David Kellen, Director, Price & Promotion Practice
Kurt Kaiser, Senior Manager, Product Leadership
SUMMARY: Trade promotions are the 800 pound gorilla of marketing spending, representing 60% of the marketing budget and accounting for more than $100 billion per year. Getting the right mix of pricing and promotion for each channel can be like playing five-dimensional chess, with all the parts moving at once: price elasticity, price gap elasticity, promotion type, frequency and discount level. What consumers buy, where and when can be influenced with the right game plan.
Ever wish your favorite team could know in advance if a critical play would work? Unfortunately, not possible. How would you like to run your next trade promotion in advance to determine the right temporary price reduction and duration? Fortunately, very possible, thanks to predictive analytics that enable marketers & sales teams to simulate consumer sales and project the impact on manufacturer and retailer financials before committing dollars in the real world.
Displays and Deals
All promotions are not created equal. Nor do they have equal impact. Consider the effect of a display on the following four categories: beer, toilet paper, toothpaste and yogurt. Will the same size and located display generate the same lift? No—not by a long shot. Toilet tissue wipes up the competition with an 82% display-driven lift, with yogurt a distant second at 28%, beer at 15% and toothbrushes at 14%. Further analysis reveals that display-sensitive categories tend to be “must have” products or “easy-to-eat” meals that are stockable and traditionally demonstrate above average sensitivity to promoted price changes.
- 14 of top 15 display categories are either “Must Have” products or “Easy to Eat” meals
- Most are stockable
- Tend to have above average sensitivity to promoted price changes
- Many utility products that are frequently purchased in Mass channel
- Consumed on a frequent basis, often for lunch or quick dinner
- Tend to be higher price
- Have above average response to promoted price and displays
Another factor influencing the ability of displays to drive sales is unit price. Consumer shopping patterns expose the fact that shoppers are less likely to purchase expensive items on display or with a temporary price reduction (TPR). Products typically less than $5 per unit enjoy significantly more lift from both promotional options. Nielsen simulation capabilities can take the guesswork out of promotion planning, pumping up sales volume and stretching available dollars.
- Shift display space from high to low price items unless they are impulse driven or have reasonable discount
- Large discounts needed to drive volume with TPRs
Offering multiples is a popular promotional technique, but one with a distinct success profile. Multiples work for items with expandable consumption, that are easily stored, where the multiple number makes sense (e.g. a five-pack lunch item that corresponds to a five-day work week). The total price should come in under $10 with a unit price no greater than $1.00, such as a 10 for $10 offer.
- Expandable consumption
- Easily stored
- Heavily promoted categories
- Logical multiples
- Total price at or below $10
- Price per unit of $1.00, such as 10 for $10
Channel differences can dictate promotional success. On the pricing front, food shoppers like deals and are highly responsive to promotions. Drug channel consumers, on the other hand, value convenience over price and mass merchandiser patrons expect lower regular prices, rendering TPRs less valuable for these segments.
- Food – highly responsive to regular and promoted price changes
- Drug – people look for convenience before price
- Mass – lower regular prices means consumers value TPRs less than in Food
On the display front, food shoppers prove to be high impulse/unplanned utility item buyers. Drug channel consumers plan their purchases and look for features, but are less responsive to displays, and mass merchandiser patrons exhibit an average response to displays, seeking overall value from the channel on the regular price.
- Food – High impulse and unplanned utility item purchases drive display lifts
- Drug – Planned purchases make features impactful and displays less relevant
- Mass – Average response to promotions, shoppers looking for overall value with regular price
When considering the promotional mix, factor in some salient shopper facts:
- Consumers demonstrate lower price sensitivity for products with high brand loyalty that are infrequently purchased or niche offerings with few competitive options.
- Display-based promotions work for stockable, must-have and easy-to-eat products.
- When placed on feature, utility products like paper goods and detergents can draw shoppers to the store.
- Food store shoppers tend to be impulse-driven, drug store shoppers come with a purpose and mass merchandiser patrons seek everyday value.
Case in Point
Manufacturer X noted a decline in base volume for its premium product, while private label value brand sales continued to grow. Assessing promotional options, the company articulated four objectives:
- Maintain or grow category sales
- Build base sales for its premium product line
- Maintain or grow retail profit
- Maintain or decrease trade spending
Historically, TPRs were the most common promotion type in the category, usually featuring a 20% discount. The standard category TPR ran for three weeks, and at the 20% discount level, generated about the same lift as a one week feature at a 30% discount. Manufacturer X typically opted for eight weeks of TPRs each year and four weeks of feature advertising.
To stir things up in the category and drive sales to its premium offering, manufacturer X considered three alternative promotional schedules. Option 1—eliminate two weeks of feature activity and replace them with two TPR periods of three weeks each. Option 2—increase the private label base price and raise promo prices by $0.10. Option 3—increase the private label base price, but hold promoted prices at current levels.
Running the simulation, manufacturer X discovered a clear winner. Only Option 1 delivered against every objective: growing unit and category sales by 0.9%, increasing CPG profit margins by 2.4%, boosting retailer profits by 0.8% and decreasing trade spending by 3.1%.
Price and promotion simulations succeed because they begin with the consumer behavior needed to shape an outcome. Knowing that consumers shop products and channels very differently, simulations should be preceded by an analysis of sales tendencies by product and retailer. This will enable the composition of a plan that leverages product strengths and minimizes weaknesses in different retail environments. While tactical, event-by-event simulation and planning is a requirement, take the time to simulate entire planning periods with different combinations of price and promotion activities to decide the approach that best fits your objectives. The definition of a truly successful promotion plan is one that delivers results for retailers and manufacturers alike. By looking at sales from a consumer perspective, you’ll be able to do just that.