don’t realize that the initial effect of cutting back on discounts is almost always a decline in sales. But a hasty retreat into poorly planned, last-minute promotions is not the answer. It only increases the damage to a brand. Ride out the ups and downs, stay focused on the long term, and embed your goals in the company culture to make sure the change takes hold. Ultimately, you will replace your harmful addiction with a powerful new promotions capability that strengthens your brand and your bottom line.

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