Promotion optimisation is impacting the retail value chain like never before, and the retail performance areas where promotions play the most crucial role are top line sales, organic store and channel growth, and bottom line profit, according to a report by Aberdeen Group.
The report, entitled 'The Changing Dynamics of Retail Promotions', says that the main departments that have traditionally interacted with promotions planning, design and execution were merchandising, marketing and finance.
A new best-in-class approach
However, best-in-class retailers are using a new approach to optimising their promotions strategy by taking the solution deeper into the enterprise and improving the understanding of historical consumer purchase patterns.
Aberdeen defines this "promotions optimisation" as a technique for determining optimum promotions at the most appropriate price level that help retailers to increase profit uplift and reduce sales cannibalisation.
Increasing adoption
Across all surveyed retail industry categories, promotion optimisation adoption was found to be increasing. Respondents were asked for their likely investment in specific value-chain areas within their retail organisation, as promotions have a cross-value-chain impact. Respondents indicated that implementation or access to features of promotion optimisation solutions, such as analytics or promotion calendars, would be provided in departments such as strategic planning, marketing, inventory management, pricing and store operations.
Interestingly, all deployments are projected to experience a double-digit adoption rate increase over the next 2 years. The highest adoption is expected within strategic planning. This department within retail is expected to place more of the decision making and control for promotion optimisation within the organisation, as it is best positioned to provide a forward-looking framework for the topline revenue and bottomline profit strategies of the CFO.
Performance benefits
Aberdeen's research found that companies with better promotion optimisation strategies are performing better and are gaining market advantages. Performance benefits include:
- Gross margin for featured and complementary products
Best-in-class companies that are using a promotions optimisation solution are 3.2 times more likely to have recorded better than average performance in margin for featured and complementary products during any given promotion period in the last two years;
- Customer retention
Best-in-class that use a promotions optimisation solution are three times more likely to perform better than industry average on customer retention;
- Average transaction value
Best-in-class companies that use promotions optimisation applications are five times more likely to record improved average transaction value when compared with the Laggard enterprises in retail.
Key findings
Other important findings from the report included:
- Promotion optimisation deployments will experience double-digit adoption rate increases, as projected over the next 2 years;
- Two-thirds of retailers report that promotion optimisation application use and strategy is centralised at the senior management level. Some components of the application are decentralised into different departments for tactical promotion campaign use;
- Sales analysis (75%) and budget management (60%) have emerged as the top areas of promotion optimisation usage within retail departments that are interacting with the application on a day to day basis;
- Margin is the top pressure prompting 83% of General Merchandise & Apparel retailers (GMA) to adopt promotion optimisation solutions;
- Promotion optimisation application users are using these tools for the purpose of sales analysis (75%) and budget management (60%);
- 75% of Hi-Low and 79% of Discount pricing stores are using promotion optimisation solutions for the purposes of sales analysis (e.g. multi-selling, up-selling, cross-selling, cannibalisation, vendor-brand performance and gross margin);
- Improving historical analysis is a key strategy focus of 71% of best-in-class and 87% of department stores;
- The single biggest market pressure is the never-ending need for retailers to improve product category margin and profit in the face of rising operations costs, including labour;
- Some retail sectors, such as supermarkets and grocery retailers (58%) are bringing in outside consulting help for promotions optimisation.
Recommended actions
Aberdeen's report also provides a number of recommendations for further action, such as:
- The "average" category firms should adopt automated promotion delivery means such as dashboards, portals and intranet systems for near real-time reporting that aids faster response to market demand.
- The best-in-class category firms must strive for quick (i.e. 6-8 months) improvements to existing solutions for creating a strong cross-channel demand chain that optimizes both promotion and price loyalty in the multi-channel environment. This will create a unified view of promotion offers for new and old customers, and drive profit uplift.
- Firms should select small projects in pilot departments to measure the return on investment (ROI) of promotion optimisation solutions;
- Firms should adopt solutions that provide multiple optimisation scenarios and rapid planning and reforecasting capabilities;
- Firms should pursue an aggressive strategy for the expansion of cross-enterprise loyalty initiatives that truly differentiate the promotion optimisation process.
Report download
Until 27th April 2007, the full report has been made available for download from Aberdeen Group's web site - click here (free registration required).
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