This is our third Trade Promotion Optimization (TPO) related episode on our weekly vlog series Exceedra Byte. Today we are going to look at the impact of running promotions and how that can affect your true margin when it comes to the duration of the promotion.
In episode 13, we introduced the fundamentals and process of TPO. In summary, it is the process used to continuously improve trade promotion strategies through predictive analytics.
We have learnt that promotions drive consumers through the doors, stock up on product and shop at the retailer where the best deal is on offer. So, would you be better off having all your products on promotion on every day of the year?
Companies do run these strategies which are commonly referred to as Every Day Low Price discount. But when we compare sales volumes between a one-week promotion and a 12-month promotion, the spike in volumes is vastly different and do not have the same effect.
12-month strategies are generally beneficial if you are trying to drop your price below a competitor while still having a promotion ticket on the shelf to grab consumers’ attention. One-week promotions are designed to drive significant volume while trying to keep the margin when not on promotion.
But let us focus on short term promotions and look at the two promotions below which are with the same discount but over a three-week and six-week period.
If we look at the yellow line in both promotions, this represents the margin per ton which you can see has a drop when it is on promotion. Just because you are reducing the margin on the product, does not mean that you are going to lose more value in margin if you did not run the promotion but let us keep this in mind.
Now let us look at the orange line where we can see in the first week of each promotion, there is a large spike in volume. Makes sense because consumers will take advantage of a discount.
In the weeks after the promotion, we start to see the base volume drop off as some of the consumers have already pantry filled. Pantry fill is where consumers have bought a large quantity of your product because a product is on sale and so they are less likely to buy in the following weeks. This drop after a promotion is also referred to as post-promotion dip. Check out episode 15 to find more details about pre- and post-promotion dip, promotion cannibalization and how it affects a promotion’s performance on margin.
Getting back to reviewing the promotions, the six-week promotion took four weeks to recover its baseline sales where the three-week promotion only took one week to recover. Again, not the end of the world but important to understand the effects it has on buying.
Lastly, let us look at the red line which is the most important line. Because there was such a large spike in volume, there was a large spike in total margin which is higher than the baseline margin.
But as the sales drop, so does the overall margin due to pantry filling. So, in the six-week promotion you can see it has lasting effects because of the recovery in sales as well.
We talked about pre/post promotion analysis and looking at the individual promotions. But if we tried to compare these two promotions, the six-week promotion on its own would have the most total margin because of the length. But to make this a fair fight, let us look at both promotions over a 14-week period.
Which promotion will have the largest total margin?
And the winner is the three-week promotion by 48k. But let us be clear, this is just an example and is not always the case.
Each product type and each mechanic can have a huge influence on these outcomes, but it does get you thinking what you should try next – and hopefully you have a great solution to help you find the right answers. There you go, you are doing TPO.
With Exceedra’s TPM tools, you can use many reports to do similar analysis where you might find something that you have not realized before and potentially change your plan to optimize your trade spend.
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