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For Better Retail Promotions, Ask These Questions by Jon Weber and Chris Randall

NOVEMBER 16, 2018

JOHN RIZZO/GETTY IMAGES

Discounts and promotions are at an all-time high, often comprising the single-biggest cost within

many retailers’ P&Ls. Yet despite these high stakes, and the growing adoption of sophisticated

analytics, many retailers continue to take a broad-brush approach to running promotions that

results in missed sales and profits.

The most common explanation for this lack of precision is that retailers tend to evaluate

promotions at a high level, without drilling down to understand the impact of individual tactics

within each promotion. By this, we mean they compare the overall event to last year’s promotion

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in aggregate without understanding how different parts of the promotion might be more or less

successful; getting the mix right is the key to creating more impact on sales and profits.

The good news is that many large retail organizations already have the tools and data they need

to craft more effective promotions. What they lack, more often than not, is a logical way to

structure their promotional effectiveness analysis. The solution can be found by asking a series of

strategic questions, then carefully parsing the data for the answers.

When are discounts most likely to stimulate a sufficient sales response?

Promotions vary in effectiveness depending on the time of the year, key holidays, and even the

day of the week. Retailers who have a firm grasp of how their customers shop during different

periods can use this information to formulate more precise promotional strategies. For example,

during certain holidays — Christmas, Valentine’s Day, Mother’s Day, etc. — consumers tend to be

in active shopping mode, and retailers should structure their promotions accordingly. Recent

analysis for a leading apparel retailer showed elasticity of customer response to promotional

discounts was up to three times higher during holiday periods than during non-holiday periods

and two times higher during weekends than on weekdays. Given this, you’re almost certainly

throwing away sales and margin dollars by not tailoring your promotions to time periods.

Furthermore, retailers should use this insight to educate themselves on when aggressive

promotions are a waste of effort and valuable margin dollars. If your typical customers have

traditional work weeks, it’s very difficult to entice them into the store for an unplanned purchase

during the week, regardless of the type of promotion. Therefore, rather than trying to use steep

promotions to drive traffic on weekdays, use more strategic promotions to encourage consumers

who are actually in the store during the week to fill their baskets.

Does the promotion work best in-store or online?

It’s important to structure promotions based on what works best for a particular channel. Our

recent work in women’s fashion suggests more complicated promotional structures aimed at

basket-building — such as buy one item and get a second at a discount — work far better in-store.

Simpler promotional structures — such as an off-the-top 20% discount — tend to yield better

results online.

What products are most likely to garner more response when promoted?

Not all items a retailer sells are created equal. Some have higher elasticities or stronger pricing

power. Certain items that are on promotion will be especially effective in driving traffic, while

others are better used as basket or margin-builders. For example, our analysis in the men’s

apparel category shows that, compared with everyday basics, promotions for in-season fashion

items bring significantly more people into stores. The same is true for lower-ticket sub-brands

and product lines at aggressive price points.

At the same time, retailers need to be aware of the signals they send to consumers when deciding

which items to promote and how often. Understanding which are your strongest or marquee

items, brands, and product lines is essential, because you could easily erode their value by over-

promoting them. Promoting too frequently may cause consumers to equate your brand with low

prices, which is probably not the profile you want to communicate unless you’re a low-cost

retailer.

How does response vary across tactics (discount depths and promotion structure)?

Promotions comprise a rich set of tools, and it’s no longer enough to just pull out a hammer every

time there’s something that needs doing. Instead, match the tool to the job, making sure your

promotional structure is aligned to your desired outcome and the manner in which your

customers shop. For instance, if you’re trying to build basket size, more complex, tiered

promotions — such as giving increasing discounts for each subsequent item purchased — may be a

better way to go. Co-promoting the right items across the store, and knowing which promotional

levels are too deep or not deep enough, will further help drive sales and improve profits.

Who is most likely to respond (e.g., new versus existing customer groups)?

Most retailers have a vision that a customized promotions strategy — one that optimizes

promotions for every consumer — is the future. But for major marketed promotions, that’s not

always achievable or practical. Nevertheless, you need to make sure that your efforts target your

most important customers who can ‘move the needle’ — either those who drive the most sales or

the ones who are the most profitable. Companies now have the data and analytic power to create

specific customer profiles at relevant group levels — for example, loyalty members or top

customers, or those who tend to purchase on certain occasions or within certain categories — and

craft promotional offers tailored specifically to these groups.

Getting promotions right

Savvy retailers now have the tools to build their promotional calendars from the bottom up,

eliminating wasted promotional dollars and moving from scattershot decision-making to

effective actions tied to strategic objectives (e.g., driving traffic, building basket, driving sales and

profit). Our experience suggests that retailers can find roughly 400 to 700 basis points of

incremental margin dollars by deconstructing and deploying promotions that are strategically

designed, targeted, and timed.

Of course, the most effective promotional strategy will differ for each retailer, and must account

for many things, including the intended value proposition, competitive position and pricing

power, and the specific consumer segments served. But through data science and a careful,

strategic approach, retailers can solve the promotional Rubik’s Cube and unlock substantial

value.

Jon Weber is a managing director and partner at L.E.K. Consulting.

Chris Randall is a managing director and partner at L.E.K. Consulting.

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