Article

Why it is time for retailers to quit discounting, start rewarding

Promos mainly appeal to shoppers that only buy on discount without the intent to repurchase.

November 2, 2011

As consumers increasingly search for value throughout the shopping experience, both retailers and brands are relying more on promotions as a strategy to achieve sales gains, drive shelf performance and attract new buyers.

For shoppers, discounts are everywhere -- on Facebook, daily deal websites, in loyalty mailers and at shelf. Coupon clipping became a popular pastime in the United States as coupon redemption rates skyrocketed during the recent economic recession, reaching record levels from 2007-2010. Thirty to 50 percent of products are sold on discount across major retailers, and promotions typically represent 15-30 percent of manufacturers' annual revenues, making this area their second-largest cost item.

According to Marx, the coupon research division of Kantar Media, marketers issued more than $451 billion in discounts for free standing inserts in 2010, a 17.4 percent increase from 2009.

As promotions continue to escalate, shoppers are now accustomed to searching for discounts. At dunnhumby, we have found that 20-40 percent of promotions erode category value, and that redemption rates have slowed with only 50 percent of manufacturers reporting that trade promotions are effective half of the time. While promotions appear to generate positive sales gains, this lift can largely be attributed to cherry pickers--the shoppers that only buy on discount without the intent to repurchase.

Within an increasingly competitive retailer environment, the pressure to grow promotional budgets is only intensifying. Retailers feel the need to promote in order to grow identical store sales, but know that increasing discounts are eroding category value. Manufacturers feel that retailers are driving promotional strategies that do not make sense for the category and are eroding their brand's equity. Yet the investment in trade spending continues to increase and limited progress has been made in measuring the drivers of promotional effectiveness.

Part of the challenge is that promotions are satisfying different objectives depending on whether you are a retailer or a manufacturer:

• For retailers, objectives are focused on category profitability targets, moving excessive inventory, price matching competitors, maintaining a positive price perception for the store and growing store traffic.
• For manufacturers, the objectives include driving shopper acquisition/trial for the brand, building distribution, improving share of wallet, short-term volume growth and reduced inventory costs.

It is not surprising therefore that manufacturers and retailers have difficulty agreeing on what is right for each of their businesses.

Breaking the promotion escalation cycle requires alignment from both retailers and manufacturers on the one thing that each has in common: the shopper. It starts by understanding the role promotions have in who buys, how much they buy, what and when they would have bought otherwise and understanding whether they will buy again.

However, just assuming a "shopper centric" position does not ensure long-term success. It takes a disciplined approach to change the way promotions are evaluated, planned and measured. At dunnhumby, we believe there are four key phases that are integral to a successful transition to shopper-based promotional planning:

Understanding: How do shoppers respond to price and promotions?

Quantifying the short-term lift that a promotion creates is not sufficient to determine its effectiveness. A 12-pack of soda on promotion for $1.99 will more than likely be accompanied by a huge lift in sales but tells us little about its impact on future performance. Additional metrics that can offer insight into shopper behavior are required to drive decisions and plans that can achieve long-term success. Sales lifts need to be analyzed in the context of the shopper segment that was targeted and tracked overtime to understand how it varies. There is often a specific price point or depth of discount at which promotions become plagued by cherry pickers. Additional metrics should seek to pinpoint the tipping point at which promotions will effectively engage a group of loyal customers and the depth of discount that will attract customers that have no long-term value to the brand.

Retailers should use the best available data that can be consistently and efficiently sourced to build a category-specific promotional library:

• Basket level data is a viable solution when frequent shopper or loyalty card data is not available. Leverage measures that can be used to build a better understanding of promotional success at a trip level, such as: What was the total spend per basket with the promoted item? How many times was the promoted item purchased? How many items were in the basket? How many non-promoted items were in the basket?
• Shopper level datais the preferred source for promotional metrics because it enables longitudinal analysis of how a shopper responds overtime to a promotion compared with other purchases and trips. Key measures to consider with shopper level data (in addition to the basket measures above) are the percentage of shoppers purchasing the promoted item and the percentage of households repeating their purchase of the promoted product or category.

Objectives: What should the retailer and manufacturer aim to achieve with the promotion?

This stage is the most critical step in determining the type of promotion, the level of discount and the timing that is required. Without a specific objective for a promotion, retailers and manufacturers will fall back into the cycle of planning promotions to lap what was done last year or match what the competition is doing.

Discussions between retailers and their manufacturing vendors should seek to pinpoint the objective of each promotion: Are we seeking to reward loyal shoppers, drive trial, and build broader engagement in the store? Is this promotion creating the appropriate investment balance across all shoppers? Will the promotion drive a sales lift for the category? Does the promotion plan for the category skew too heavily to a group? If so, what are the right brands, products and promotional tactics to use to meet the needs of the underdeveloped shopper?

During this phase, it is important to also consider the associated impact of the promotion on other categories in the store. For a July 4th promotion, for example, the objective of a promotion could be to win the event or to sell burgers, but associated categories like ketchup or buns will also benefit from the promotion. Therefore, promoting associated categories in addition is not a smart allocation of investment.

Decision: What is the right promotional mechanic and price point to deliver the objective?

Based on the objective, retailers and manufacturers can collectively review the promotional library to identify the types of promotions that drive the desired behaviors. Price point and tactic will always be important considerations for a promotion. However, the objective and the corresponding benchmark data will help identify whether there are opportunities to reallocate spending from one promotion to another in order to deliver against the key objectives.

Understanding which products appeal to which customers can help to match the right mechanic with the right promotion. If a product has a broad appeal across segments, such as cookies, placement at an end cap could achieve five times the lift as a niche product in that area with a steep discount.

Products that are "expandable consumables" are often prime targets for a deeper discount because they drive an increase in the repurchase rate. For example, promoting a laundry detergent as 2 for $15 is not an expandable promotion because it does not change the usage of the product for the customer. However, a customer could purchase their favorite soup on a promotion of 10 for $10 and still come back the next week and purchase the normal amount of the same soup.

Measurement: What happens when the promotion is executed?

Finally, each promotion should be evaluated to understand whether it achieved the intended results. This stage is often missed or largely ignored but it is a vital element of achieving long-term growth. Returning to the metrics established in Phase I, results from each new promotion should be fed directly into the promotion summary database library. If the objective was to target a promotion to loyal shoppers, were they rewarded? Did the promotion drive a sales lift among that segment of shoppers?

Shopper-driven promotional planning, if executed correctly, can break the promotion escalation cycle and generate long-term success. Greater collaboration between the retailer and their manufacturing vendors is key to delivering the right promotions to the right shoppers, regardless of the channel. By aligning on the objectives and leveraging data beyond two-dimensional metrics like sales, units and margins, promotions can become a powerful way to relevantly reward customers and drive long-term brand loyalty.

Bob Welch is Senior Vice President, Manufacturer Practice Client Solutions at dunnhumbyUSA, responsible for working directly with the company's major consumer packaged goods partners to identify and develop custom insights and solutions that generate a holistic, customer-centric strategy. (Photo by Lordcolus.)