Mike Anthony @ engage consultants

Mike Anthony on Shopper Marketing

Want To Drive Profits? Look At Your Promotions

with 8 comments

Want To Drive Profits? Look At Your PromotionsAcross the world things are tough for companies, and those in the consumer goods industry are no exceptions. Each piece of good news on the economy seems to be accompanied with ten pieces of bad news: the economy is tough; shoppers are being more choosy, and are willing to sniff out a bargain – yet both manufacturers and retailers have sales targets to hit. What to do if you have to hit your targets and want to drive profits?

It appears that the in the vast majority of cases the answer is to increase the number of promotions. Whilst dining with a retailer friend of mine recently, he suggested that promotional intensity was at an all-time high, with some chains in some stores having over 40% of their range on promotion at any time. This responds to the deal hungry shopper, but what does it do to the shoppers who are not deal obsessed, and what does it do to profits?

Profit slipping away

The answer to the second question is pretty straight forward. Whilst Toby Desforges and I were researching “The Shopper Marketing  Revolution” we spoke with Chris Hoyt, of Hoyt & Company, who told us that from their research in the US, the average trade promotions ROI is typically between 55% and 75% marketing – for every dollar spent the manufacturer might get back as little as 55 cents, losing 45 cents in the process. This backs up analyses that we have seen from CAS (the trade promotions experts now owned by Accenture) which suggest that 70 percent of promotions lose money for manufacturers, and extensive data that we have seen from our work in Asia.

Destroying value from loyal shoppers

Most promotional evaluations only actually look at what is sold – so are often merely a calculation as to whether there was enough additional sales value to cover the cost of the discount. But it doesn’t really account for who actually buys, and what they do with the product after they buy it. In every category some promoted goods will be bought by someone who would have bought the brand anyway; or who brings forward a future sale because of the deal. Unless they consume more as a result of buying more, then this is just lost money. In categories with inelastic consumption this is often the case (when you buy extra laundry detergent do you wash your clothes more frequently? No I thought not!) In some categories we’ve seen “loyal shoppers” buy five months’ supply in one go as it’s on a deal – but as they don’t use any more, then they end up not buying again for five months!

Brand value eroding

And what of the impact in the long term? Over time shoppers who believed the brand was worth one price, now start believing it is worth another price. They wait for promotions, as they now have recalibrated the value of the brand. It seems crazy for brands to be simultaneously spending millions to build brand equity with consumers, when at the same time spending money to lose brand equity with shoppers.

There are plenty of other negative factors relating to promotions (the fact that they are often the cause of out of stocks, which again prevents loyal shoppers buying the product at full price); but even these are enough to suggest that the estimates of the negative value of promotions are fair, or even generous – the true cost of promotions may well be significantly higher.

But for marketers who have targets to hit, promotions may be seen as a necessary evil: how then to address the problem, without losing all of those sales uplifts that are deemed as essential to the brands success?

Getting out of the promotions money pit

Measure:

Not all promotions are bad, and some are worse than others. Begin evaluating promotions, and work out which ones are good for business, which are OK, which are not OK and which are really poison. Stop taking the poison, and replace with more of the good stuff.

Don’t go cold turkey

Even if your boss would let you, stopping is a bad idea. Your customers won’t like it, and your shoppers will get confused, and that might cause problems. Most manufacturers have been killing themselves slowly with promotions for years, so a few more years won’t hurt. Start gently, by reducing the intensity, reducing the depth of deals or the duration of the deals. Identify the worst offending promotions and stop those. If 70% of promotions lose money we don’t have to move to zero overnight, but if we were to nudge towards 60% that might make a huge difference.

Take alternatives to retailers

Retailers are suspicious folks and when a supplier wants to stop something, they get worried about their profits, and the funding (end caps, mailers) that is associated with the activity. Go to retailers with alternatives which maintain investment levels in the first instance. Once we prove our activity works, these things can be re-negotiated later.

