JTPP: The Real Issue Behind Promotion Optimization

Discussion
Jul 20, 2009

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
    impacts.
  • 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?

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12 Comments on "JTPP: The Real Issue Behind Promotion Optimization"


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Doron Levy
Guest
Doron Levy
11 years 9 months ago

After reading this article, I’m more confused than ever. Isn’t promotion optimization when you take a hit on a product to get people to buy full-margin products? That view is a lot simpler than what is presented here. And a simpler term for it is shielding. This stuff is too complicated for field operators. If shampoo is on sale, I’m clip-stripping brushes and combs on the display. That’s how I look at promotion optimization.

Max Goldberg
Guest
11 years 9 months ago

Promotion optimization makes a lot of sense, if it can be easily executed; and that is where the problems begin. Retailer chains are not set up to do this. Yes, you might see a few items priced differently by store location, but really diving into the numbers and coming up with innovative solutions remains out of the grasp of most retailers. Over the years, retailers have passed much of their analytical work to manufacturers. Few still have the wherewithal to undertake a full-blown promotion optimization program.

Do these programs make sense? Yes. Will we see many chains adopt them? Probably not.

Nikki Baird
Guest
Nikki Baird
11 years 9 months ago
To me, the real issue behind promotion optimization is not art or science, but data. Customer data in particular. It’s interesting that there may end up being a debate in this column as to what promotion optimization even is, because to me it is taking the principles of price optimization and applying them to a subset of customer purchase history (usually based on segmentation) to identify price point differences from “general” demand, and use those price differences as promotional offers. You can apply it at the general level of population, but it’s more effective when you apply it to segments. With that definition, the challenge is in getting clean customer purchase history, and having agreed upon customer segments that both marketing (who communicates the offer) and merchandising (who shapes the offer) use and understand well. I’ve seen many a company never make it past the segmentation issue, let alone scrub their customer purchase history data to the point where it can be an input into a sensitive price optimization algorithm. Lots of retailers that I’ve… Read more »
Bill Robinson
Guest
Bill Robinson
11 years 9 months ago

Three are three major reasons for the slow adoption of promotional optimization in retail.

1. The Downturn. The consumer is reacting very differently to promotional pricing. So there is little to be gained from looking at previous year’s history. This leaves the opportunity to merchants with stable, non-seasonal product offerings.

2. Limited measurements of market basket, stock outs and lost sales. If you are going to measure the success or failure of a promotion, you have to take into account the promotional product pull and the extent to which it was stocked out during the promotion. Most retailers don’t do this well.

3. Lack of a clear buyer. Optimization projects require the intense collaboration of IT and a senior sponsor from the business. IT has been smashed by recession cost cutting. The Business is running for cover.

Promotional optimization will take hold as the economy recovers and seasonal-fashion merchants will have some data that they can work with.

Gene Hoffman
Guest
Gene Hoffman
11 years 9 months ago

As the march of product proliferation races fast-forward its pace is second to that of the mercury-quick wave of tools to measure the retailer’s promotional progress. The retailer has become a multiple target and he is not too deft in catching and utilizing all the pitches being thrown at him today. Thus his usage, or lack thereof, draws topical and critical questions, but life still goes on.

