Optimizing the true value of your promotions.
Most companies and c suite leaders realize the importance and benefit of Revenue Growth Management (RGM), also referred to as SRM (Strategic Revenue Management) or NRM (Net Revenue Management). It's a topic we have recently written about in a co published whitepaper and there exists a wealth of powerful insights and data points from multiple leading consulting companies that evidence the impact RGM can have.
If you were to summarize much of the literature, then two key themes would emerge: 1. that price remains the most effective way to improve profitability in the short term and 2. the majority of promotions (just like range) generate little to no real incrementality.
Whilst these sentiments are undoubtedly true, we believe that such analysis can underplay the positive impact and benefits that CPG companies can achieve from promotional optimization (which together with PPA, portfolio pricing and trade spend make up the core pillars of RGM).
So, to help companies get clearer on the benefits that promotions can deliver, here are suggestions on how to think about the value that promotions can play in your business:
Think about promotions more holistically & strategically.
In our experience, the real net value of promotions can often be misunderstood or under appreciated.
We often hear leaders talking about a desire to reduce depth or frequency of promotions, but when we complete our RGM analysis, promotions are nearly always the main source of incremental value and profit each week and over the course of the business year - for both suppliers and retailers.
Often the delta between what promotions deliver and other business activities can be stark. The probability and risk is that if a supplier were able to replace promotional sales and profitability from other business levers (such as contribution from innovation), then retailers are likely to fill these promotional slots with activities from competitor products.
Our view is that companies need to truly understand the financial value that promotions deliver, net of cannibalization, for their total portfolio as well as the broader category. Companies also need to understand the execution conditions that impact the promotional returns delivered as the in many instances it's not the depth or tactic that is the biggest driver of promotional uplift... instead it's the visibility that promotional support creates. In these cases, the greater opportunity is in slowly reducing depth (whilst still achieving a strong value message and meeting retailer promo requirements) whilst maintaining similar levels of executional support.
Promotions have both a financial and strategic role to play.
They are key levers the brand / category has in being able to trade shoppers into the key segments / brands / focus packs, plus they can be incredibly effective in trading shoppers up from lower value items to create positive mix shift. Too often suppliers don't talk to the financial role that promotions play in both their business and for their customers.
Promotions can move volumes into areas that are better for supply.
Due to covid and inflation, suppliers have been frequently challenged in terms of availability and profitability, often leading to choices in terms of which parts of their portfolio to produce and how to off set COGs. Encouragingly, many suppliers have worked collaboratively with their retail partners to better understand which promotions to remove and which activities to change to help shift demand into the areas where supply is more available or more profitable.
Whilst supply has normalized somewhat post it's peak challenges, our view is that many categories remain over ranged, with too much duplication and therefore have opportunities to shift volumes into more profitable & more efficient parts of companies portfolio's.
Promotions help shoppers in multiple ways.
Some shoppers are overwhelmed and confused by the paradox of choice and for these shoppers promotions can offer reassurance and a degree of control in the purchase journey.
For some shoppers on ‘auto pilot’ then promotions, especially when supported with engaging in store media, can help disrupt and encourage browsing.
For value orientated and promo only shoppers then promotions make Brands accessible when they otherwise wouldn't be considered.
Promotions frequently help increase baselines & penetration
There is often confusion as to the impact that promotions can have on baseline sales of brands. A common school of thought is that over promoting can erode the baselines available to brands, but we often see that the inverse is the case.
In many of the categories we analyze, brands often increase their baselines over time as a result of running regular promotions, thus driving frequency of purchase and increasing propensity to buy brands, on or off promotion.
Promotions can be especially helpful in driving trial for innovation:
The statistics on the success rates for innovation is often eye opening and in many situations the window to establish the required turns / ROS is limited. To this end, promotions can be instrumental in helping innovation gain trial in two important ways:
Promotions can amplify the impact of marketing by increasing visibility
Marketing is a critical CPG investment and, in our opinion, many companies would benefit by increasing their investment in consumer facing, demand creating programs. The challenge that we see is the misunderstanding that can exist between how to think about marketing alongside promotional investment. We believe that marketing is great for creating relevance, distinctiveness and awareness, whilst Promotions can be highly effective in creating visibility, access to brands and physical availability. In tandem, they can increase the number of shoppers open to purchasing a brand as well as shoppers willingness to pay.
A clear example would be Proctor & Gamble, who are consistently one of, if not the highest spenders in marketing both globally & locally. They also happen to be one of the most sophisticated companies when it comes to data driven decision making and RGM capabilities.
So what's their promotional program for core brands such as Pantene & Head & Shoulders? In the Australian market they typically follow an ‘always on’ promo program such as 1 in 3 weeks @ ? price, where they regularly receive strong catalogue & display support (such as FGE 1-6)
Think how you can better leverage the benefit of promotions for & with your customers
Suppliers have tremendous opportunities to shift the conversations they have with retailers by helping them understand the broader benefit that promotions can bring as well as the incremental value they can create for the category.
Too often, time poor retailers get caught cycling past activities or giving precious promotional space to brands that generate the highest absolute $ sales. Against this backdrop suppliers can help retailers understand the value that promotions bring to their business:
All of the above can help equip buying teams to be better informed and more persuasive in influencing internal stakeholders (such as Promo Teams, Marketing & Ops) to gain support for your activities.
We encourage teams to make the above understanding a core part of their regular promotional and business reviews with customers.
Understanding promotions impact on shoppers brings strategy into the discussion.
Promotions have different impacts on different shoppers, so bringing a granular understanding of the impact of promotions on different shoppers can be a powerful addition to your customer conversations. As we move towards ever increasing ability to target smaller segments of shoppers then this micro targeting capability will continue to become increasingly important.
In addition, helping customers understand which categories, segments and brands are most important and can best help them execute corporate strategies relating to quality, value & premium are also great opportunities to add a strategic dimension to the promotional conversations.
Going forwards, we are going to see a shift from specials to all shoppers to retailers offering more and more 'members only offers'. In this environment promotions become even more strategic as they become vehicles to encourage more shoppers to sign up to loyalty programs, with all the data benefits this brings to retailers.
Think of your promotional capabilities as a journey and an opportunity.
Optimizing promotional outcomes requires precision capabilities
There has been significant progress in recent years as businesses invest in analytic capability, data science teams, data lakes and advanced tools such as TPO's (Trade Promotional Optimization) and predictive analytics. Despite such advances, many companies are still completing what we believe are critical business analysis in excel tools that limit the insight available. In our view there is an increasingly widening playing field between those businesses who are closer to a Level 1 ‘Basic’ capability vs those aspiring to and moving to Level 4 ‘Advanced’ capabilities.
Our perspective is that RGM is a multi year journey and comprises a number of components:
The good news is that optimizing promotions should become a self-funding journey as often the incremental profit that can be made each year is significant and can help fund many of the required capabilities builds.
If you feel you have opportunities to get more value out of your promotions or just want to understand what we do in this space, reach out for an initial discussion.
Paul Bull
Commercial Director
FMCG Analytics