On this week’s episode of Exceedra Byte, Luke Pocock, Exceedra Senior Customer Success Manager, APAC, continues exploring the Trade Promotion Optimization (TPO) topic and focuses on cannibalization and post-promotion dip.
Let us have a quick re-cap on TPO. In episode 13, we introduced the fundamentals and process of TPO.
Put simply, it is the process to continuously improve your trade promotion strategies and results through predictive analytics.
Today we are going to understand a little more about the impact of running promotions and how that can affect your overall margin including cannibalization and pre/post-promotion dip.
Traditionally, companies review promotions using a baseline forecast and then any remaining volume as incremental volume. It is simple to track and understand. But what if we told you that there are other costs and factors that affect your overall promotion margin.
For the manufacturer, when looking at the budget of a promotion, it has a component of costs for the discount, advertising costs and then we are left the profit of what the consumer has purchased.
If you review the products performance, there are so many other factors that you need to think about such as:
So, when we take all those points away, the true incremental lift is only the brand growth and competitive switching which is not a lot left of the pie.
From a retailer point of view, it is a slightly different lens with some similarities:
So that then leaves us with category growth and competitive switching as the true incremental for the promotion.
Now that we understand all factors of cannibalization, what does this mean to the overall performance of a promotion? Let us compare a few promotions on how the traditional view vs true cost after cannibalization has been considered.
Here we have two promotions that on face value, look like a very good return of investment with 80% for both promotions. But look what happens when we consider all the cannibalization effects.
When we factor in cannibalization such as product or retailer switching, our margins have significantly dropped. So, the ROI efficiency has dropped from 80% down to 20% or -40% respectively.
If you look at the sales before and after the promotion, you see here that consumers are buying less of your product when comparing to baseline sales. This is what we call pre & post-promotion dip.
Pre-promotion dips occur because the consumer may be waiting for your next promotion as they do not want to pay full price for your product. Some retailers also behave in this way when it comes to on or off invoice discounts. Can you see that we are training our consumers to act in a specific way?
Post-promotion dips occur because the consumer has stocked up the pantry full of your product and does not need to buy any more in the following weeks.
Let us recap on what we just learnt and put it in simple words.
Consumers are driven by where there are discounts and are not necessarily loyal to a brand or retailer and if the discount is big enough, they horde all your products in their pantry until the next deal. But all of these types of cannibalization have a cost to your bottom line.
TPO is like a game of Ten Pin Bowling that aims to get a perfect score, but it is about optimizing the best path of getting the bowling ball through the pins to get a strike over and over. The more strikes you get, the more likely you are to miss.
At Exceedra, our TPM solutions have features and tools to help understand when planning a promotion, what are the cannibalization impacts on other products including pre- and post-promotion dips. This way you can understand what the true cost of the promotion really is. If you have access to competitor data ePos data, you can also load that into Exceedra to understand what effects your promotions have on competitors or your competitors’ promotions on your products.
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