Ben Sprecher
Guest
Ben Sprecher
11 years 9 months ago
Why aren’t promotion optimization tools being utilized today? One word: resources. Specifically, the retailer’s IT and Marketing resources. Existing systems have a very resource-intensive life-cycle: high up-front licensing costs, major investments in technology infrastructure, lengthy and burdensome systems integration, intensive training of a select few highly technical users, and then heavy reliance on those few users to manage an enormously complex process. In order to see mainstream adoption, these systems will need to be less expensive, less disruptive to install, and less reliant on a few highly-trained technical wizards. I see two possible ways to ease the resource bottleneck. The first would be to simplify the process and the software so that it doesn’t require as much effort to manage. Of course, that inherently might reduce the value of the promotion optimization if it becomes less responsive and flexible. The other approach would be to push some of the work out to more users. This, in essence, is what Kroger has done with its dunnhumby partnership–it has bought access to a couple hundred additional bodies… Read more »
John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
11 years 9 months ago
Promotional solutions are tough since each retailer’s needs and objectives are different and within a retailer, their stores are different depending on location and competition. I worked for years with promotional optimization solutions from the manufacturers’ side and found them to be very helpful for understanding what promotions worked and if they did not work what might have caused the issue. Was it a retailer execution issue or a supply/out of stock issue or was it just a poor promotion? It also took into account the key objectives of the manufacturer/retailer which was key since you wanted to try and run programs that matched everyone needs. From the retailer perspective it can be more challenging since they have so many ideas being thrown at them from manufacturers and outside vendors. I was in a retailer’s office last week and the executive talked about having far too many promotional programs and they needed to sharpen their focus and do fewer, better. Here are a few suggestions on how to sharpen your promotional programs:1) Be sure any… Read more »
Kevin Price
Guest
Kevin Price
11 years 9 months ago
A lot of good comments above. Here’s my view: A lack of retailer resources applied to understanding promotional effectiveness is certainly an issue. However, I have conducted literally several hundred promotional analyses, including use of customer-level (shopper card) data…and the $ savings potential in making better decisions SO FAR outweighs whatever resources a retailer might throw at the issue, it’s ridiculous. Kroger knows this…it’s how they can pay enormous sums to their ‘outside consultants’. Other factors mentioned above, such as a lack of software, unclear objectives, data access issues, data quality issues, changing sensitivities during changing economic times, and so on, are all valid inhibitors. But if retailers truly understood the $ involved in promotional effectiveness, none of these inhibitors would really matter. The TRUE inhibitor is organizationally- and culturally-related, specifically with respect to incentives. For example, I personally have brought Category Managers through results of analyses which clearly show a particular promotion is a financial train-wreck. But they don’t care if they are judged on the VOLUME a promotion provides…even if their bonus includes… Read more »
Jonathan Marek
Guest
11 years 9 months ago

I just don’t buy this, unless you are only talking about a small subset of retailers. My company, APT, has more than 40 retail clients and the vast majority of them are using our Test & Learn software to optimize promotions.

Bill Bittner
Guest
Bill Bittner
11 years 9 months ago
I am very confused by the promotion steps described here. I really believe that the “art” should be up front. Most of the facts are given to the retailer by the terms of manufacturer discounts. Performance requirements will often dictate the magnitude of the discounts, the manufacturer’s way of getting even for slotting fees (just kidding). It is the Art of good merchandiser who knows the overall strategy of their banner and the role they want to play in market place that allows the retailer to select from the various manufacturer offers. The truth is that there are too many moving parts in this whole process to successfully document all the attributes for thousands of items on a weekly basis. When you add custom item lists and different promotion zones, the number of attributes becomes even larger. Histories are fragmented and the impact of exogenous factors such as weather, construction, or a competitor action often make the history misleading. Item numbers and sizes change consistently so that comparing historical data across seasons is often problematic.… Read more »
Todd Michaud
Guest
Todd Michaud
11 years 9 months ago

Most retailers that apply automation to promotions today allow vendor dollars to drive their decisions. I see Promotion Optimization as a more agnostic and goal oriented approach to promotions.

Promotional optimization leverages advanced analytics to allow retailers to identify the very best items to promote at the ideal price point knowing in advance the impact at the item, category, and store level.

Promotion Optimization should be goal driven. For example, if a retailer is trying to drive traffic to the stores, that is usually a completely different set of items than if a retailer was trying to drive profit or maximize vendor dollars. Promotion optimization can consider all of those variables and help the retailer arrive at the best decision.

A good promotion optimization system should also consider the impacts of cannibalization, affinity and pantry loading.

Shilpa Rao
Guest
11 years 9 months ago
Great comments above.Apart from the data availability, limited customer analytics, economic downturn, other factors that hinder adoption of promotion optimization – 1.Downstream Complexity – A promotional optimization exercise would typically yield the ideal promotional price and promotional type (BOGO, Percentage off & others), for a customer segment. The challenge is to execute this in stores. Typically retailer’s IT systems grown organically over the years cannot handle this downstream complexity of setting up the promotion at the granular level in the store systems. Typically challenges faced by retailers to execute a targeted promotion ( a promotion for a specific customer segment) are:a. How do I recognize the customer when she comes to my store – Most loyalty cards issued by retailers are used as discount cards, (one can avail a promotion only when they have a loyalty card). Hence for the cashier at the till, they are segmented as “one who has a loyalty card” and “the ones who don’t.” It’s a challenge to make the information of the various customer segments available to the cashier… Read more »
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