In our part 1 of our price promotion series, we talked about how to design promotions to drive consumer behavior. In the second part of our series, we will discuss the four steps for building a promo plan. Temporary Price Reduction, promo price, discount price all mean essentially the same thing: a short-term lowered price offering the consumer a savings on a purchase. We learned in Econ 101 that items are elastic; sales units go up as price goes down. As a buyer, the majority of time I had a conversation with a brand about sales needing to increase on their product, the first tactic that was discussed was price. Simple, right? If you want sales to increase on an item, just lower the price.
But there’s a catch. There are multiple ways to determine if a promotion is effective: margin, sales dollars, pull forward business, etc. As retailers get back to the basics and focus on the fundamentals, promotions are increasingly being evaluated by retailers in more detail. As a result, it is getting increasingly harder for brands to get promotions on their products.
Promo optimization initiatives can come across like another way for buyers to tell brands “no” and another tactic to grow selling retail and ultimately margin. It will be increasingly more challenging to get promotional offers approved one at a time or without data support. To be more successful in working with your retail partners, approach the conversation on promos with a promo cadence supported by data that influences consumer behavior and drives financial results for your retail partners as well as for your brand.
4 Steps for Building a Promo Plan
Step 1. Strategy development starts with hindsights and insights.
When working with my teams as a retailer, I framed this up as “Know what is happening in your aisle, in the store, outside of the store, and what is impacting your customer.” Before building a promo plan, start with completing hindsights to get a complete picture of your business, your consumer, and your market.
Data and insights fuel this part of the process. However, before you rush to collect data and identify resources, start with the end in mind and consider the answers to the following questions:
- What questions do you need to answer?
- What gaps do you have in your understanding of your business, your consumer, and your market?
- What do you need to make an informed decision?
You can go as far as creating a list of hypotheses that need to be validated. So often, teams rush to compile data quickly leading to analysis paralysis with data overload or leading to a narrow focus with incomplete resources to complete the big picture.
An important output of the hindsight process should be an understanding of how each of the previous year or period’s tactics influenced results. Tactics included in the evaluation would be from both your brand and also your competition. How did consumer behavior change? How did the changed behavior impact financial results? This will also result in a list of tactics that influenced consumer behavior and noticeably impacted business, and also a list that didn’t achieve either.
Step 2. Identify your brands goals.
When working through promo optimization for a retailer, I was asked by leadership repeatedly, “Is this the best promotion we can offer this month?” Leadership was looking for a binary response, but my response was “Define best.”
The reason I couldn’t answer the leadership’s question is that “best” is subject to what needs to be accomplished. Coming out of the hindsight analysis, brands should have a clear understanding of what needs to be accomplished financially. Some brands need rapid expansion of top line, where some brands need to be focused on stabilizing margin degradation, or it could be a combination of both. Either way, before discussing a promo plan, get aligned internally and with your retail partners.
Once you have alignment on financial goals, it’s time to start understanding which consumer behaviors need to occur to achieve your results. Do your aggressive topline sales goals require massive amounts of new customers? Or maybe your brand already drives new customers through current trial efforts, but retention to the brand is the behavior that needs to amplify to achieve your plans. Successful promotions require you to translate your financial performance goals to behavior goals, ultimately intensifying your focus on your consumer.
Step 3. Build a plan for 12 months.
There are two common approaches I have seen in retail when it comes to building a promotional cadence. The first is repeating a “favorite” promotion as often as possible. The other is repeating promos in a pattern throughout the year or regurgitating last year’s offers. These tend to occur when planning for a short time frame.
There is a third recommendation to consider: Plan your year or as long of a period as you can and start with your peak time frame. Then, plan the promotion that best achieves your financial goal for that period. Next, looking across your time frame, what are your consumers naturally doing throughout the year? How can you maximize that? It has been proven time and again, that it is always easier and cheaper to get a consumer to do more of a current behavior than to get them to do something new. How does that principle translate into your promo plan?
The same thought process would apply to all your customers or retail partners. Planning one partner in a vacuum has the potential to drive little impact for your total by shifting demand vs. growing demand. While it would likely be impossible to plan all your partners congruently, the point is to ensure your brand has a lens on the total impact of your efforts.
Step 4. Your plan isn’t complete without KPIs.
There is nothing worse than designing a promotion with the intent of driving new consumers and then later using a different metrics as the key measurement of success. This seems intuitive, but I can’t count the number of “Monday business meetings” or monthly reviews that I have been a part of where this has happened. The team designed a promotion with the intent of influencing a behavior, but then the promotion was deemed unsuccessful because the success metric changed or was determined post promotion.
As the promotional plan is developed, include the KPI’s for the promotion. Decide prior to running the promotion what success and failure would look like for each offer. In retail, we get heartache if performance does not exceed last year. If your promotion will by design drive results of one metric below last year, make sure your measurement plan accounts for that. The full benefit of a promo might not be realized in the month the promo is offered. Measurement plans should account for the halo impact, as well.
Opportunity cost is easily missed when measuring promotional success
When working with a team to reduce out of season inventory, we had a theory that if we could sell additional units… even at an extreme discount… we would make more money than outdating the inventory and destroying it. Logical, right?
All tests were conducted on Halloween merchandise in test stores to determine which discount depths and which timing would generate the most profit. What none of us were expecting to find was that the control stores generated the most margin.
The truth is that a quarter in profit is better than zero profits if you are only evaluating profit on the one unit. In our test, the impact of lowering the retail on all the units that were going to be sold regardless of the deep promotion far outweighed the additional demand generated. Make sure your measurement includes opportunity cost.
Having a long-term outlook, beyond the next few months, will establish a stronger plan on how to grow your brand through promotions supported by data-driven decisions. This will also make navigating promo optimization conversations with your retail partners more successful and increase the chances of getting your promotions approved.
Stay tuned for the final blog in this pricing series with tips on measuring promotions. Can’t wait to talk promos?! Email me.