Whatever you do, do something. The pressure isn’t going to stop soon, and more promotions, at some point (if it hasn’t happened already) just won’t work anymore. There is only so much stuff that people can buy. There is only so long that prices can be cut deeper. Something will one day give. Wouldn’t it be good to be half-way out of the hole when it begins to cave in?

Advertisements

Written by Mike Anthony

February 21, 2013 at 3:22 pm

Posted in Promotions

8 Responses

Subscribe to comments with RSS.

  1. What type of alternatives can you offer to retailers?

    Sue Publicover

    February 21, 2013 at 10:29 pm

    • HI Sue,

      Good question – and of course it depends.

      The challenge is to understand what the retailer actually needs. Is it the sales uplift, or the fees, or what?

      With an understanding of what the retailer actually needs to get, then an assessment of alternatives can be made.

      THe second part is to have built an understanding of what is of value to the brand: if the promotion isn’t, what it? More space on the home shelf? Better space on the home shelf? What?

      Often it is the fees more than anything that the retailer needs in the short term. Therefore perhaps more space, better space on the fixture might be more valuable.

      Armed with both an understanding of the true needs of the retailer and a list of what is important to the brand (in that it can create a positive change in shopper behavior), the chances of a more mutually beneficial deal improve.

      It doesn’t always happen, but the chances of a better deal do improve!

      Hope that helps,

      Mike

      Mike Anthony

      February 22, 2013 at 1:11 pm

  2. Hi Mike

    Thanks for the well written article. An alternatives i’ve been thinking is redirect the promotion budget into adding extra value to the products. It might be a simple tips How to keep the products last longer and save money or upgrading the contact center (to shorten waiting line or adding more staff). But it depend on the actual needs of the customer. So with an extra value for money we could keep the profit and still manage to increase the volume.

    Cheers
    Mario

    Mario

    February 22, 2013 at 4:05 pm

    • Hi Mario,

      Thanks for the suggestions: Anything which upgrades the product/service to the customer should be good: the challenge for many is that promotions deliver sales in the short term, whereas product upgrades often deliver extra sales, but in the long term. I believe that this is why promotions are everywhere in some categories, as they feed this short term need.

      The bad news is that it creates a vicious cycle of time/money… people don’t have time of funds to invest for the long term as they are too busy managing promotions!

      Thanks!

      Mike

      Mike Anthony

      February 25, 2013 at 7:42 am

  3. Hi good piece of work.
    Definately the products of planned purchase gets affected with promotions and should be done carefully keeping in mind the competitors activities and to increase market share.
    However for impulse products promotions definately add value and increase the basket value for retailer and the company.

    Haider Kadri

    February 23, 2013 at 8:18 pm

    • Hi Haider,

      Thanks for reading and for contributing to the discussion.

      At one level you are right: and impulse versus planned is a great rule of thumb: but often we see that the split is more complex than that. Amongst planned purchasers there are lots of levels of planning, and there are examples where increasing purchase will drive consumption.
      Likewise within impulse categories there are planned shoppers; and there are shoppers who buy on impulse yet still stock up the products, thus devaluing the impact of the promotion. Potato chips for example will see in some markets a lot of planned purchase, and a lot of people stocking up on deals.

      The key we find is that not all shoppers are equal, therefore to truly evaluate the impact of activity we need to know more than just what is bought and when: we need to know who buys, and what impact it has on consumption. This model is in our experience the only way to truly evaluate the impact of any activity.

      Thanks again,

      Mike

      Mike Anthony

      February 25, 2013 at 7:47 am

      • Hi Mike,
        Thank you for your feedback.

        Haider Kadri

        February 25, 2013 at 5:41 pm

  4. […] We track customer satisfaction, when satisfaction hardly guarantees future behavior. I’m satisfied with lots of products, but it’s only when I’m delighted that you have won me over. Satisfied customers are at risk. Satisfied customers are the ones that increasingly need promotions to bind them to brands. […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: