Promotions have been a regular part of the Grocery retailing scene for many years now – maybe 30 or more years. When I was first involved in Grocery, nearly fifteen years ago, this question typically was dismissed as obvious. The theory that was put forward at that time was that a promotion was run so that the rate of sale after the promotion would be higher than that before – in other words one was led to believe that the objective was to gain a permanent increase in the rate of sale. Now that scan data is readily available (sales through the cash register) we realise that this is not something that can be guaranteed, indeed the vast majority of products appear to continue with precisely the same sales pattern as existed prior to the promotion. If it is in a growth cycle, that probably continues, if it is in decline, that also continues. Why then do we promote?
So you have done your promotional planning, does that mean no more problems? Unfortunately not. It is still quite easy to end up with a severe overspend situation. This is because most promotions have no limit on the amount the chain may wish to buy. Why this should be so is one of those things that has become ‘part of the way we do business’, and has no basis in logic. It is just as illogical as extended buy periods, for businesses where there is perpetual motion and a pipeline of product! But it causes very real problems. Even with the most careful of planning, unless you monitor the trade spend during the year, you will almost certainly get a big surprise at the end of the year. Planning alone will not control trade spend. In this section we are not concerned whether the trade spend is worthwhile, only with keeping the total costs within predefined boundaries.
The availability of retail scan data means that suppliers can now evaluate their promotions in terms of the additional sales that were sold through to the consumer. In this paper we will look at the issues surrounding this, and some of the problems.
For some time those seeking to measure promotions have talked about efficiency and effectiveness. However I have never seen a universally accepted definition of these terms, and in my book I set out a number of ways of measuring each. It seems logical to me to use the term efficiency to relate to the overall promotional program – a period of time that is reasonably long, and the inclusion of all promotional costs for a number of promotions compared to the total sales over that period. On this basis, efficiency is a measure of the average cost of trade spend. To relate this to a single promotion, the promotional costs would be expressed as a percentage of the sales on that promotion. Individual promotional efficiencies would be related to the overall promotional program efficiency in terms of the frequency with which that promotion is repeated. To use an example, if a single promotion has an efficiency cost of 20% to sales, and the frequency is such that 30% of the total sales in a period are on a promotion, then the overall efficiency will be 6% of sales.
Effectiveness on the other hand would seem to relate to any gain in sales achieved by the promotion, and be measured in terms of the costs to achieve that gain. A simple theoretical model using real world price/volume relationships indicates that efficiency and effectiveness can have a minimum point – that there are optimum price points. It also indicates that both measures reach a minimum at about the same price point. This suggests that if you optimise effectiveness you will optimise efficiency at the same time. However my own experience indicates that this is not the case, and indeed I have now developed a promotional evaluation system which proves this to be the case. If effectiveness and efficiency are independent, there are four possible states for a product on a promotion.