As discussed throughout the Integrated Business Planning series, any company conducting true Integrated Business Planning (IBP) will have a single consensus forecast across all functions: sales forecasting and budgeting, commercial planning, revenue management, and trade promotion management. This is often referred to as a ‘one number forecast’. The goal of this ‘one number forecast’ is to have a single set of numbers driving the business, and to have complete buy-in from all business functions.
Today I want to share some insight on optimizing your promotional programmes. By following these three steps, your promotional programmes are more likely to deliver consistent and positive results – ensuring satisfaction from all business stakeholders, and customers.
STEP ONE: You need to know, WHY are you running a promotion in the first place?
For a promotion to be successful, measurable and attractive to consumers you need to ascertain the EXACT reason why you are running this promotion. For the purpose of clarity in this article, the reason why you could be running a promotion has been narrowed down to three options. You must decide which is most relevant for your business, as the choice here will impact how you go forward.
1. To Increase Volumes
One of the most valid reasons to be running a sales promotion is to increase sales volumes in the short term. You may have excess year-end inventory you want to get off your hands, or need to boost cash flow. If you have a factory, you may need to maintain volume in order to keep the factory efficient, and that means running promotions to keep stock ticking over.
2. To Increase Market Share
Today, businesses operate in a very competitive and globalised marketplace, thus sales promotions are commonly used to increase market share and encourage repeat purchases. If the goal is to increase market share, businesses are often prepared to do deeper cut promotions to increase their volumes and maintain (or grow) their market share. These type of sales promotions are highly effective for newly launched products, particularly to encourage trial purchases, and subsequently increase market share through attracting a new consumer demographic.
3. Because You Simply Have To
The final reason to be running a promotion is because you simply have to. This reason is widely overlooked in the Consumer Packaged Goods (CPG) industry. Many fail to realise how common this strategy is, but if you are taking up precious shelf space at a retailer – there will be an underlying expectation that you will run promotions in order to maintain the current ranging and distribution levels. In this scenario you are not looking to overdo promotions, but are being strategically savvy in order to guarantee that your product is promoted enough to keep it ranged. You are also satisfying the demands of the retailer, without spending too much.
Now that you have a clear indication of why you want to promote, discussion can begin on promotion efficiency, and the specific strategies available to optimize these particular promotions.
STEP TWO: Establish Your Breakeven Price
Your promotional journey is now in full swing, you know the reason why you are promoting but it is now time to understand and confirm what the breakeven price is. Every good account manager should prioritise this number, and keep it at the forefront of their mind. In simple terms, the breakeven price is the promotion price point at which you start to lose money (and the promotion becomes unprofitable).
Let me explain:
For example, if you are fully funding a deal where the price is $1.99 normally, and you’re promoting at $1.49, then you are funding the $0.50 margin. It is vitally important to know, at what point when you are fully funding it, you start losing money.
Ideally, as a long-term strategy you do not want to be losing money when promoting, but sometimes losing money in the short term may be beneficial. If for instance you are trying to gain market share, and due to the potential added market share value of the promotion, it makes sense to lose money at first. But generally speaking, you should aim not to lose money for an extended period.
Once you have confirmed your breakeven price point, the next step is to calculate which price points you should promote at in order to give you optimal results. The Integrated Business Planning Solution from Blueshift comes with a selection of great tools to achieve this, but if you do not have access to those tools then you can analyse your promotional data to find the answer.
STEP THREE: Calculate Which Price Points Achieve Optimal Results
To calculate which price points will achieve optimal results for your organisation you need to evaluate promotable groups that are executed at the same price. Start by looking at each group to determine how much is sold at promotion point X and how much is sold at promotion point Y. An example is if you promote at $1.99 you might get an uplift of 200%, compared to if you promote at $1.79, you might get the same uplift of about 200%.
Now if you put those to findings together, you might ask yourself, why am I promoting at a $1.79 in the first place?
The reality is that you are promoting at a lower price, but not receiving any additional sales volume at all. Consequently, to optimize your promotional programme, just simply commit to promoting at the higher ‘promotional’ price point rather than the lower one.
Second of all, acknowledge the price points you do not usually promote at. It will take time and a degree of risk to experiment with different price points – but this is the only way you will learn what would happen if you promoted at the new X price? For example, if you promote at $1.59, what does that achieve and what sort of uplift would you get? Have you considered what the results would be if you ran a promotion at your breakeven price point? All of these questions need to be considered to optimize your promotional programme.
In some international markets, Australia for example, the major retailers tend to dictate what uplift you need to give. So if the base is 20%, you might want to run an experiment and give 22%. Also, what is stopping you asking the retailer if you can only give 15%? You never know until you ask!
In most markets the team at Blueshift operate in, price is definitely king! Therefore, we encourage our CPG customers to focus on getting the price right first and foremost, with other promotional factors, like product display, coming into play much further on in the promotion optimization process.
In summary, the three steps for promotional programme optimization are:
- Know the reason WHY you are promoting
- Establish your BREAKEVEN price point
- Calculate WHICH PRICE POINTS achieve optimal results
Want to find out more about successful IBP implementation? Request a consultation with one of our Integrated Business Planning experts.
Our team at BlueShift has years of experience helping consumer goods companies build and manage their Consensus Business Plans. Although IBP is our speciality, we also consult to companies looking for TPM, TPO and DP solutions. Blueshift provides expert consulting in IBP transformation, IBP roles and systems integration. We engage to understand your business at a high level and establish a simple estimated ROI.