Can smarter pricing and promotion reduce the emphasis on discounting?

By better directing their spending on trade promotion, consumer products companies could achieve greater profitability without sacrificing revenue.

Three-quarters of consumer product (CP) companies are struggling to grow both revenue and profitability. What worked before does not work today.

Pricing and promotion value levers can increase profitable growth if managed appropriately. But companies need to build a clearer, fact-based understanding of what actually drives a successful promotion, and manage those levers better.

They can then run promotions that strike a better balance between investment and return — and achieve profitable growth at an affordable cost.

The most effective strategies tend to be those that consider pricing and promotion together — these are not separate challenges. And, success is more likely when manufacturers and retailers work in partnership.

To highlight the scope for companies to design and implement much more effective promotion strategies, we studied over 2,000 promotion events across more than 14 US retailers and 25 promoted product groups (PPGs). The events included a range of categories and channels.

We found that close to 20% of revenue was invested in trade promotion, but on average, these events lost money.

By breaking down such a large number of promotion events, across a wide range of scenarios, we identified five ways to make pricing and promotion work harder.

Companies that take these steps to retune their pricing and promotion strategies could significantly increase their return on investment (ROI), to drive profitable growth at an affordable cost.

Our research suggests the benefits could include:

  • Volume up 1% to 4%
  • Sales revenue up 8% to 10%
  • Gross profit up 8% to 12% (net of trade spend)

Five steps to improved pricing and promotion

1.  Optimize everyday prices

Standard discounts and general promotions seldom work. In fact, nearly 70% of such promotions lose money.

To increase ROI, companies need to start by establishing the right everyday price. Of the promoted product groups (PPGs) and retailers we studied, more than 80% could improve volume, revenue or profitability by changing everyday price. About half of them could improve profitability by taking their price up, with limited impact on volume or revenue.

A data-informed view of price elasticity — the effect of price changes on demand — can result in better pricing strategies. Companies are better able to spot opportunities to drive margin, volume and revenue. They can also clarify whether it’s better to go with an “everyday low price” (EDLP) strategy, or to take a more standard “hi-lo” route, where a product is offered at a high price and then heavily discounted.

A range of factors come into play here — from changes in the weather to rival offers from competitors; companies can use predictive modeling to assess their impacts. If the analysis shows the company’s products are more sensitive to everyday price changes than promotion discounts, then it’s time to consider an EDLP strategy.

And in their efforts to set a better everyday price, companies should move away from “deadwood” discounting — setting prices at an artificially high level and then cutting them back to a more realistic point. Where possible, CP companies should instead invest in activities that drive greater shopper loyalty, such as product innovation, better in-store positioning and promotion events.

2.  Use smaller discounts — only go deep for feature or display

Nearly, 40% of the PPG and retailer combinations we analyzed could make their promotion events more profitable by offering smaller discounts, as heavily discounted events largely lead to negative ROIs.

CP manufacturers often use temporary price reductions in isolation, even though promotions do not succeed by price alone. These events are more likely to increase revenue and profit when they are combined with merchandizing, such as in-store, visual shelf or aisle PPG promotions.

If there’s no merchandising, discount levels of 20% or below deliver better results. So, manufacturers should only use deep discounting as a bargaining chip to gain access to merchandizing.

3.  Rethink duration, timing, shopper marketing and co-promotions

Promotions can be much more effective when companies use data insights to optimize the core elements of their offer.

  • Most promotions are too short: Four to five weeks is the duration that gives most companies optimal ROI — the average promotion only runs for around a third of that time.
  • Timing makes a big difference: If a PPG is not heavily seasonal, promotions outside of core holidays are often more effective as they avoid competition with seasonal products on promotion.
  • Question shopper marketing: Shopper marketing promotions — such as sweepstakes, in-store demos or store TV — cost more and result in significantly lower ROI. But done properly, such promotions can build brand equity, so they should be considered with both short- and long-term impacts in mind.
  • Single-product promotions can beat co-promotions: Companies that combine multiple PPGs in one co-promotion risk cannibalizing their own sales. Some of the companies in our study could have increased revenues by 30% and profits by 33% if they had run separate promotions on each product instead of using co-promotion.

Companies can use predictive analytics to help them understand the risks associated with their promotion tactics and make better decisions.

4.  Create promotion strategies at the retailer and PPG level

Manufacturers can improve performance across categories and channels by sharpening the focus of their promotion tactics at a granular level.

Both manufacturers and retailers will find it harder to meet their financial goals if they use high-level promotional strategies that are not tailored to influence the consumers’ purchase decisions.

Not all retailers in a channel are alike — they require different strategies and tactics.

5.  Build profits for both the retailer and the manufacturer

Manufacturers need to build more collaborative relationships with retailers. Too often they see pricing and promotion as a zero-sum game, where a win for one side implies a loss for the other.

There are untapped opportunities for both sides to improve their business performance. Over a third of the promotion events considered in our study were “win-win” — they delivered a positive incremental profit for both manufacturers and retailers.

To identify more win-win opportunities, CP companies need a better understanding of how their promotions perform not just for themselves but also for retailers. They must expand their promotion performance measures beyond their own KPIs to include metrics such as incremental revenue, incremental profit and margin for retailers.

And focusing more on win-win opportunities could also help reduce the problem of noncompliance: according to our analysis, nearly one-third of retail stores did not run planned promotions.

Getting to the prize

Companies can use data analysis to understand the performance of their promotion events and to model future events. The results will help them to fine-tune their future strategies with laser precision.

Key steps include:

  • Set clear priorities: Effective pricing and promotion strategies target the right balance between volume and profit. There’s usually a trade-off between the two.
  • Embrace analytics: Decision-makers need access to powerful, relevant data analytics. Companies should now be moving beyond piloting tools and should embed analytics into the fabric of the business.
  • Work together: Companies must create a collaborative mindset where people work together, both across internal functions and with retail or manufacturer partners.
  • Build capabilities: Companies need to find the right balance between short-term actions that lead to better pricing and promotion strategies, while building the capabilities that will sustain long-term success.

We conducted this research with the help of two leading US price and promotion organizations — Sequoya Analytics and the Promotion Optimization Institute. We’d like to thank them both and also thank the companies that shared their data, time and energy. This research wouldn’t have been possible without them.

  • About the analysis

    Promoted product group (PPG) and retailer-level models were created from 104 weeks of historical syndicated data. Using the models, the team was able to identify the impact (i.e., coefficients) of both base and incremental variables. Base variables included everyday price and seasonality. Incremental variables included multiple forms of temporary price reductions — such as discounts, bonus packs and BOGOs (buy-one-get-one-free offers) — as well as feature and display activity. We reinforced the incremental variables with manufacturer-specific overlays, such as shopper marketing events and holiday and calendar effects. The models were supplemented with promotion event spend and financial margins to allow an understanding of profitability.

    To perform the analysis, we used a two-stage approach. In Stage 1, we conducted post-event analysis to understand how each event performed in terms of ROI, lift and incremental revenue/profit (including pantry loading). In Stage 2, we used the variable coefficients from the models to perform predictive analytics (i.e., “what-if” simulation), thus enabling us to test various scenarios/hypotheses. Lastly, PPG-level product interactions were modeled among a manufacturer’s own brands to incorporate the effects of cannibalization.

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Resumen

Taking a data-based approach can help CP companies to deliver profitable growth through smarter pricing and more successful promotions.

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