JTPP: The Real Issue Behind Promotion Optimization
By Kevin Sterneckert, research director, retail
at AMR Research
Through a special arrangement,
presented here for discussion is an excerpt of a current article from The
Journal of Trading Partner Practices (JTPP), the official online publication
of the Vendor Compliance Federation (VCF), Trade Promotion Management Associates
(TPMA), and the Federation of Credit and Financial Professionals (FCFP).
With a typical food retailer
realizing up to 60 percent of its revenue from promoted items, why are
there considerably more price optimization stories than promotional ones?
AMR Research’s studies suggest there are less than 10 retailers engaged
in any form of promotion optimization. Remember, it’s not just about the
ability to optimize promotional pricing, but the size and complexity of
the business process as well.
Despite the quickly maturing
science with its proven success, today’s applications reinforce the broken,
linear process, which isn’t the reality of how retailers promote their
assortments (see Figure 1). These typical five steps to creating a circular
across hundreds or thousands of items and flavors create an unwieldy and
sub-optimal workflow for merchants.
Successful promotional optimization
stimulates consumer response by finding the right price for the right shopper
segment in the right store, requiring the appropriate blend of science
and art conducted in a time efficient manner.
For a typical food retailer
that promotes up to 3,000 items per week, scalability becomes an issue,
with item level decisions next to impossible. Delegate these activities
to analysts, and the merchant becomes removed from the decisions of what
merchandise to promote.
AMR Research suggests letting
the science and business processes handle the initial administrative work
of creating suggested promotional candidates for a given promotion week.
This new approach removes administrative steps from the merchant’s desk,
allowing the merchant to be a merchant. In the art-science equation, the
science virtually eliminates and/or consolidates significant activities
into a single step to deliver the candidates that meet the objectives of
a given promotion week (see Figure 2).
Be sure your application
provider’s functionality includes the following capabilities. Doing so
will deliver the right conditions to succeed in implementing promotion
optimization across the enterprise:
- Start where you end today, recommended
promotional items. Let the software and science do the heavy lifting
and simplify the entire process.
- Include robust workflow/task management
as well as role-based activity management and reporting.
- Demystify the black box (science). Merchants
should be able to understand the reasons behind a recommendation.
- Don’t forget versioning optimization.
True consumer-centric merchandising suggests that circulars should differ
(items and prices by location or ad zone).
- Integrate or include ad planning tools.
- Have support for trade fund management
(not manual entry).
- Include total business halo and cannibalization
- Embrace customer segmentation capabilities
and loyalty pricing.
- Be sure to have e-commerce capabilities
for cross-channel retail.
- Ensure the single demand engine receives
signals and sends to the supply chain.
Discussion Question: Why aren’t
promotion optimization tools being utilized by retailers? Are the inherent
conflicts between the art and science side of merchandising bigger around
promotions than pricing? What do you think of suggestions made in the
article for implementing promotion optimization?