It’s the little details that are vital. Little things make big things happen. – John Wooden
As a retailer, how important are promotions to your business?
Whenever we engage with a new retail client, this is one of the first questions we ask. Promotions – particularly short term price promotions – can have a profound impact on the supply chain (think about trying to shove a basketball through a garden hose) and pretty much always requires some significant thought around processes to plan and execute them properly.
More often than not, we’ll get an answer along the lines of “We do 30% of our business on promotion.”
How do they come up with this number?
Virtually all modern point-of-sale systems will flag a sale as promotional when it is being transacted, which makes things pretty simple: Sum up all of your sales where a promotional code has been affixed by the POS system, divide it by your total sales for the same time period and voila – you get a percentage you can recite to anyone who asks.
But does that actually mean “you do 30% of your business on promotion” or does it just mean that 30% of the sales you transact have a promotion identifier applied by the POS system?
If the overall goal of promotions is to drive additional sales and traffic, you can’t really measure them against that goal unless you know (or can reasonably estimate) a number of things, beyond just the sales that were recorded:
How many customers were going to buy promotional items at full price that week anyhow?
- How many customers were going to buy promotional items at full price in future weeks but purchased decided to purchase earlier and/or in larger quantities to take advantage of the promotional price?
- How many customers were going to buy a different brand at full price, but switched to the brand that was on sale?
- How many customers were going to pay full price for a different brand, but switched to a promotional item instead?
- How many sales did you miss because a number of stores ran out of stock before the promotion ended?
- Etc.
The specific impact of each of these consumer behaviours can vary item by item and store by store. Even worse, none of this information is stored in your POS system (or anywhere else), so if that’s all you have to work with, it’s really tough to understand the true impact of promotions on your business.
But what if you had a process and a system at item/store level that could:
- Identify promotions and other events in your sales history; and
- Estimate and isolate the incremental impact of those events for the purpose of developing a baseline forecast?
This would give you a view – for every item at every store – of what your sales would have been in each week that was impacted by a promotion:
The methods for calculating “sales that would have been” will differ, but this type of sales history cleansing/segmentation is standard functionality for virtually all forecasting systems. Putting aside the “how”, the “what” gives you what you need to better estimate promotional impact:
So now in addition to knowing that you sold 31 units at the promotional price, you also know:
- The actual uplift in sales during the promotion week was 22 units – in other words, had the promotion not happened, you would have still sold 9 units at regular price that week.
- This store ran out of stock 5 days into the promotion. Had that not happened the actual sales could have been 40 units.
- Because of customer hoarding behaviour (or perhaps the stockout mentioned above persisted into the next week or two), your regular price sales for the next few weeks after the promotion declined by 11 additional units.
- When a competing item was on promotion a few weeks later, this item was cannibalized to the tune of about 15 units.
This is the story for one particular item at one particular store and in sales units only – and that’s the whole point. When you plan in this way at the most granular level, you can gain insights at every level above it that can help you with planning future promotions, by understanding:
- What was our true incremental sales gain from promotions?
- Was our incremental sales gain constrained due to out-of-stocks during promotional periods? How do we factor this into our forecasts and stocking plans for future promotions?
- How much did we sacrifice in regular price sales and what was the true incremental profit gain from our promotional activity?
- Does the incremental profit gain reasonably offset the additional costs of promoting items (advertising, signage, store labour, logistics costs, etc.)?
Knowing that promotions are key to your business is one thing. But knowing their true impacts and tradeoffs to sales and profitability can really help you make better decisions that will squeeze maximum value from your promotional activity.