Promotions is not always the first item you study about in marketing and/or category management classes. For sure, we discuss about 4 Ps, but most of the time, while talking about promotions, professors talk about media planning, communication channel, rather than how to spend a promotional budget.
But nowadays, promotion is clearly part of the landscape of what is going on in retailing. The share of sales under promotion is about 20 to 30% (depending on categories), and is still growing. I invite you to read Toby Desforges' amazing article he wrote about the topic. He assesses the right diagnosis of what the state of promotion is at the moment, in the UK, but same thing could be said of the French market. Here are the key bullat points I must highlight:
- an annual promotions spend of close to US$310 Billion. That’s roughly US$44 spent for every person on the planet and nearly twice as much as is spent on cancer research every year in the EU.
- less than one third of promotions break even
- Today promotions are a habit. As shoppers we are used to stores and websites dripping with messages about the latest offers
- nearly 80% of the time is spent planning, executing and evaluating promotions
- Even a reasonably profitable brand (making say 25% EBIT) would have to sell 66% more in order to break-even on a 10% price discount (see page 219 of “The Shopper Marketing Revolution“). According toDeloitte’s, the average composite net margin of a global consumer goods business is 9.6%, so for most securing a break-even is probably economically impossible.
- More over, promotions are so key to suppliers that it is most of the time one of the key elements of the contracts they sign with retailers.
So why are we going on? Well, because as I have said, 30% of sales are made under promotions, and by avoiding promotions, you leave the space to competitors to get market shares, and also retail space (end of the aisle ones). It is also an easy action which impacts instantly sales and market shares.
Now don't get me wrong, promotions are a great way to attract new customers, to increase sales, to trigger impulse purchases, to show out innovative products. It needs though to be mastered carefully.
1 Identify clearly discount hunters and loyal customers
The discount hunters will always get non profitable products, which they would get either in your store or somewhere else. Those could be abandonned for sure. Loyal customers must get their discount as a reward to their loyalty.
How to identify them? Loyalty programs provide enough data through the purchases habit to identify them & what they buy. Probably some brands and/or markets interest more those people than other. Cutting on those promotions could be a clear first step to have clear results.
2 Test the strategy
You may identify some stores where you could cut off promotions to identify what is going on. By having those sample stores, it would help to identify clearly what is at stake, how the permanent items sell. But more than simply by cutting down the promotions, it is also important to have clear idea on how to create added value to customers to compensate the lack of promotions: merchandizing, product range, cut down prices, new services...