Price reduction is a tool for companies to encourage the sale of their products. However, to generate greater effectiveness from promotional campaigns, there are several key questions that must be answered when designing and implementing promotional campaigns, as the author explains. Marcelo Krybus is a Certified Pricing Professional (CPP) and great pricing enthusiast. He currently works as Manager Partner at Quantiz Pricing Solutions, a pricing consulting firm in Brazil. With more than 10 years of experience in pricing, he has developed more than 40 projects in different sectors including agriculture, construction, education and pharmaceutical. Contact him via LinkedIn here.

The Pricing Advisor, July 2021

Introduction: Pricing Promotions

A recent study carried out by Nielsen indicates that approximately 2/3 of sales promotions do not bring positive results. According to the survey, it is better to keep prices consistent and avoid discounts to at least ensure the same profit result. Many companies allocate large amounts for TPR (Temporary Price Reduction) but end up without the expected return.

In addition, a survey by Retail Week magazine showed that shoppers expect more sales promotions in the post-pandemic economy. Before Covid-19, 70% of respondents had a high/average likelihood of waiting for a promotional offer before making certain purchases. In the post-pandemic scenario, this proportion jumps to 78%.

The pandemic also brought about a change in consumer behavior. Many people reduced their consumption patterns and downgraded their preferred brands. According to a research by MindMiners in Brazil, 70% of people cut some type of spending after March 2020.

So, what now? What should be considered when designing new sales promotions given these consumer insights? Many companies had an impact on sales volume and thought – or even executed – sales promotions campaigns to avoid losing market share.

This article aims to present best practices to help companies create a guide for designing, executing and controlling sales promotion actions. To begin, you must be ready to answer the following questions:

Why? (Objectives)

Englishman Simon Sinek, motivational speaker and author of five books, says that everything should start with ‘why.’ He inspires people and companies to discover their purpose in order to achieve success and happiness. For sales promotions, the approach is no different. It is important to be clear about the promotion’s objectives when carrying out a promotional campaign. This will help you to assess whether the sales promotion action was successful or not (as the objective is not necessarily to have a greater margin of contribution).

Some examples of goals that can be pursued with a sales promotion are:

It is essential to always have the objectives in mind to answer the questions below, and to be able to measure the results of the promotional campaign.

Who? (Public)

In this question, the target audience for the sales promotion should be defined. The maxim “using a sledgehammer to crack a nut” applies here. The more targeted and personalized your promotional campaign, the greater the expected return. Therefore, it is necessary to think about whether the sales promotion will target a specific region to combat a regional brand, a specific sales channel or a similar profile shopper segment.

Personalized sales promotions are already a reality. At the present time, there are tools that make it possible to have sales promotions both in e-commerce, with dynamic pricing, and physical retail locations with applications for retailers’ discount.

What? (Product/ Service)

When defining which products or services will be part of the promotional campaign, companies should have the following information on hand:

• Price Elasticity: It is important to measure elasticity levels before the campaign as higher returns are expected for products with a higher level of elasticity. Inelastic products are not recommended for promotions as the return in sales tends to be unrepresentative.
• Category Management: It is essential to understand the role of different categories in both the retailer’s and the shoppers’ eyes. Categories are divided into four groups:

With that in mind, categories classified by retailers as “destination” or “routine” should be the ones with the highest incidence of price reduction. On the other hand, products classified as “convenience” should have a lower frequency in sales promotions.

• Shopping Basket: Through this analysis, it is possible to avoid reducing the price of items with a high degree of association in sales. If two products are already historically sold together, would it be necessary to design promotional campaigns for both? Or, if you have just one of them in a sales promotion, would you already leverage the sales of both? This type of analysis can help not only better target the investment in sales promotion, but also the design of visual materials, planograms and product visibility in the e-commerce setting.

• Inventory Level: Does the company have an inventory or the ability to deliver the anticipated number of incremental sales?
• Product Expiration Date: Products with close expiration dates are items that could have their price reduced to prevent destruction and loss. It is important to emphasize to the shoppers that there will be no produt replacement if the date expires, whether for retailers or industries.
• Recent Sales Promotions: In the final part, this article will deal with indicators to measure the sales promotion’s results. This control is essential to assessing the success or failure of any campaign in addition to enabling the identification and repetition of successful cases.

How? (Execution/Communication)

You must take into account “How” a shopper will be impacted by a promotional campaign in order to define the best price reduction strategy.

Some possibilities include:

How Much? (Value)

Here, the benefit to be granted for shoppers must be evaluated. 20%, 30%, 40% discount? For this decision, some factors are relevant:

• Sales Promotion Goal: What is the goal of the sales promotion? For example, if the goal is to urgently reduce inventory, keep in mind that a higher discount percentage may be required in this case.
• Discount Optimization: Through measured elasticity, it is possible to assess which discount percentage would least affect the absolute contribution margin. The cross- price elasticity can also be included in the model in order to generate a more accurate estimate of the result.
• Competition: It is essential to have traceability in regards to your competitors’ moves (in real- time, if possible).
• Recent Sales Promotions: Evaluate past hits and misses.
• Profitability: What is the available investment for this promotional campaign (assuming that positive financial results will not be achieved in the short term)?

