In the scramble to attract as much of the shopper’s attention and wallet as possible as the Black Friday and beyond timeframe sinks in, retailers faced with a ferocious competitive landscape often lead with aggressive promotions to be the first to gain shoppers’ eyeballs and foot traffic. At the same time, they fall back on price-matching policies and attempt to take advantage of competitive stock-outs by bumping up prices in the short run.
For decades these time-honored strategies have been assumed to be an effective approach to the year’s busiest shopping season. But in a day and age when huge amounts of data are available to retailers across channels, and when science-based machine-learning algorithms can holistically optimize your end-to-end price, promotion and markdown strategies, the conventional wisdom is being upended by data-driven decision making. Today, innovative internet and omnichannel retailers, all too aware of competition from behemoths like Amazon and the rise of multinational discounters, are turning to science-based approaches to offer meaningful prices and promotions to shoppers on the items that matter most to them—all while sustaining healthy margins for long-term business sustainability.
The Dirty Secret of Promotions
Regardless of channel, retailers often promote just to promote or repeat the same promotions as the prior year without a clear understanding of the true effectiveness of those promotions or whether they are relevant today. We have identified some key behaviors that contribute to irrelevant promotions that erode the bottom line while leaving shoppers cold:
- Excessive promotion
- Repeating the same promotions year after year
- Blindly matching competitive prices and promotions
- Non-targeted offers
- Reaching customers on the wrong channels
- Poor use of promotional vehicles, such as circulars, emails or endcaps
- Inability to accurately predict consumer demand
All of these lead to margin leakage and erosion. To break it down a bit more, while it may seem reasonable to repeat promotions from earlier years, the analytics on what promotions work—and which ones do not—are eye-opening. A recent case study of a large omnichannel speciality retailer who used science-based analytics to measure the effectiveness of their historical promotions revealed a $60 million savings simply by identifying and removing unprofitable promotions. Case studies across several other retailers revealed that on average 5% of their promotions accounted by half of the profit lift due to halo and cannibalization impact of other items, and the top 30% of promotions have been found to generate 90% of the promotional revenue—but the top 15% of promotions generate 85% of the promotional profit.
Shoppers are very loyal and many only respond to specific channels. A Revionics-commissioned global shopper study conducted by Forrester Consulting found that 31% of shoppers do not respond to online promotions, 29% will not respond to mobile promotions and 20% will only respond to them in the store. Clearly retailers who do not carefully target their promotions accordingly are leaving a lot of money on the table while failing to incent the shopper behaviors they are seeking. Using analytics and promotion-optimization solutions, retailers can ensure that they double down on the profitable promotions while stepping away from money-losers that fail to engage shoppers.
Know What Aspects of Pricing Really Matter—and on Which Items
The Forrester study exploded some other cherished myths as well. We’ve seen plenty of industry pundits counsel that because shoppers are monitoring prices across online and in-store channels 24/7, retailers must go to great lengths to ensure that they provide complete price consistency across those channels.
Of course retailers know that costs and other factors vary significantly by channel and it doesn’t make business sense to set prices the same blindly. And research shows your shoppers don’t expect that either. Interestingly, the study found that shoppers expect higher prices in the store than online across nearly every category, with the notable exception of grocery, where they anticipated lower prices in the store.
At the end of the day, shoppers are tired of the arbitrary pricing that retailers continue to come up with. Shoppers want a fair price, which they believe data science can provide. The study found that 78% of of shoppers trust data science more than retailers’ judgment to set fair prices. They also do not expect it to always be the lowest price. Only 17% of shoppers claim to buy at the lowest price. And with tools that provide thorough predictive and prescriptive analytics around key value items, shopper price sensitivities and competitive elasticity, a retailer can ensure that they offer attractive prices and deliver promotional offers on those items that matter most and against those competitors who truly impact their demand, while avoiding the race to the bottom that comes with broad-brush price-matching.
Which begs the question of hiking prices on items when there are competitive stock-outs. Particularly during the holiday season, it’s tempting to raise prices when you know competitors are short on an item. But shoppers’ sense of fairness means that they will react either by deferring the purchase until prices fall back in line, or they may make the one-time purchase at the higher price, but you will have crossed into their mental catalog of retailers whose pricing is not to be trusted, losing any hope of driving retention and loyalty.
A more recent Revionics- commissioned Forrester study found that nearly 60% of shoppers would not purchase, would wait, or would buy at another retailer if retailers were to raise their price due to limited availability. Shoppers also stated that the most important factor driving their loyalty to major online retailers was trusted pricing.
The Win-Win Mentality
Ultimately the challenge for retailers is to find that sweet spot of a win-win—providing targeted prices that make customers happy while protecting margins to ensure your profitability. With science-based tools that give you data-driven insights and recommendations, you can make this holiday season merrier for your shoppers AND for your business.
Revionics provides price-optimization software for retailers.