Understand the return on investment of promotions through advanced analytics

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Ina Oosthuizen, Decision Inc, Data Scientist.

The retail industry is becoming more and more competitive day by day. Promotions can be an effective way to increase demand. But doing it optimally remains a challenge for companies. Even if the increase in volume is positive, what really matters is the total benefits versus the discount – the return on investment (ROI).

Return on investment is what separates a good promotion from a bad one. Conducting promotions without examining the inherent factors that influence ROI can lead to promotions that hurt results. Adapting a centralized solution to give stakeholders a holistic view of the different facets is the key to effective promotions that grow the business. By using advanced analytics, a business can take into account all the inherent factors and determine its true promotional ROI.

Factors inherent in promotions

Below are five factors inherent in promotions that business leaders should know and watch closely:

  1. Benchmark: Accurately calculates the additional sales increase needed to achieve constant sales volume. If this is not the case, it will not be possible to determine the share of sales attributable to promotional activity.
  2. Refueling: More for less inevitably leads to stockpiling. Factoring in the drop in sales right after a promotion due to a forward purchase is important for achieving an overall ROI.
  3. Cannibalization: Cannibalization will examine the effect of promotional products on non-promoted items and whether there has been a loss of sales due to increased sales of promoted items.
  4. Market share: Has increased sales created higher demand for products by reducing demand for competing products?
  5. Incremental Promotional: Consumers who bought the product only because it was on promotion and would not otherwise buy that product.

Each of these components should be taken into account when calculating the ROI of a promotion.

Actual incremental volume increase

The actual incremental volume increase is the sum of the additional volume redirected to gain market share and customers who bought the product only because it was on promotion. It could also include customers who bought more product because it was on promotion i.e. they would have bought a certain base amount but because it was on promotion they bought some more.

Promotional cost

  • Indirect promotional cost

The indirect promotional cost associated with the following three factors should be taken into account:

  1. Reference: Revenue is lost on items that are sold at a discount when the consumer would have purchased them at the original price.
  2. Storage: Sales may drop after promotion ends due to customer inventory.
  3. Cannibalization: Revenue is lost on items that are sold at a discount when the consumer would have purchased another product at the original price of that product. This effect can be positive if the promotional item is more profitable. However, with promotions, this is rarely the case.

These costs vary by industry and across the value chain. However, they can include any direct cost for the promotion, including slot fees, display fees, and any advertising costs.

Return on investment

The ROI of a promotion is the sum of all promotional costs (direct and indirect) divided by the profit generated by the promotion.

By paying attention to this key KPI, you ensure that promotional spend is allocated to the right promotions and that the company doesn’t run promotions that hurt results.

Gaining volume doesn’t necessarily mean gaining profit – in fact, it can hurt the business if it doesn’t conduct promotions with the full picture in mind. Investing in promotional analysis can take the business to where it needs to be in terms of successful promotions.

Additional advantages of a centralized system:

Consumer’s behavior

Is the company offering the right products at the right time, in the right stores, or at the right price and encouraging the right kind of promotions to really change consumer behavior? All of these questions can be answered by a business if it applies the right analytics. Creating a consumer-centric view of historical data provides insight into what promotions should be done when, where, and how.

Successful promotion depends on careful planning, monitoring and analysis of many different factors.

Data-driven forecasting

Without the correct supply, a business will be unable to reach the full potential of a promotion strategy. Through analysis, he can look to the future (investment and inventory forecast), helping him plan accordingly and not lose sales.

For more information, visit: https://decisioninc.com/


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