When business is slower than desired, many companies turn to promotions to help them increase their revenue. It is an understandably easy trap to fall into, companies assume that by giving more promotions, they can generate new customers and increase sales.
Unfortunately, this is not always the case. As the number of promotions increases it can lead to unfavorable consequences:
- Consumers become conditioned to expect more deals and avoid buying at regular price
- Continuous promotions coupled with intense competition dilute margins
The second point is especially true in many CPG companies which do not have the appropriate financial infrastructure in place, as they implement “value-eroding” promotions that have negative ROI and fail to generate adequate volume lifts.
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Segmentation Helps Find “Value-Eroding” Promotions
Before you fix “value-eroding” promotions, you must first identify them. One of the best ways to do this is by segmenting every promotion based on ROI and volume lift. Generally, there are four segments where promotions can fall:
- Top Performers bring both high volume lift and high ROI. Typically, 30% – 40% of promotions are Top Performers.
- Value Generators are profitable and generate returns, but their volume lift is substandard. Typically, 10% – 20% of promotions are Value Generators.
- Volume Generators are the opposite of Value Generators, having high volume lift but generating low returns. Typically, 10% – 20% of promotions are Volume Generators.
- Value-Eroders yield negative ROI and have limited volume lift. You want to fix these promotions as soon as possible! Typically, 30% – 40% of promotions are value-eroding.
Dealing with “Value-Eroding” Promotions
Tackling value-eroding promotions head-on provides a huge opportunity to generate additional profit. There are five main ways to deal with value-eroding promotions to increase their profitability:
#1: Increase Investments In Promotion Activation
Rather than having consecutive promotions, a better way to improve the performance of your promotions is by investing in additional activation mechanisms. For example, instead of just being content with having your offerings on retailer shelves, try to secure secondary placement at the end of aisles to generate greater sales volume. From our engagements with CPG companies, we have found that getting secondary placement can increase promo sales by up to 75%!
#2: Decrease Your Promotion Amount
Minor changes to a promotion, like going from a 50% promotion to a 40% or 45% promotion, usually result in moderate volume losses but large profit gains. However, be careful with how you re-set your promotions. Companies often make the mistake of following in the footsteps of competitors, even if they have different objectives or target customers. While higher percentage discounts may work for them, they may result in something completely different for you. For example, if your competitor is a new market entrant and they are offering large discounts to increase share, do not follow suit as it will result in a substantial loss in profit for you as the market leader.
#3: Decrease Your Promotion Frequency
When you frequently promote your offerings, customers become accustomed to buying them at a discounted price. When you have fewer promotions, these expectations diminish. Recall that only 30% – 40% of promotions are top performers. Thus, companies should strive to have more attractive promotions but with less frequency to stimulate growth while avoiding cannibalizing loyal customers.
#4: Redistribute Promotion Budget Between Retailers
Just because a promotion was effective at one retailer does not mean it will be successful at another. Promotion results vary greatly depending on factors like customer characteristics at a particular retailer location or support from the retailer. It is important to gauge promotion performance by retailer so you can effectively allocate your budget and plan activities accordingly.
#5: Reconsider Which Offerings Should Be Promoted
This may be a hard pill to swallow, but some offerings will never generate a positive ROI on promotion. No matter what type of promotion you run, their profitability will be low, their promotion uptake will be limited, or they will cannibalize other offerings. Now, this is not to say that these offerings should never be promoted, you just have to be smart about when to run a promotion. There are two scenarios where promotions are warranted. The first is if your objective is to “activate” your offerings (i.e. generating a trial or up-selling from a cheaper alternative). The second is if the promotions have a major impact on sales volume. For everything else, you want to avoid running promotions to maximize profit.
Final Thoughts
While promotions might seem like a sure-fire way to get more customers and generate sales in your business, there are a lot of potentially negative implications to consider before implementing one. Promotions can go either way, depending on how it is structured, and it is a tough call that requires considerable thought, industry knowledge, and market awareness.
ABOUT THE AUTHOR Michael Stanisz is a Partner at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Michael at mstanisz@revenueml.com
