Retailers use a large chunk of their revenue on promotions. Promotions are extremely useful in the growth of sales margins, revenue, and profits. But there is a downside to heavily relying on promotions without the ability to measure promotional effectiveness.
Retailers are not armed with comprehensive knowledge about which promotions are working better and the reasons for the same. Therefore, retailers are incapable of knowing how to strengthen their promotion strategies and boost their sales.
Retailers cannot stop promoting their brands as they cannot afford to climb down in the competitive retail environment. After the Covid-19 pandemic started, customers want to stay safe. So, they prefer online retailers over brick-and-mortar stores. This increases the pressure on retailers to develop better promotion methods.
What is Promotion Effectiveness?
Promotion effectiveness is measuring how beneficial a promotion is and how well it is executed. It lets the retailers know about the return on investment (ROI). If promotion effectiveness is high, it means that promotions are working well which results in increased sales.
A successful promotion increases profits, sales volume, customer satisfaction, and meets organizational goals.
Retailers run hundreds of promotions every year. Most of these promotions don’t generate the expected value. But retailers will not decrease promotions because this is a proven way to improve foot traffic, sales, brand image, etc.
Some promotions create a halo effect, i.e., promotion of one product increases sales of another product also. There is also an issue of cannibalization i.e., promotion causes an increase in sales of one product and a decrease in sales of another product. Therefore, it is crucial to understand how each promotion performs to know which promotion to run again and which one to stop.
There is a four-part approach to improve promotion effectiveness.
1. Build a successful promotion strategy
- Retailers need a clear goal to design a promotion strategy. Retailers could be trying to garner new customers, increase the frequency of visits of loyal customers, or make the customer buy more when they visit, improve store or brand loyalty, etc.
- A strategy must be designed to meet the retailer’s objectives. Understand the effect of previous promotions. Retailers should decide the frequency of the promotions, product combinations and categories to focus on, retail price rate, changes based on demographics across multiple stores, negative impacts, effective promotions, etc.
- Promotions methods could be coupons, discounts, contests, buy one get one free, free sample, free delivery, customized promotions, and more. They have to calculate the amount invested in these promotions. They have to decide how much funds should be allocated to each category.
2. Use Big data analytics to produce proactive suggestions
- Retailers sometimes do not have access to complete sales data related to promotional events. In some cases, they have access to flawed information. Analyzing such inaccurate data can be difficult.
- Even when proper data is available, if the retailers use inadequate analytic tools, there will be no usefulness. Such analytical tools do not suggest any promotional changes for retailers to easily follow.
- Using Big data analytics can drastically improve this situation. It provides the best suggestions and retailers will be capable of pinpointing and making required changes like improving certain promotions, stopping a few, and increasing a few.
- They see differences that took place in both actual sales and incremental sales. Retailers will be able to see the accurate ROI generated. It can predict future sales after running a particular promotion. It will consider discounts, cannibalism, supplier funding, and advertising costs for calculating such an analysis.
3. Improve collaboration between retailers and vendors
- Vendors want to create brand loyalty while retailers want to create store loyalty. Promotions run by vendors must profit retailers. This is not always the case. For example, the vendor might be interested in-store promotion team but the retailer may not allow vendor representatives inside the store. The vendor may want more space in the front display and retailers may not comply. Vendors might want to promote their brands but the retailer may not like it as it might cause cannibalism.
- Although their objectives are different, they must work in tandem to create the best results. They must include a solid strategy and good analytical data to take a step further.
4. Build organizational capabilities
- Having the right organizational structure is essential to have promotion effectiveness. Retailers need a dedicated team to plan, execute, analyze, improve the promotions continuously. Every member of the organization must be given the required training to improve promotion effectiveness at each level.
- While store employees are extensively trained to work in new ways, IT teams are trained to work with new platforms like big data analytics and artificial intelligence, and managers are trained to make category-specific recommendations.
Conclusion
By having a deeper understanding of customer needs and journey, a retailer can make promotions accordingly. For example, Retailers can invest in digital advertising if customers are more likely to respond to that.
Promotion effectiveness can be achieved through defining clear objectives, crafting robust strategies, executing promotions, analyzing the data before and after promotions using big data analytics, and using the insights generated to improve the promotions. Promotional effectiveness is a major key to staying ahead in competitions.
