20-30% of your promotions are unprofitable Here is how to fix them!

Retailers spend between 3-10% of their revenue on promotions. Our research indicates 20-30% of all these promotions are unprofitable. In this article we outline how retailers can increase the %-share of profitable promotions and improve overall margins with 2-5%.

Promotions are a critical component of the marketing mix and one of the biggest items on a retailers P&L statement. Formulate's research suggest that grocery retailers spend ~2-5% of the revenue on promotions, where the same figure is ~5-10% for retailers within fashion and durables.

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0.1. There is money on the table

Today retailers run thousands of promotions in a typical year, many of which are unprofitable.
Anywhere between 20% and 30% of all promotions (up to 50% in some really bad cases) are actually unprofitable in that they don't generate a sales lift sufficient to offset the promotion cost despite supplier funding. A significant improvement opportunity. In this post we outline some practices how retailers can improve the promotion performance and increase the overall profit margin with 2-5%.

0.2 Find your True Lift

To improve promotion performance retailers first need to find a way to continuously calculate the True Lift from every single promotion down at the SKU level. And share this True Lift data with the entire merchandising organization and preferably also with suppliers. So they can use it throughout the merchandising process from follow-up, to vendor negotiations and forecasting. For most retailers this can be achieved by using the existing point of sales data.
 

When calculating the The True Lift metric it is important to both capture the incremental sales lift that a promotion generates above the baseline, as well as all the other factors that impact the promotion performance; cannibalization effects, up-sell effects, and stockpiling effects. Our experience is that most retailers don't have this. And therefore they struggle to choose the promotions that help achieve the company objectives.

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0.3 Get the full picture

Once the True Lift has been correctly calculated, retailers should use it to evaluate all promotions on a company wide level. And find out which ones that work and which that don't. This process can be simplified by the organising the analysed promotions into groups, such as:

  • Promotions that grows both the sales and the margin
  • Promotions that grow sales significantly but have a negative or slightly negative margin impact
  • Promotions that erodes margins and sometimes also the sales
  • Promotions that has an overall low impact
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0.4 Spend your money where it matters

Once the promotions have been evaluated it is time to take action and start reallocating your promotions budget from promotions with a low incremental sales and margin impact, to the ones that really drive your sales and margins. These are just some of the actions that can be taken:

  • Terminating promotions that have a negative impact on incremental sales and margins as well as promotions with a low impact on incremental sales and margins
  • Reallocate more resources promotions with a positive incremental sales and margin impact
  • Renegotiate and increase vendor funding, in particular for products with high sales growth but low margin impact
  • Replace and introduce new brands in categories with high cannibalization
  • Optimize the discount depth and tactic (e.g. 3 for 2, % discount, giveaway) across the board for promotions
  • Make sure products that cross-sell are promoted together

To summarize, most retailers can improve their overall margins by 3-5% if the work more efficiently with their promotions. This requires that the true lift is continuously calculated for all promotions. That this information is shared across the organization and used throughout the campaign process.

Stay tuned for our next post to further move the needle by working proactively with predictive promotion analytics!

Cheers /the Formulate team

Arvid Stenback Lund