Is anything sold at full price these days? Anything? Anytime? Anywhere?
You can’t click a link, touch a mobile app, or set foot inside a bricks and mortar store, without being confronted by some kind of promotion or other - BOGOFF here, 70 percent off there. As long as you keep your wits about you and shop wisely, it’s great a great time to be a shopper.
And the shop? Ask a retailer if a promotion is working and you come away with the distinct impression that their answer is based on guesswork rather than deduction. And although they might be measuring its effect on sales of that particular promoted product, will they also be considering the impact of the promotion on their business, overall?
A recent survey by the Boston Consulting Group discovered that around half of all promotions create no noticeable lift in sales. And something like another third dilute margins.
Why run so many promotions?
The thing is, promotions can be counter-productive. Take a Fresh Chicken promotion, for instance. Naturally, you’d expect fresh chicken sales to increase. All well and good, but how’s that going to affect frozen chickens? Or, even worse, what if you promote frozen chickens and the sales of fresh chickens drop, leaving you with a stack of not-so-fresh fowls which you’re obliged to discount or cart off to the dumpster?
Or how about a promotion on toilet paper: 33 percent extra - 12 rolls for the price of 9. On the surface, a pretty good deal. But will customers visit the lavatory more often just because they have three free rolls? Not very likely is it? And, in the weeks following the promotion? Sales go right down the toilet - and full-price sales, at that. So, in the long run, does the promotion help the retailer sell more toilet paper? No.
Mmm… apple pie and cream
Cannibalization and pull-forward of demand reduce overall promotion profitability. There are positive examples, of course - if you promote apple pie, you sell more cream (halo effect). But, in general, if promotions have such a negligible effect on sales and dilute margins is there such a thing as a truly profitable promotion?
If we understand the relationship between products and customer shopping behaviors, we can start to detail what constitutes an effective promotion. Some relationships are straightforward like apple pie and cream, or fresh and frozen chicken. Some aren’t. Pasta and tomatoes, for example.