Are you sure you’re measuring your promotional effectiveness correctly? How confident are you at determining which of your promotions were truly successful, and which ones were simply a waste of money?
They sound like simple questions, but, in working with clients over the years, I’ve found that most retailers and/or manufacturers measure promotion effectiveness with the wrong metrics.
That lack of understanding is costly. It leads to lost profits, missed opportunities and the most damaging factor: training your customers to only buy on promotion.
What are the root causes?
To be blunt, most marketing practitioners aren’t going back to perform a thorough post-mortem on the effectiveness of their promotions. There are usually two times when even a cursory analysis is done:
- When it’s time to promote the same week, the following year, some analysis might be performed – but this is rare. Often, last year’s promotion will be used as a starting point for this year’s campaign.
- When comparable sales were down last week and people are blame-storming, it’s time to defend the promotions. The answer is often a quick, high-level analysis, usually with a revenue focus – which, as we’ll discuss below, is the wrong metric to analyze.
The problem is compounded by the fact that retailers are usually hyper-focused and incentivized on top-line revenue, while most manufacturers are focused on volume. Long-term profitability and customer behavior are rarely part of incentive plans and therefore rarely analyzed. Top-line revenue and profit not only cannot quantify the effectiveness of a retail or trade promotion – they usually lead to decisions that hurt the retailer long-term.
You must look under the hood to truly measure promotional performance. This way, you won’t fall prey to The Four Dysfunctions of Promotional Analysis.
Dysfunction 1: Thinking that the promotion caused every sale.
When you put it this way, most practitioners will say, “of course my promotion didn’t drive every sale – but that’s not what I’m measuring. I’m measuring promoted sales.” But when you dig into how the metric is constructed, it turns out their math attributes every sale to the promotion.
Only an incremental-sales metric shows the additional sales attributed to a promotion.
Focusing on promoted sales instead of incremental sales is dangerous on three levels:
- The practitioners don’t really understand what the metrics are measuring and making assumptions instead.
- It’s rampant in the industry. Even some of the most respected, analytical people in organizations are making false assumptions on what their metrics really are and whether or not they’re appropriate.
- And the most damaging is this: It actually encourages what we call “subsidized sales” – when people come in the door willing to buy a product at full price are pleasantly surprised to find it on sale … and then become trained to hold off buying the item until it’s promoted again in the future.
If you’re not measuring incremental sales and subsidized sales, that’s the first thing you need to fix.
Dysfunction 2: Believing that all incremental sales were, in fact, incremental.
You might read #1 and think, “Actually, we do break sales into base and incremental.” But this dysfunction is about understanding where the incremental sales came from.
There are two types: organic when people bought the product because it was on sale and wanted to give it a try, and cannibalistic, when people switch from a similar product to buy the cheaper, promoted one. Cannibalistic sales can be misleading if you “rob Peter to pay Paul.”
Let’s say Kraft is promoting shredded cheese at $1 off per bag. What retailers don’t measure is how many customers switched from paying full-price for the more profitable own-brand to the discounted Kraft brand. On the surface, it appears that Kraft got a huge bump in sales that week, which must be good, right? Not always.
And what if you’re Kraft? Let’s say you only promote your medium sized bags. Some of that incremental volume is just coming from people who switch up from small bags (good) or switch down from large bags (not so good). You need to understand the organic lift from your promotions (the people who switch from other brands) vs. the cannibalistic lift (the people who switch from other Kraft products).
If you’re not breaking incremental sales into organic vs. cannibalistic, you’re getting an overly-inflated view of your promotional effectiveness.
Dysfunction 3: Measuring revenue, not basket and customer effects
There are only three ways to improve retail revenue and profit:
- Get more customers to walk through the door (traffic) and actually buy something (conversion)
- Get customers to add more items to their baskets, and
- Get them to move up to higher price (or higher profit) items.
The problem is the majority of retailers smash these three factors together into “revenue” – and that’s what they focus on. Remember poor Mister Magoo, the vision-impaired cartoon character who caused havoc because he didn’t realize how blind he really was? Well, promotion analysis always goes awry when you don’t have a clear view of what’s actually happening.
Now, if you’re a retailer, you’re probably thinking, “We do basket analysis all the time.” Sure – but if you’re incentivizing people on aggregated revenue and gross margin, they’ll focus on aggregated revenue and gross margin. Yes, they might occasionally peek at the basket metrics out of interest, but until the incentives are fixed, people will continue to blindly fall into Dysfunction #3.
If you’re not tracking—and, more importantly—incentivizing people on trips, conversion, and basket size, you’re encouraging incorrect behavior.
And the fourth dysfunction is …
Okay. The title of this blog is the Four Dysfunctions of Promotional Analysis, but so far there are only three.
Dysfunction 4 is not analyzing a promotion by what it was designed to accomplish. It means you must be promoting with purpose. And when I say purpose, I don’t mean “more revenue.” This is a much bigger topic that my next blog will tackle in depth.
Look beyond the sales numbers
Being data-first and customer-centric helps you understand and quantify the effectiveness of your promotions. What did you really achieve and how much did you spend?
One of my former clients, a national consumer packaged goods player, used this top-level type of analysis of their promotions and found $100 million in savings in a single year.
So, I’ll close by adding two questions to the ones I posed at the top of this blog:
Do you really know how well your promotional campaigns are performing? Do you need to make sense of the data to gain a clearer view?
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I’d love to talk to you about how we can put better information, including predictive and prescriptive analytics in the hands of your employees – and how it can revolutionize your customer experience.