In Part III of Game Changer my co-author Arnab Sinha, and our colleagues, looked at how companies in retail and consumer goods sectors are deploying advanced analytics to completely rethink and revamp their promotion strategies. This is challenge for companies in sectors with short or seasonal life cycles, such as apparel, furniture, and décor.
As Jacqueline Martinez describes in this week’s guest newsletter contribution, retailers can improve their price realization – and maintain positive customer value perceptions – when they take a more proactive and holistic approach to planning and implementing promotions.
Planning retail promotions in volatile markets
Even in good times with stable conditions, a carefully planned retail promotion strategy is essential for products that have short or seasonal life cycles. But how should retailers plan their buying and promotion strategies when they see mixed or unclear signals from both the supply and demand side? Lead times for the delivery of many goods remain longer than pre-pandemic norms, and consumer trends remain in flux: What is the new “business casual” if hybrid work and work-from-home are here to stay? How many consumers will trade down to “good” products? Are luxury customers less resilient than in the past?
The high headline inflation rates of the last few years provided relatively easy cover for retailers that wanted to raise prices to drive sales. But as inflation rates slow and deflation emerges in many categories, retailers must rely heavily on their promotion strategies to hit their growth targets, especially when consumers are displaying more price sensitivity.
A robust end-to-end pricing capability is one of the best ways for a retailer to grow sales when faced with the combined headwinds of lower inflation and continued volatility. Getting to this value requires more sophisticated ways to predict demand than the traditional method of looking at the previous year’s trends. It also requires replacing the usual reactive, siloed approach with better end-to-end planning and keener read-and-react capabilities. Having a smart, inventory-aware, combined capability for promotions and clearance can make a decisive difference in a retailer’s ability to react timely to market volatility, thus reducing the cost to exit items that underperform and increasing price realization on hot items.
Right price at the right time
The reactive approach most retailers use leaves value on the table. For one retailer, we sized this opportunity as a 1-2% sales lift, which would flow directly through to the bottom line in the form of reduced markdowns. They had discounted around 20% of their categories too late in the season and discounted around 5% of their categories too early. While a more effective localized clearance strategy could realize part of this value, the real impact comes from looking at promotions and clearance together.
Many retailers have built siloed capabilities in either clearance or promotions over the past few years, but few retailers currently have the end-to-end capabilities to holistically consider in-season and post-season outcomes. This reactive and isolated optimization does not always lead to optimal performance over the entire season.
We recommend a more proactive and holistic approach centered around managing promotions in-season by considering both the overall value perception and the inventory position of the product. To understand these trade-offs, retailers need to understand how much markdown they can mitigate with a deeper in-season offer on an item selling behind plan, and likewise, how much they can reduce promotions on a top seller to keep it in stock through the season and maximize sales. This, in turn, depends on knowing what types of offers are most effective for each product category, which deals drive overall traffic, and which deals only drive sales of the anchor product. Finally, retailers need rich competitive intelligence to ensure that the overall value proposition aligns to the strategy.
Getting this right requires advanced analytics, dynamic tools, an agile decision-making process, and a thoughtful store execution approach that preserves the customer experience.
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