In some price reductions, it is necessary to limit the number of units to be sold. Thus, it is possible to obtain greater control over the amount invested.

When? (Period/Frequency)

The promotional calendar provides, in advance, better visibility of when sales promotions should take place. This calendar should consider important events in the market as a whole (e.g. Black Friday, Valentine’s Day, Easter), as well as specific events in your segment (e.g. National Nut Day, Read a Book Day, National Dog Day).

Besides the promotional calendar, you should measure the promotional campaigns of your main competitors to assess whether counter actions are needed.

There are two ways to act in this scenario:

1) Reactively: that is, monitoring prices, and as soon as the competition reduces the price, your company acts in a similar way; and

2) Proactively, through historical monitoring of competitors’ sales promotions. Thus, the month with the highest incidence of price reduction is evaluated, or, in more detail, the week of the month and the days of the week. Remember: to avoid unnecessary price wars, this is a recommended step for companies that are not market leaders.

Another relevant aspect is the sales promotion frequency is how often promotional sales are being executed. If a product is on “sale” all year, the shopper may feel cheated, since the “sale” is the regular price.

Where? (Ways of communicating)

In this question, Pricing/Revenue Management should have less interference so that specialized divisions within the company can make the most appropriate decisions. Some possibilities for communicating and marketing the promotion are:

Before implementation:

For a successful implementation, good communication among stakeholders is necessary, from the internal team (e.g., Marketing, Sales, Trade Marketing) to shoppers (e.g., banners, labels, etc.), or from industries to retailers. If there is any miscommunication, the sales promotion and the investment spent will most likely not bring the expected results.

It is also important to parameterize the system with the rules defined during the planning, such as discount levels per product, the maximum number of promotional products, dates for beginning and end, among other rules.

Did the promotion/campaign work?

The first question that arises after the sales promotion period ends is whether or not the financial return was positive. But first, it is necessary to assess whether the campaign’s objective was achieved. We recommend closely monitoring this indicator closely.

One of the indicators to measure the financial performance of a campaign is the analysis of isolated effects, conducted with the objective to isolate most of the sales promotion effects. Starting from a contribution margin reference (which can be historical or projected), the following are added/deducted:

• Incremental Sales: How much incremental revenue occurred as a result of the increase in volume/quantity?
• Discount Effect: What is the effect of the price reduction on revenue?
• Variable Cost: How much more of the variable cost is incurred in the result due to the increase in quantity?

The next three indicators are more complex to calculate. However, only an estimate of them is required:

• Experimentation: Was a goal of the promotion to attract first time buyers and for a segment of these buyers to make the purchase a recurrent action? How much additional revenue will this generate for the company in the future?
• Stocking: Did you observe that clients and shoppers “stocked up” to take advantage of the price reduction? If so, what is the impact of this action on future sales with the regular prices?
• Cannibalization: Does the promotional action somehow cannibalize the sale of another product in the portfolio? If so, what is the impact of this change that the client or shopper is making?
• Marketing Costs: This indicator includes all expenses associated with the campaign, such as investment in media, promotional materials (Trade Marketing), etc.

Adding all of these effects together, it is possible to evaluate the financial performance of the promotional campaign. The share graphic below illustrates those effects:

To fully understand the effectiveness of the sales promotion, it is important to also measure other indicators:

• Sales evolution: registered vs. targeted vs. budgeted
• Market share evolution
• Response or not from the competition
• Percentage of sales at the regular price vs. promotional price by category/product/region
• Quantity of shoppers
• Number of different products sold
• Promotional campaign elasticity vs. historical elasticity
• Shopping basket to assess changes in shopper behavior
• Frequency of promotional campaigns

Conclusion

Price reduction is a tool for companies to encourage the sale of their products. However, to generate greater effectiveness from promotional campaigns, it is necessary to dose the investment.

You should treat promotional campaigns sparingly. It is common to see companies implementing recurrent promotional prices for the same product and the desired effect of the promotion does not work. Nowadays, shoppers are more rational and, therefore, marketing actions should be well planned in order to be successful.

In addition, regional characteristics should be evaluated when defining sales promotions. For example, in some regions, a higher discount percentage generates more effect than in others where a promotion with a product combo has a better performance. In the same way, companies with a multi-category portfolio should know that promotional actions can work differently in each category.

Most companies, in order to maintain their results, are under pressure to increase their prices due to their increased costs. On the other hand, clients and shoppers are increasingly sensitive due to market uncertainties. Therefore, it is extremely important that pricing processes are well established in the organization.

Although promotional campaigns are a pricing department process, they should be treated in a multidisciplinary way, as the participation of other departments is essential for promotions to be more successful and gain the necessary dynamism.

Some of the decisions during the process should not be under pricing’s purview, such as marketing. It is essential to understand that all departments need to be aware of their individual roles and responsibilities despite being a multidisciplinary process.

References:

Nielsen: https://shorturl.at/isKUW

Retail Week: https://shorturl.at/dzCF8

MindMiners: